Saturday, April 24, 2021

Eleventh Circuit Joins the Consensus that Reckless Conduct Is Subject to the FBAR Civil Willful Penalty (4/24/21)

In United States v. Rum, 2021 U.S. App. LEXIS 12160 (11th Cir. 4/23/21), CA11 here; TN here, the Eleventh Circuit in a per curiam opinion affirmed the district court’s grant of summary judgment for the Government in an FBAR willful civil penalty collection suit.  I wrote on the district court’s grant of summary judgment previously.  District Court Confuses Analysis in Approving Magistrate's R&R Imposing FBAR Willful Penalty (Federal Tax Crimes Blog 9/26/19), here.  

The Eleventh Circuit opinions lists Rum’s arguments:

(A) that the district court applied an incorrect standard of willfulness (by holding that willfulness as used in 31 U.S.C. § 5321(a)(5)(C) includes a reckless disregard of a known or obvious risk); (B) that the district court erred in concluding that there were no genuine issues of material fact as to whether his conduct rose to required level of willfulness/recklessness; (C) that the district court erred in refusing to recognize that 31 C.F.R. § 1010.820(g)(2) limits the amount of a willful violation to $100,000; (D) that the district court erred when it held that the IRS's factfinding procedures were sufficient and therefore applied the arbitrary and capricious rather than a de novo standard of review with respect to the amount of the penalty; (E) that, even assuming the arbitrary and capricious standard applies, the district court erred in failing to conclude that the IRS factfinding procedures were arbitrary and capricious; and finally, (F) that the district court erred in rejecting Rum's challenge to the additions to the base amount (interest and late fees).

I address here only (A) and (D)-(E).

Standard for FBAR Civil Penalty Willfulness

The  Court adopted (Slip Op. 12-16) the consensus holdings that “willfully” as the element of the civil penalty includes recklessness.  I don’t think I need to say more about the holding here because it just rehashes what courts have held before.  The importance of the holding is that it adds to a number of similar holdings, so that it seems that there is no real counterweight to the holding.  It states the consensus.

Rum’s APA Claims

The Court rejected (Slip Op. 22-27) Rum’s APA stated in (D) and (E).  The Court first rejected (Slip Op. 22-27) his claim (D) of entitlement to de novo review of the penalty amount.  Rum made a mélange of claims in this regard Among the background recounted in rejecting his claims, the Court said (Slip Op. 15):

Fourth, Rum argues that Kerkado [the IRS agent] improperly merged his FBAR penalty examination and the tax return examination when she offered him an improper bargain. Initially, we note that Rum cites the I.R.M. for the proposition that the two examinations cannot be merged. However, this merger argument was not presented during the IRS proceedings and is therefore waived. Moreover, nothing in the cited provision of the I.R.M. precludes settlement offers, as made by Kerkado in this case. Indeed, Congress has expressly authorized the IRS to negotiate compromised penalties under 26 U.S.C. §§ 7121 (Closing Agreements) and 7122 (Compromises). Employing her discretion, Kerkado offered Rum the same terms he would have received had he qualified for the Offshore Voluntary Disclosure Program in return for not contesting his civil fraud penalty: 20% instead of the 50% that would otherwise be imposed. There was no improper bargaining here. Rather, Kerkado proposed a global settlement; it was an authorized settlement offer, not a threat of unwarranted penalties as a bargaining point.

It is not clear what version of OVDP Rum was offered because the amount of the miscellaneous offshore penalty (“in lieu of penalty”) is not stated.  Readers will recall that the OVDP miscellaneous offshore penalty (in lieu of the FBAR penalty) started at 20% and increased from 27 ½%.  Moreover, the income tax penalty required was the 20% accuracy related penalty rather than the 75% civil fraud penalty.  So, I assume, Rum was offered only the FBAR part of the OVDP structure.  It is also not clear whether the offer of a 75% civil fraud penalty for more than one year or even all years or, importantly, how many years were involved.

I looked at the Tax Court docket entries for the case, Rum v. Commissioner (T.C. Dkt. 20328-15), here.  I had not realized before that the Tax Court does not make available the decision document (whether stipulated or not).  The decision document, the equivalent of a judgment in district court, seems like a classic case of a public record that should be available.  That seems odd to me, but I suppose one could order the stipulated decision from the Tax Court.  What I was looking for was how many years were involved – specifically, did the IRS use the fraud allegation as a basis to open up otherwise closed years.

Taking what little I know, I can make a meaningful comment about the Eleventh Circuit’s statement that the stipulated decision applied only the accuracy related penalty after the IRS claimed the civil fraud penalty (at least for some year or years) in the notice of deficiency.  I think this is a good illustration of the IRS’s difficulty of proving civil fraud as compared to FBAR civil penalty willfulness.  First, the standard for the civil fraud penalty is higher than the FBAR civil willful penalty—the civil fraud penalty requires the basically the Cheek standard of intention to violate a know civil penalty, whereas the FBAR civil willful penalty can include reckless conduct.  Second, the proof standard for the civil fraud penalty  that the IRS must prove is clear and convincing, a very substantial burden, whereas the proof standard for the FBAR civil willful penalty that the Government must prove is preponderance of the evidence.  As practitioners know, the higher standard for the civil fraud penalty is significantly higher than preponderance of the evidence.  The combination of the higher standard and the higher proof requirement means that there will or should be many cases where the Government can sustain the FBAR civil willful penalty but can't sustain the civil fraud penalty.  Of course, as in Rum v. Commissioner, the taxpayer may have to fight the assertion of a civil fraud penalty in order to achieve the divergence in result.


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