Friday, April 3, 2015

Court Approves FBAR NonWillful Penalty Merits But Wants Further Development of APA Issues (4/3/15)

There is a an FBAR nonwillfull penalty opinion entered April 1, 2015 by the US District Court for the Western District of Washington.  The case is Moore v. United States, 2015 U.S. Dist. LEXIS 43979 (W.D. WA 2015).  The opinion on summary judgment opinion is here.  The briefs  on the motion (excluding exhibits) are:
  • US motion for summary judgment, here
  • Moore's Response to the US Motion, here; and 
  • the US Reply to Moore's Response, here.  
The docket entries as of 4/3/15 are here. (Not sure whether the subject is plural, so I rather than slow down to figure it out, I just went with my gut.)

In summary, on opt out from the OVDI/P, the IRS imposed 4 years of maximum nonwillful penalties against the taxpayer (Moore).  The record before the court was inconclusive as to precisely why the IRS chose to impose 4 years of nonwillful penalties and why to max out the nonwillful penalties.  In the de novo proceeding in the district court, the court determined that the taxpayer was liable for the nonwillful penalties.  The caption for that part of the opinion tells the conclusion:  “On De Novo Review, the Court Concludes that Mr. Moore Violated the Law By Not Filing FBARs and is Subject to a Civil Penalty.”

The court then held that it could not determine on the record whether the IRS had followed the proper procedures under the APA.  The Court rejected the taxpayer's arguments on due process and excessive fines.  There will be further submissions on the APA issue; it is unclear where that is going.   (I include below the portion of the opinion dealing with the APA issue.) There might  be a remand to the IRS for further consideration, but presumably the IRS would just clean up the administrative record and impose the same penalty now that the district court has held that he is liable for the penalty.  Alternatively, since the $10,000 per year penalty is an “up to” penalty, the Court may enter the fray on whether the IRS should have imposed the maximum penalty or some lesser penalty.  That same issue applies to the willful penalty in other cases; what is the appropriate court (or jury in jury cases) review of the of the quantum where the penalty is a maximum without any minimum?

Here is the key part of the Court's opinion on the APA issue:
3. The Court Cannot, On the Record Before It, Determine if the IRS Acted Arbitrarily, Capriciously or Abused Its Discretion in Assessing the Penalties. 
                To determine if an agency acted arbitrarily or capriciously or in abuse of its discretion, the court conducts a "thorough, probing, in-depth review." Volpe, 401 U.S. at 415. The court presumes that the agency acted correctly, and is not permitted to substitute its judgment for the agency's. Id. at 415, 417. The court must nonetheless be certain that the agency acted within the scope of its authority, and its must determine whether the "decision was based on a consideration of relevant factors and whether there has been a clear error of judgment." Id. at 415-16; see also Ocean Advocates v. Army Corps of Engineers, 361 F.3d 1108, 1118 (9th Cir. 2004) (explaining review under § 706(2)(A) of the APA). The court's conclusion that Mr. Moore lacked reasonable cause is sufficient to answer any question about the IRS's authority to impose penalties. 
                The court can only guess, however, as to whether the IRS considered relevant factors or made a clear error of judgment. The record before the court contains no administrative explanation of the IRS's decision to impose penalties. The IRS's December 2012 "appeals" letter to Mr. Moore contains three sentences of "explanation" that do nothing to illuminate what the IRS considered or why it arrived at its decision. The letter at least mentions the "reasonable cause" standard; it says nothing at all about why it choose a $40,000 maximum penalty as opposed to a smaller amount. The court looks for a "rational connection between the facts found and the choice [the agency] made." Nat'l Ass'n of Home Builders v. Norton, 340 F.3d 835, 841 (9th Cir. 2003). That connection must, however, come from the administrative record. Id.
                The administrative record is, with one exception, devoid of any explanation of the IRS's reasons for imposing the maximum penalty. Agent Tjoa's 2011 Summary Memo is in the record before the court, but (so far as the court is aware), Mr. Moore did not see the Summary Memo until the IRS produced it in discovery in this case. Even then, the IRS redacted portions of the Summary Memo. The Summary Memo at least arguably provides an explanation of Agent Tjoa's decision to recommend the maximum penalty. Indeed, Agent Tjoa cited the portions of the IRM that are relevant to determining the amount of an FBAR penalty, and explained many other facets of her recommendation. What the Government ignores in its motion, however, is that the Summary Memo is not an explanation of the ultimate decision to impose a penalty. n6 The Summary Memo was, at least on the record before the court, the basis for the IRS to require Mr. Moore to either accept the assessment of penalty or "appeal" it before the assessment. The issue before the court is the basis for the IRS's decision to actually impose the penalties. As to the 2005 penalty, the court can only guess. The IRS disregarded its own promise and assessed the penalty before Mr. Moore could request an "appeal."
   n6 The APA's informal adjudication procedures exempt a decision "affirming a prior denial" from the requirement that an agency provide a "brief statements of the grounds for denial" of a request for relief. 5 U.S.C. § 555(e). The Government invokes that section, but does not acknowledge that there is no "prior denial" in the record in this case. The only denial of Mr. Moore's request that no penalty be imposed came in the December 2012 letter closing the "appeal" process.
                As to its decision on "appeal" to assess four penalties, the IRS has already refused to produce the only document (so far as the court is aware) that addresses the material Mr. Moore submitted in support of his appeal or provides explanation of the reasons for imposing the maximum penalty. On January 8, 2015, the court denied Mr. Moore's motion to compel production of an "Appeals Memo" that Agent Batman authored at some point in the "appeal" process. The IRS claimed that the deliberative process privilege protected the Appeals Memo. The court agreed. What the court did not know at the time is that the Appeals Memo is apparently the only contemporaneous source of explanation for the IRS's decision to assess maximum penalties against Mr. Moore. 
                The Government asks the court to rubber-stamp a decision that lacks any explanation in the administrative record. That the Government offers an explanation for that decision in the briefing before the court is irrelevant. What the court requires is evidence from which it could conclude that the IRS did not act arbitrarily, capriciously, or in abuse of its discretion when it imposed $40,000 in penalties on Mr. Moore. That evidence is absent. 
                The court cannot, however, overturn the agency's decision merely because it failed to articulate a basis for it: 
                If the record before the agency does not support the agency action, if the agency has not considered all relevant factors, or if the reviewing court simply cannot evaluate the challenged agency action on the basis of the record before it, the proper course, except in rare circumstances, is to remand to the agency for additional investigation or explanation. The reviewing court is not generally empowered to conduct a de novo inquiry into the matter being reviewed and to reach its own conclusions based on such an inquiry. 
Florida Power & Light Co. v. Lorion, 470 U.S. 729, 744 (1985). When there is "such failure to explain administrative action as to frustrate effective judicial review, the remedy . . . [is] to obtain from the agency, either through affidavits or testimony, such additional explanation of the reasons for the agency decision as may prove necessary." Camp v. Pitts, 411 U.S. 138, 142-143 (1973). What is preferable is contemporaneous evidence of the factors the agency considered when it made its decision. Volpe, 401 U.S. at 420; see Alaska Dep't of Environmental Conservation v. EPA, 540 U.S. 461, 497 (2004) ("Even when an agency explains its decision with less than ideal clarity, a reviewing court will not upset the decision on that account if the agency's path may reasonably be discerned.") (internal quotations omitted). That may, in appropriate cases, permit the court to rely on contemporaneous evidence (like the Appeals Memo) that the agency did not disclose during the decisionmaking process. For example, in Tourus Records, Inc. v. Drug Enforcement Admin., 259 F.3d 731, 737-38 (D.C. Cir. 2001), the court permitted an agency to supplement its bare-bones written decision with memoranda that explained the basis for that decision. In any event, that is preferable to an after-the-fact rationalization of the agency's decision. See Volpe, 401 U.S. at 420. 
                The court will permit the Government to supplement the record to provide some basis for the court to conduct review of its penalty assessment. Specific instructions for that supplementation will come in Part IV of this order. For now, the court concludes only that unless the Government provides evidence articulating its reasons for assessing a maximum penalty against Mr. Moore, the court will have no recourse but to hold that it acted arbitrarily and capriciously. 
                The Government may also choose to supplement the record to provide contemporaneous explanation of its decision to assess the 2005 penalty without providing the "appeal" it promised Mr. Moore. On the record before the court, that decision is baffling. The only reason the Government offered, its concern that the statute of limitations would expire, is nonsensical on the record before the court. The statute of limitations would not have expired until at least the end of June 2012; the IRS assessed the penalty in January 2012. The court acknowledges that the IRS's inexplicable conduct was perhaps harmless. The IRS apparently considered Mr. Moore's "appeal" of the 2005 penalty just as it considered the "appeal" as to later years. Nonetheless, the IRS assessed a penalty without providing Mr. Moore the "appeal" it promised. The Government can perhaps supplement the record to provide an explanation for its failure to honor its promise, or clear explanation that the failure was harmless. If it does not, the court will rule that assessing the 2005 penalty in January 2012 was arbitrary and capricious
JAT Further Comments:

1.  It is important to note that this was an opt out.  One question is whether Moore was a good candidate for opt out.  Of course, I know the final result and don't know all the facts, so I really cannot second guess.  But it seems to me that, based on statements of fact in the pleadings and the opinion, one might have been concerned before opting out that a willful penalty might be asserted or that fallback maximum  nonwillful penalties mightbe asserted.

2.  In this regard, I wonder whether four years of maximum nonwillful penalty may have been in some way a proxy for a willful penalty for what the IRS perceives as a bad actor but didn't want to spend the resources to develop.  I have not seen the IRS assert the maximum nonwillful penalty on the first round of opt out.  (In truth, I have seen maximum multiple year nonwillful penalties in one case where the IRS asserted multiple year willful penalties; we finally settled an amount that the IRS characterized as maximum nonwillful for three years; my client did not owe that (best opt out case I have ever seen), but litigating the issue did not seem cost-effective and would require many months of distraction for the client.)

3.  In that same vein, the amount of nonwillful penalties in Moore would not seem to justify litigation.  At least from the opinion, prevailing on the merits seems a long shot  and it is not clear that the procedural issues will ultimately be resolved favorably.  Hence, there is a long shot case with only $40,000 in issue.


  1. Mr. Moore did not see the Summary Memo until the IRS produced it in
    discovery in this case. Even then, the IRS redacted portions of the
    Summary Memo...... unbelievable !!!

  2. Jack can you explain to me why you write here :

    Court Approves FBAR NonWillful Penalty Merits... when it says

    For now, the court concludes only that unless the Government provides evidence articulating its reasons for assessing a maximum penalty against Mr. Moore, the court will have no recourse but to hold that it acted arbitrarily and capriciously. Nonetheless, the IRS assessed a penalty without providing Mr. Moore the "appeal" it promised. The Government can perhaps supplement the record to provide an explanation for its failure to honor its promise, or clear explanation that the failure was harmless. If it does not, the court will rule that assessing the 2005 penalty in January 2012 was arbitrary and capricious

  3. Jack.....the amount of nonwillful penalties in Moore would not seem to justify litigation.

  4. Amazing that $40,000 these days are nothing worth fighting for anymore..... especially when the TP who sues the IRS for her arbitrary and capricious actions does not get the satisfaction to include ALL of his legal costs. I am so happy that I renounced last year and be done with this craziness of THE TAX BERMUDA TRIANGLE.

  5. The problem is that litigation is expensive. Even if it is a slam dunk winner for the taxpayer and the Government nevertheless chooses to litigate, it will like cost well in excess of $25,000 to litigate. Of course, if it is a slam dunk winner, the taxpayer will win and may even recover attorneys fees (although I have not researched whether attorneys fees are available in FBAR litigation, but in any even the amount recoverable is not the full hourly fees).

    And, of course, this case was far from a slam dunk. So, when you consider the costs of litigation, the uncertainty of winning, the hassles of litigation (including deposition of the taxpayer), etc., $40,000 may not be worth those costs.

    Jack Townsend

  6. The Court may rule against the Government on procedural grounds, but not on the merits. And, it is not clear whether the Government has a fix for any procedural defaults that the facts suggest.

    Jack Townsend

  7. Jack it does not matter on which grounds the IRS looses this case . The ONLY thing that matters is that the Court rules against assessing the 2005 NW FBAR penalty.

  8. I just love these US motions for summary judgement when the facts and circumstances are less than clear...just like US vs. Mr. Hom.

  9. Further it was undisputed that the IRS continued with its arbitrary actions and lack of transparancy throughout the FBAR assessment phase by failing to provide a ``brief statement of the grounds for denial `` a total disregard of the most basic of notice requirements.

  10. Sabine you make some valid and good points here and I myself wonder what the purpose of that brief statement was. Clearly, conclusory statements are inadequate and cannot substitute for sound explanation and finding.

  11. Sabine, I think most practitioners -- at least most that I know -- do not share your views as to objectivity and fairness of the Appeals Office and fairness of the process. That does not mean that things do not go off the rail sometimes, but not often.

    Jack Townsend

  12. ``The legislative history shows that Congress created the NW penalty , along with the RC defense, to cut down on the use of offshore accounts to evade federal income tax.``
    ``EVADE``.........tell this to the millions of expats for them offshore accounts are local and they pay already their income taxes to the country where they currently live and work.

  13. Jack you are not being credible here. I remember reading a response from you here complaining yourself about the OVDI-P ...opt-out appeals process and how ``

    opaque,murky and non-transparent`` it was !!!!!

  14. Does the government have any sort of cost/benefit analysis with respect to litigation? Admittedly, their legal costs are fixed but their must be some sense of use of resource/opportunity cost vs. the amount of recovery. $40k seems quite low. Given that they had to litigate, surprised they didn't go for the wilful penalty, especially since their response indicates they feel that his failure to check no penalty would have been sufficient.

  15. Sabine thank you for your contribution are bringing tears into my eyes.
    Partially out of anger and frustration and partially because I still have hope that one day this madness of CBT comes to an end.

  16. Yes Loverboy you are correct Jack did himself complain about the opt-out Appeals process as ````opaque,murky and non-transparent``. But since it is never his money on the line but instead he is a $700/h profiteur from this madness it is no wonder that he tries to defend the ``system``.

  17. ``That does not mean that things do not go off the rail sometimes, but not often``..... how comforting !

  18. I just cannot get over this revolving door career move from Caroline D. Ciraolo. Up to december of 2014 she played a big part in defending exactly these type of NW cases like the one here envolving Mr. Moore and just 3 month later I see her signature under this motion.

  19. Great comments. This whole FBAR thing isn't about tax evasion, it's a mafia style shakedown. The US government has proven itself to be a bunch of feckless thugs who will gladly steal your money simply because they have the power to do so. With millions of honest, hard working tax paying Americans being punished over a 1 page form that was in such brutal and draconian ways, one has to wonder if the US government exists for the people or for its own perpetuation. The IRS is simply a diseased corrupt arm of a corrupt government.

    Let's be honest here gang. The people the IRS is going after on this stuff are the low hanging fruit. The good honest people who simply made mistakes (or in some cases didn't even do that much such as some of the civil forfeiture IRS seizure cases recently). They're not going after the real big money millions or billions of dollars tax evading criminals because that would require more work and resources than they have. This is all about the quick win guys, which is about all a lazy, corrupt greed sickened government can muster.

    I also must admit that I've lost some respect for Mr. Jack as he seems to take the position of the government more often than not, rather than the position of what is right and just, and to me, this simply is not credible.

  20. I agree UStax , 3 month ago Ciraolo would have had no problem defending Mr. Moore ...taking his money/retainer and asking for a reduction of the 4x NW max. FBAR penalty

  21. Jack the other question I have for you here is why have your ``friends`` Ciraolo and Co. not honored its agreement to delay assessment of the penalty pending the “appeal” deadline ?
    The statute of limitations for tax year would have not expired between its assessment of a $
    10,000 penalty on January 23, 2012 and the January 28, 2012 response
    deadline it gave to Mr. Moore.

  22. Guest,

    I think you may be jumping the gun before the facts are in. However, from what I gather in the facts, the 2005 assessment was a statute of limitations issue. The IRS requires certain minimum periods for Appeals in order to insure orderly processing before the statute of limitations expires. If the taxpayer does not give a statute extension, then the IRS proceeds to do what it has to do in the statutory period. It appears that the 2005 assessment may have been required because of a pending statute date that would expire in the normal processing of Appeals.

    As to Ciraolo and Co., surely you know that she is not with the IRS but rather with DOJ Tax. That is an important distinction. The IRS took the action that apparently bothers you so much. And, given her role at the top of all the DOJ Tax lawyers, I doubt that she even knew anything about this case before the court rendered its decision and, in the course of her role, is not likely to spend substantive attention to the matter for several months, if then.

    Jack Townsend

  23. The nature of all of our agencies is that career officials are rarely appointed to high level positions. Rather, those appointed come from outside the government and usually from roles in which ;they, directly or indirectly, worked for or on behalf of the constituencies regulated by the agencies they are appointed to lead. That is simply the system we have.

  24. The cynical part of this case is that we learn that the US District Court for the Western District of Washington is only interested in procedural issues. What standard applied to the IRS’s determination on the FBAR penalty?
    The court accepted the government’s position that it “should determine
    de novo whether Mr. Moore is subject to an FBAR penalty, but should
    review the IRS’s determination of the amount of that penalty only for
    abuse of discretion.”

    Moore thus opens the door to DOJ in the future to test the waters on
    perhaps getting a more deferential abuse of discretion standard of
    review on the question of liability.

  25. The Government likely has no evidence of the tax avoided or evaded in years prior to 2002. The taxpayer does know that. If that information would have been helpful to the taxpayer, one would think he would have supplied it. Most courts would not hold that against the Government but, if any event, might draw an adverse inference against a taxpayer who failed to produce evidence which might have helped his case. That is the principal reason why, in civil cases involving taxes, the taxpayer bears the burden of proof (persuasion). The taxpayer typically has the facts and the Government does not.

    Jack Townsend

  26. Jack please acknowledge that under the APA, generally courts look to determine if an agency has acted
    arbitrarily or capriciously or in abuse of its discretion. It was here that the court found fault with the IRS. Recall that above
    the IRS sent Moore only a three-sentence explanation that does “nothing
    to illuminate what the IRS considered or why it arrived at its
    decision…it says nothing at all about why it choose[sic] a $40,000
    maximum penalty as opposed to a smaller amount.”

  27. In Moore, the district court directed that the government was to “provide evidence articulating its reasons for assessing a maximum penalty against Moore” and explain why it failed to honor its promise of assessing the 2005 penalty without providing the appeal it promised.
    Absent evidence on why it imposed the maximum penalty, the opinion warns then it would have no recourse but to conclude that the IRS acted arbitrarily and capriciously.


  29. The point of this submission, is to demonstrate the harm the US policy of citizenship-based taxation brings in its various (and bizarre) applications to individual situations.
    TP who received totally erroneous advice having already relinquished US citizenship decades ago but still being put into OVDI !
    Every time I hear of someone being advised by an incompetent tax lawyer to become compliant when they are NOT a US Person makes me want to scream for the blood of those who continue to do this.....I hope Caroline C. Ciraolo is reading this and can put her signature under a ``motion`` that puts these incompetent tax lawyers in jail.

  30. Michael J. MillerApril 7, 2015 at 3:10 PM

    On the other hand ... from the court's description of the facts, the IRS potentially could have asserted the taxpayer was willful, and declined to do so, notwithstanding that (among other things) the taxpayer provided clearly false information on the organizer. That may well have been a mistake, but in seeking the NW penalty, Ms. Ciraolo is hardly trying to "nail" the taxpayer in my opinion. Like it or not, the FBAR exists and there are substantial penalties for noncompliance. Based on the information available to me, I don't in any way see the IRS as acting improperly in determining that reasonable cause didn't exist and that NW penalties were therefore appropriate.

  31. Michael sorry but you are missing the point . When you read all the
    comments here carefully you will see that NOBODY was suggesting that a
    NW penalty was improper. What got people rightfully upset here was the
    4X max. $10K NW penalty and amongst a few other IRS whoppers which I am
    not going to repeat here again Mr. Moore should not have been
    forced/bullied to sue in federal court to get an
    explanation as to the agency’s rationale or the evidence it considered
    in making its decision (Summary Memo).

  32. Jack, if the IRS is not able to serve up enough evidence that will
    satisfy the court’s desire to show why it acted as it did in proposing
    the penalty - does that mean Moore will not have to pay anything ?!

  33. After I read this blog post from an FBAR ambulance chaser law firm I was thinking about your comment...yes even 4/2015 these things happen.


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