New Case Filing Challenging Streamlined Transition Disparity with Streamlined (10/31/15)

In Maze v. United States (D DC Dkt. No. 1:15-cv-01806) (complaint here), three citizens who are in OVDP complain about the disparate treatment afforded them under the Streamlined Transition requirements as compared to the better treatment afforded other citizens who delayed joining OVDP until the new Streamlined rules were announced in June 2014.  Here are some excerpts:

1. The Internal Revenue Service (“IRS”) required Plaintiffs Eva Maze, Suzanne Batra, and Margot Lichtenstein to transition from the 2012 Offshore Voluntary Disclosure Program (“2012 OVDP”) to the 2014 Streamlined Filing Compliance Procedures (“2014 SFCP”) solely through the use of rules mandating that Plaintiffs meet a set of secret, unpublished, and arbitrary criteria, file and pay tax and interest on eight, rather than three, years of amended tax returns, and pay an accuracy-related penalty otherwise inapplicable under the 2014 SFCP (the “Transition Rules”). The application of these Transition Rules purportedly required Plaintiffs, who reported their foreign bank accounts and assets through participation in the 2012 OVDP out of a sense of responsibility and candor, to satisfy monetary and compliance burdens that similarly situated individuals who waited until the 2014 SFCP were announced do not face. 

* * * * 

7. The Transition Rules are not the product of notice-and-comment rulemaking, constitute arbitrary or capricious agency action, and injured Plaintiffs, who were subject to increased [*4] monetary payments, filing burdens, and disparate review standards, solely because of the requirements of the Transition Rules. Accordingly, Plaintiffs request the Court to hold unlawful and set aside the Transition Rules, to declare that the Transition Rules are invalid, to declare that Plaintiffs may process their voluntary disclosures through the SFCP, and to enjoin Defendants from enforcing the Transition Rules.

The complaint then sets forth a good history of the IRS offshore initiatives beginning in 2009 (as well as some history before 2009).  See ¶¶ 16-42, pp. 5-13.

The complaint then has detailed discussion of the Streamlined Transition rules.  See ¶¶ 43-56, pp. 13-16.

The complaint then discusses Administrative Procedure Act ("APA") deficiencies under the outline heading "The Transition Rules Are Not the Product of Notice-and-Comment Rulemaking."  See ¶¶ 57-68, pp. 16-18.  These allegations raise serious issues involving the role of the APA in IRS rule making, an issue which was dormant for most of the life of the Internal Revenue Code, but which has been gaining prominence in recent years.

The complaint then alleges that "The Transition Rules Are Arbitrary, Capricious, an Abuse of Discretion, and Otherwise Contrary to Law." See ¶¶ 69-79, pp. 18-21.  These are worth excerpting:

69. Applicants who directly enter the 2014 SFCP are required to file and pay tax and interest for amended or delinquent tax returns and related information returns for only the previous three years, but similarly situated applicants seeking to transition from the OVDP into the 2014 SFCP are required to file and pay tax and interest for amended or delinquent tax returns for the eight previous years. 

70. Applicants who directly enter the 2014 SFCP are not required to pay any accuracy-related penalties, or, if applicable, failure-to-file and failure-to-pay penalties that would be due under the OVDP Penalty Framework, but similarly situated applicants seeking to transition from the OVDP into the 2014 SFCP are required to pay these penalties. 

71. Applicants who directly enter the 2014 SFCP are able to participate by certifying non-willfulness. The IRS then determines whether willfulness is present and selects applicants for audit pursuant to the normal IRS audit procedures where the IRS has the burden to prove willfulness. In contrast, applicants who already participated in the OVDP (before July 1, 2014) and who are compelled to enter the 2014 SFCP through the Transition Rules have to affirmatively prove non-willfulness before being allowed to enter the 2014 SFCP. The IRS does not publish, and IRS examiners do not adhere to, any uniform set of standards under which non-willfulness may be consistently and appropriately determined. 

72. The Transition Rules require applicants to prove their eligibility for the 2014 SFCP before being allowed to participate, but similarly situated applicants who directly enter the 2014 SFCP may participate unless the IRS subsequently makes a determination of willfulness. In effect, the Transition Rules operate to block applicants from entering the 2014 SFCP in the first instance; similarly situated applicants do not face such an obstacle. 

73. Under the Transition Rules, an applicant does not have any opportunity to administratively appeal or otherwise dispute a determination that the applicant could not establish non-willfulness. If an applicant disagrees, the only option is to opt out of the OVDP and likely face an IRS audit of the issues, higher penalties due to a different standard of review, and possible criminal prosecution. Pursuant to the Transition Rules, an applicant currently in OVDP cannot opt out of the program and enter into the 2014 SFCP unless the applicant fully complies with the Transition Rules. If the applicant is removed or opts out of the OVDP, then that applicant is deemed ineligible for the 2014 SFCP. Transition Rules FAQs, at Nos. 2, 4. 

74. From March 1, 2011, when the IRS reversed its position with respect to FAQ No. 35 and foreclosed the ability of IRS examiners to make determinations of non-willfulness, reasonable cause, and decreased penalties under “existing statues,” to June 18, 2014, when the IRS announced the 2014 SFCP, the IRS did not provide an option within OVDP to determine non-willfulness, reasonable cause, and decreased penalties under existing law. 

75. The Transition Rules prohibit applicants currently in the OVDP from obtaining a determination of non-willfulness, reasonable cause, or decreased penalties under existing law unless they satisfy additional burdens that are not applied to similarly situated applicants who directly enter the 2014 SFCP. 

76. The IRS contends that applicants entering the 2014 SFCP via the Transition Rules are treated differently than similarly situated applicants because the IRS must “concur on the non-willful statement before agreeing to give the 5 percent penalty” under the 2014 SFCP. Kristen A. Parillo, ABA Meeting: More Guidance Coming on Modified OVDP and Streamlined Filing, 75 Tax Notes Int’l 1117 (Sept. 29, 2014) (summarizing statements of Jennifer Best, IRS Senior Adviser to the Deputy Commissioner (International), IRS Large Business and International Division). But the IRS also determines whether applicants who directly enter the 2014 SFCP have willfully violated FBAR requirements. The need to determine non-willfulness is the same in both programs and does not justify the additional filing burdens, a heightened standard of review, and the additional tax, interest, and penalty payments required by the Transition Rules. 

77. The Transition Rules treat similarly situated applicants differently depending solely on whether they came forward before July 1, 2014, or after June 30, 2014, with the applicants who were more responsible and came forward earlier under the OVDP being treated worse under the Transition Rules than those who waited to disclose until the 2014 SFCP were promulgated. 

78. The Transition Rules are arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law under 5 U.S.C. § 706(2)(A) because the Transition Rules disadvantage applicants who voluntarily disclosed their offshore accounts before July 1, 2014, and treat them worse than similarly situated applicants who voluntarily disclosed their offshore accounts after June 30, 2014. 

79. The Transition Rules also are arbitrary and capricious because the IRS changed its position with respect to transitioning from the OVDP into the 2014 SFCP by imposing additional compliance, review standards, and monetary burdens.

The complaint then alleges the plaintiffs' participation in OVDP and attempts to get Streamlined treatment rather than Streamlined transition.  ¶¶ 80-100, pp. 21-24:.

The complaint then concludes as follows (¶¶ 101-111, pp. 25-27):

INJURY TO PLAINTIFFS 

101. The IRS arbitrarily and capriciously prohibited Plaintiffs from withdrawing from the 2012 OVDP and entering into the 2014 SFCP through any procedures other than the Transition Rules, which are arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with law, and which are not the product of notice-and-comment rulemaking. 

102. The IRS treated Plaintiffs worse than it treated other similarly situated applicants solely because the Plaintiffs filed their voluntary disclosures and entered the 2012 OVDP before these other similarly situated applicants. 

103. The IRS blocked the Plaintiffs from withdrawing from the 2012 OVDP and entering the 2014 SFCP through any route other than the Transition Rules. 

104. The IRS’s decisions to deny the Plaintiffs entry into the 2014 SFCP through any route other than the Transition Rules and the IRS’s failure to provide a direct method of entry into the 2014 SFCP imposed upon the Plaintiffs a greater offshore penalty, exposure to additional civil penalties, increased filing burdens, a disparate standard of review, and a longer case-review time (and thus attorneys’ fees) as compared to other similarly situated applicants. 

CAUSE OF ACTION 

105. All preceding allegations are incorporated here as if set forth in full. 

106. The actions of the Defendants in promulgating the Transition Rules were arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law under 5 U.S.C. § 706(2)(A). 

107. The actions of the Defendants in promulgating the Transition Rules were contrary to the notice-and-comment rulemaking requirements of 5 U.S.C. § 553 and without observance of procedure required by law under 5 U.S.C. § 706(2)(D). 

108. The Transition Rules purport to have, and are treated as having, the force and effect of law, but are not the product of notice-and-comment rulemaking, are arbitrary and capricious, and are therefore invalid. 

109. Plaintiffs have no adequate or available administrative remedy. In the alternative, any effort to obtain an administrative remedy would be futile. 

110. Plaintiffs have no adequate remedy at law. 

111. The action of the Defendants in promulgating and enforcing the Transition Rules imposed a harm on Plaintiffs that warrants relief. 

REQUEST FOR RELIEF 

Therefore, Plaintiffs respectfully request the following relief: 

A. A holding by the Court setting aside the Transition Rules as unlawful under 5 U.S.C. § 706(2); 

B. A judgment by the Court that, under 5 U.S.C. § 706(2)(A), the Transition Rules are arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, and are therefore invalid; 

C. A judgment by the Court that the Transition Rules did not comply with the notice-and-comment rulemaking requirements of 5 U.S.C. § 553, were without observance of procedure required by law under 5 U.S.C. §706(2)(D), and are therefore invalid; 

D. A judgment that Plaintiffs may withdraw from the 2012 OVDP and directly enter the 2014 SFCP where the IRS must treat them the same as any other 2014 SFCP applicants;
E. An injunction prohibiting Defendants or their agents from enforcing the Transition Rules; 

F. An award of attorneys’ fees, costs, and expenses in this action; and 

G. Any other legal or equitable relief to which the Plaintiffs may show themselves to be justly entitled.

The attorneys on the complaint are:

George M. Clarke III (D.C. Bar No. 480073)
Joseph B. Judkins (D.C. Bar No. 499737)
(Admission Pending)
Baker & McKenzie LLP
815 Connecticut Ave. NW
Washington, DC 20006
Tel: (202) 452-7000 

Milan K. Patel (Admitted in New York and New Jersey and appearing pursuant to LCvR 83.2(c))
Anaford AG
Toedistrasse 53
8002 Zurich, Switzerland 

Marnin J. Michaels (Admitted in New York and appearing pursuant to LCvR 83.2(c))
Baker & McKenzie LLP
Holbeinstrasse 30
8034 Zurich, Switzerland

JAT Comment:  It is clear that the financial cost of taxpayers doing the Streamlined Transition are greater than the financial costs of taxpayers doing straight Streamlined.  I think that more costly treatment is unfair, particularly given that the taxpayers doing the Streamlined Transition outed themselves earlier.  Taxpayers doing straight Streamlined thus are given a reward for waiting.  That does not seem to me to be fair.

The question then is whether it is so unfair as to be arbitrary and capricious so that a court can provide some relief.  Possibly.  This is a well-pleaded complaint, stating the gravamen of the claim.  I will post further as the Government answers the complaint and then as the parties file briefs detailing their respective positions.