Source: https://taxlitigator.me/page/3/
Timestamp: 2019-01-18 14:42:13
Document Index: 226019093

Matched Legal Cases: ['§1', '§1', '§7202', '§6672', '§34', '§ 5321']

TAXLITIGATOR - Tax Controversy (Civil & Criminal) Report | The difficult will be done immediately, the impossible will take a little more time . . . | Page 3
Posted by: Robert Horwitz | July 12, 2018
In the years following the Mortgage Crisis many taxpayers did short-sales of their homes. Many of them tried renting their homes before doing a short sale or allowing the home to go into foreclosure. Guidance on the tax consequences of short sales have been non-existence. It only recently, in Simonsen v Commissioner, 150 T.C. No. 8 (March 15, 2018), that the Tax Court addressed the tax consequences of a short sale that occurred after the taxpayers converted their home to a rental property.
The Simonsens purchased a condominium in 2005 in San Jose for $695,000. They put 20% down and borrowed the remainder of the purchase price from Wells Fargo Bank. The condominium was their principal residence until late 2010, when they moved to southern California. They converted the condominium to a rental unit. In late 2011, they negotiated a short sale of the property for $363,000. After $26,000 in costs, the balance went to Wells Fargo Bank which applied it to pay down the loan. It wrote off the unpaid balance of the loan and issued a Form 1099-C to the Simonsens for $219,270 of cancellation of debt income.
The Simonsens used Turbo-Tax to prepare their return. They treated the short sale as two separate transactions: a sale of the condominium and a cancellation of debt. Since the price, $363,000, was less than the cost basis less depreciation, they reported a loss on the sale of $216,000. Under the 2007 Mortgage Forgiveness Debt Relief Act, a taxpayer does not recognize cancellation of debt income from “qualified principal residence indebtedness.” Consequently, they did not report cancellation of debt income.
Not so fast said the IRS. The IRS took the position that since the Simonsens had converted their residence to a rental, the condominium was not their “principal residence” for purposes of the exclusion. Further, the short sale was really a sale for the amount of the note, which was $555,960. Finally, the IRS determined that when they converted the property to a rental unit, the Simonsens’ basis became the fair market value on the date of the conversion. Since this was $495,000, instead of a loss and no COD income the Simonsens had taxable gain of $60,000. The IRS also asserted an accuracy penalty.
The first issue was whether the condominium was the Simonsens’ principal residence. Pointing to sec. 121, the Simonsens argued that since they resided there at least two of the preceding five years, it was their principal residence. The IRS argued that since they had converted the property to a rental unit prior to the short sale, it was no longer their principal residence. The Court considered this a difficult issue. It therefore sidestepped it by going on to the question of whether the short sale was one or two transactions. It was one. The short sale was coordinated with the bank and could not have gone forward unless the bank agreed to release its deed of trust from the property. It was nothing more than a substitution for a foreclosure. Thus the Simonsens erred in treating the short sale as two transactions. Since the loan was nonrecourse, the amount realized was the amount of the debt, or $555,960.
This lead to the question of whether there was gain or loss on the short sale. The Court noted something that the parties had overlooked: although when a property is converted to a rental unit its basis is the value at the time of the conversion, under Treas. Reg. §1.165-9(b)(2), the value at the time of conversion is only used to compute loss. To compute gain, you use the taxpayer’s adjusted cost basis. The amount realized from the sale (the $555,960 owed on the note) was more than property’s fair market value at the time of conversion but less than the Simonsens’ adjusted cost basis. So what happens when the amount realized from the sale is more than the basis used to compute loss but less than the basis used to compute gain? As noted by Judge Holmes, this is a conundrum that only a tax lawyer could love. There were no cases on point, but there was an analogous situation under the gift tax regulations. A donee’s basis in property acquired by gift is the donor’s basis. Under the regulations, where the donee sells the property, she computes gain using the donor’s basis and loss using the lesser of the donor’s basis and the fair market value of the property on the date of the gift. The regulations provide that if the sale price falls between the donor’s basis and the value on the date of the gift, there is neither gain nor loss. The Court found this a logical way to resolve the issue of whether there was gain or loss.
This left the issue of penalty. The Court found that the Simonsens were not liable for the accuracy penalty. First, the IRS failed to meet its burden of proving that it complied with the requirement for written managerial approval before issuance of the notice of deficiency. Even if it had, the Court found that the taxpayers acted with reasonable cause and in good faith. First, while Wells Fargo issued a Form 1099-C for cancellation of debt income, the title company issued a Form 1099-S for the sale of the property. This supported their belief that there were two transactions. Second, the IRS had not issued any regulations addressing the Mortgage Debt Relief Act, case law was scarce and it was not clear what “principal residence” means for purposes of the Act. Additionally, the IRS pamphlets on cancellation of debt indicate that a basis adjustment is only necessary if you continue to own the property after the debt is cancelled. The Court therefore found “that the Simonsens’ 2011 reporting errors were the result of an honest misunderstanding of the law that was reasonable considering their lack of tax knowledge, the complexity of the issues, and the information returns that they received. And we are convinced, based in large part on Christina’s honest and believable testimony, that the Simonsens acted in good faith.”
Posted in Uncategorized | Tags: Form 1099-C, Form 1099-S, Mortgage Forgiveness Debt Relief Act, Simonsen, Treas. Reg. §1.165-9(b)(2)
Posted by: evanjdavis | July 6, 2018
Two weeks ago, the Supreme Court reinforced that a felon’s liberty interest outweighed inconveniencing the district court when the Court held that appellate courts must send cases back to the district court where the district court made a mistake in calculating the federal sentencing guidelines. Rosales-Mireles v. United States, 585 U.S. ___ (2018), available at https://supreme.justia.com/cases/federal/us/585/16-9493/.
In 7-2 victory for justice over expediency, the Court slammed the Fifth Circuit Court of Appeals’ overly stringent standard for granting a defendant a new sentencing hearing after the parties discovered for the first time on appeal that the district court’s guideline calculation was erroneous.
In the real world of federal sentencing, the “advisory” federal sentencing guidelines determine the sentence in most cases, even though they are supposed to be just the first step in an analysis that accounts for the defendant’s history and characteristics, among other factors. United States Probation Officers – employed by the district court – prepare a presentence report that includes a calculation of the guideline sentence based on the offense level and criminal history.
Florencio Rosales-Mireles’ guideline sentence was erroneously calculated because the Probation Officer double-counted a misdemeanor conviction and increased his criminal history level. This increased his guideline sentence from 70-87 months to 77-96 months. The district court imposed a 78-month sentence, which was within both the correct and erroneous guideline ranges. Only on appeal did anyone notice the double-counting. Because Mr. Rosales-Mireles didn’t object to the error in the district court, the Court of Appeals used a difficult-to-show “plain error” standard that required the defendant to demonstrate, among other things, a reasonable probability that the error affected his sentence and that it seriously affected the fairness and integrity of his sentencing.
The parties agreed that the incorrect guideline likely affected his sentence (even though the imposed sentence was still within his correct guideline sentence range), but disagreed whether the plain sentencing error implicated the fairness and integrity of his sentencing. Siding with the government and adopting a test that would make few sentencing errors reversible, the Fifth Circuit held that only sentencing errors that “shock the conscience” are reversible. The Fifth Circuit was an outlier, as most other circuits including the Ninth Circuit had adopted a lower standard for reversing sentencings based on erroneous guideline calculations.
The Supreme Court granted certiorari to resolve the circuit split, and reinforced that inconveniencing district judges for a few hours isn’t a sufficiently important concern when balanced against ensuring the integrity and public confidence in sentences. The Court emphasized the convicted defendant’s perspective: “To a prisoner,” this prospect of additional “time behind bars is not some theoretical or mathematical concept.” However, the Court didn’t lose sight of judicial efficiency, noting resentencing hearings are relatively low-cost, compared to a costly new trial. The implication: less-egregious mistakes at sentencing can warrant remand, whereas only more-serious mistakes at trial will warrant a new trial.
Getting the guidelines right wasn’t just about the defendant being sentenced, as the Court noted that sentencing data is used to revise the guidelines, among other things, and not correcting guideline errors would skew the data. Protecting sentencing data justified requiring a new sentencing hearing in this case, even though Mr. Rosales-Mireles’ 78-month sentence was within the correct guideline range and, according to other precedent, was presumptively reasonable as a result.
The opinion was laced with lofty quotations from earlier Supreme Court cases and, interestingly, an appellate court decision penned by Judge (not-yet-Justice) Gorsuch of the Tenth Circuit:
In considering claims like Rosales-Mireles’, then, “what reasonable citizen wouldn’t bear a rightly diminished view of the judicial process and its integrity if courts refused to correct obvious errors of their own devise that threaten to require individuals to linger longer in federal prison than the law demands?”
United States v. Sabillon-Umana, 772 F. 3d 1328, 1333–1334 (CA10 2014) (Gorsuch, J.).
The next question: will the Supreme Court and lower courts elevate fairness and integrity over expediency in situations where a new trial would have to result? Although the Supreme Court noted the relatively low cost of resentencing in support of remanding to correct a guideline error, the Court’s remaining arguments in favor of remand would apply with even more force to errors that affected guilt. It’s important to ensure a defendant like Rosales-Mireles doesn’t have to spend seven extra months in custody based on a guideline error, but isn’t it even more important to ensure that a defendant wasn’t convicted as a consequence of an error at trial in the first place?
EVAN J. DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3288. Mr. Davis is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) handling civil and criminal tax cases and, subsequently, of the Major Frauds Section of the Criminal Division of the Office of the U.S. Attorney (C.D. Cal) handling white-collar, tax, and other fraud cases through jury trial and appeal. He served as the Bankruptcy Fraud coordinator, Financial Institution Fraud Coordinator, and Securities Fraud coordinator for the USAO’s Criminal Division, and the U.S. Attorney General awarded him the Distinguished Service Award for his work on the $16 Billion RMBS settlement with Bank of America.
Posted in Uncategorized | Tags: Rosales-Mireles, Sabillon-Umana
Posted by: Robert Horwitz | July 3, 2018
Supreme Court Overrules Prior Commerce Clause Cases: Internet Retailers Will Now Be Liable for Sales Tax by Robert S. Horwitz
For over fifty years the Supreme Court has held that the Commerce Clause of the U.S. Constitution prohibits states from collecting sales tax from out-of-state retailers unless the retailer had a physical presence in the taxing state. National Bella Hess, Inc., v. Ill. Dept. Rev., 386 U.S. 753 (1967); Quill Corp. v. North Dakota, 504 US 298 (1992). A physical presence normally required the retailer to have employees or physical facilities in the taxing state. On June 21, 2018, the Supreme Court jettisoned its prior interpretation of the Commerce Clause and held that a state can require an out-of-state seller who ships goods into the state to collect and remit sales tax. South Dakota v. Wayfair, Inc., here,
Like most states, South Dakota has seen a decline in tax revenues. To increase the amount of sales tax collected, it enacted a law in 2016 requiring out-of-state retailers to collect sales tax on goods shipped to consumers in South Dakota. An exception was carved out for retailers that annually shipped $100,000 or less of goods or services into the state or engaged in fewer than 200 separate transactions for the delivery of goods or services in state. The law could not be applied retroactively. Wayfair, Inc., and several other online retailers who did not have employees or physical facilities in South Dakota challenged the law. Although the South Dakota high court found the State’s rationale for the law persuasive, based on the physical presence test it held that the law was unconstitutional. The Supreme Court granted certiorari. Over forty-one states, two territories and the District of Columbia filed amicus briefs urging the Court to overturn Quill.
In reversing the state court and overruling its prior decisions, the Supreme Court began by focusing on the two “primary principles that mark the boundaries of a State’s authority to regulate interstate commerce.” These are: 1) a state may not discriminate against interstate commerce and 2) a state may not impose undue burdens on interstate commerce. The Supreme Court will uphold a state tax “so long as it (1) applies to an activity with a substantial nexus with the taxing State, (2) is fairly apportioned, (3) does not discriminate against interstate commerce and (4) is fairly related to the services the state provides. The physical presence rule enunciated in Bella Hess and Quill “is an incorrect interpretation of the Commerce Clause.”
The Court additionally stated that Quill put local and many interstate businesses at a competitive disadvantage to sellers who did not have a physical presence in the state. This allowed out-of-state sellers to avoid the regulatory burden of tax collection and to offer lower prices, especially since most consumers do not pay use tax on goods purchased from out-of-state sellers. Overruling the physical presence test ensured that artificial competitive advantages are not created by the Court’s precedents.
The Court further noted that modern ecommerce does not align analytically with a test that relies on Quill’s physical presence test. Due to targeted advertising and instant access on the internet an out-of-state retailer may be present in a state in a meaningful way without having employees or a physical location in the state.
The Court also rejected the argument that stare decisis required affirmance of the state court’s decision. First, stare decisis is not an inexorable command. If a prior decision is incorrect, it should be rejected. This is especially true where circumstances have radically changed, as occurred with the internet’s prevalence in commerce and the economy. This has increased the revenue shortfalls faced by states seeking to collect sales and use tax.
Because of South Dakota’s exceptions for out-of-state retailers that do a limited amount of in-state business, the Court did not need to address at what point imposing the duty to collect and remit sales tax on out-of-state retailers imposes an undue burden on commerce. The Court also did not address whether a complex sales tax system could be unduly burdensome, though it did note that there are various plans to simplify collection and that, since small in-state retailers pay the tax as well the risk of discrimination against out-of-state businesses is avoided.
The exceptions in the South Dakota law also meant that the Court did not have to address whether there was a substantial nexus between the out-of-state retailer and the taxing state. The Court finally noted that there may be questions of whether other principles in the Commerce Clause could invalidate the law, but these had been neither briefed nor litigated. Nonetheless several features of the law ensured that it did not discriminate against or place undue burdens on interstate commerce: 1) the safe harbor for those who only did limited business in South Dakota; 2) the law was not retroactive; and 3) South Dakota had adopted the Streamlined Sales and Use Tax Agreement that reduces administrative burdens and provides sellers access to sales tax administrative software paid for by the state.
Justices Thomas and Gorsuch concurred. Chief Justice Roberts, joined by Justices Breyer, Kagan and Sotomayor dissented. They argued that while Quill and Bella Hess were wrongly decided, they are stare decisis and any alteration in the rules should be undertaken by Congress. Additionally, many businesses have acted in reliance on the Court’s prior jurisprudence and changing it may have unintended effects on the growth of ecommerce. Thus, they would “let Congress decide whether to depart from the physical-presence rule that has governed this area for half a century.”
We can expect to see a number of states, including California, amend its sales tax statutes to reach out-of-state retailers. It remains to be seen whether all states will 1) have exceptions similar to South Dakota’s for those that do limited in-state business or 2) have simplified procedures or 3) not apply retroactively. These are issues that will be litigated in the future.
The Wayfair decision could affect a state’s ability to impose tax on non-residents. Earlier Supreme Court cases barred a state from taxing an out-of-state lender on interest from loans made to a resident of the state because the out-of-state lender did not have a situs in-state (and the site of a loan is where the state where the lender resides or has business offices). See Beidler v. South Carolina Tax Comm., 282 U.S. 1 (1930). Whether any state will argue that these decisions must be overturned in light of Wayfair cannot be predicted. But probably several state taxing agencies are already thinking about it.
Posted in Uncategorized | Tags: Bella Hess, Quill, Wayfair
Posted by: Cory Stigile | July 2, 2018
Financial Status Audit Techniques: Part Three – The Bank Account Analysis by CORY STIGILE
This is the third of a six part series devoted to utilization of various indirect methods of determining the income of a taxpayer.
The Bank Account Analysis compares total deposits with the reported gross income. for all accounts, whether designated as personal or business. The examiner will review the taxpayer’s business and personal bank accounts (including investment accounts); i.e., statements, deposit slips, and canceled checks, etc. looking for unusual deposits (size or source), the frequency of deposits, deposits of cash, specific deposits that do not follow the taxpayer’s normal routine or pattern, nontaxable deposits such as loans and transfers, commingling of personal and business activities, and cash-backs when a deposit occurs.
If the analysis results in the identification of excess deposits over the reported gross income, the excess represents potential unreported income. If specific transactions or deposits can be identified as the source of the understatement, the examiner may assert a specific item adjustment to income supported by the direct evidence of excess deposits. If the specific transactions or deposits creating the understatement are not identified, an adjustment to taxable income may be made based on the circumstantial evidence. If the business expenditures paid by check are less than the deducted business expenses on the return, then the taxpayer may be overstating expenses, paying expenses by cash (unreported income), or paying expenses from an undisclosed source of funds. If the analysis indicates significant commingling of funds, then the internal controls are weak and the books and records may be unreliable.[ii]
[i]. See IRM 4.10.4.3.3.4. (08-09-2011)
Posted in Uncategorized | Tags: 446, 446(b), bank account analysis, FSAT, Holland v US
Posted by: Robert Horwitz | June 13, 2018
It seems like discussions of burden of proof and the definition of “willful” in FBAR cases are getting to be as routine as discussions of what it means to be a “responsible person” and to act “willfully” for the trust fund recovery penalty under Internal Revenue Code sec. 6672. And the courts have so far fallen in with the line espoused by the Department of Justice.
The latest case in point is United States v. Garrity, No. 3:15-cv-00243 (D. Conn. April 3, 2018), a suit brought to reduce to judgment a penalty assessed under 31 USC sec. 5321(a)(5) for willful failure to file an FBAR, in violation of 31 USC sec. 5314. The Court had ordered the parties to file pre-trial briefs on the burden of proof and what must be proven to establish “willful.”
The Government argued that its burden of proof is by a preponderance of the evidence rather than by clear and convincing evidence as defendants claimed. The Court sided with the Government based on Supreme Court cases holding that this is the normal burden of proof in civil cases, including those involving monetary penalties, at least where the interests at stake are only financial and not “important individual rights and interests” that would warrant a higher standard. The Court rejected defendants’ analogizing the FBAR penalty to a civil fraud penalty, where the Government must prove fraud by clear and convincing evidence. It also rejected defendants’ assertion that since willful involves a question of intent the burden of proof should be greater.
Every published case involving a willful FBAR penalty has held that the government’s burden of proof is by a preponderance. This includes the Bedrosian case, which held that the plaintiff did not act willfully. Practitioners should take comfort that the courts have not held that the assessment of the FBAR penalty is entitled to a presumption of correctness and placed the burden of proof on the person against whom the penalty was assessed. In a trust fund recovery penalty case, the taxpayer has the burden of proving two negatives: 1) that he was not a responsible person and 2) that he did not act willfully.
The Garrity Court also held that the Government can prove that the defendant committed a willful violation by showing he acted recklessly, rejecting the defendants’ argument that the Government must prove that the failure to file an FBAR penalty was a voluntary and intentional violation of a known legal duty.
The Court stated that defendants’ arguments “do not account for the well-established distinction between civil and criminal formulations of willfulness.” The Court relied upon the Supreme Court’s holding in Safeco Insurance Co. v. Burr, 551 US 47 (2007), which held that proof of reckless conduct was sufficient to establish a willful violation of the notice provisions of the Fair Credit Reporting Act. Since numerous cases have held that reckless conduct is sufficient to establish a willful violation of the FBAR reporting provisions, and the defendants could only point to criminal cases defining willful as a “voluntary and intentional violation of a known legal duty,” the Court found no reason to deviate from the cases holding that reckless conduct equals willful conduct.
The courts in FBAR cases have so far ignored the fact that in civil trust fund recovery penalty cases the courts apply a similar definition of “willful” as is applied in criminal cases: a voluntary, conscious and intentional violation of the known legal duty to pay withholding taxes. Phillips v. United States, 73 F. 3rd 939 (9th Cir. 1996). The Ninth Circuit in United States v Easterday, 594 F. 3rd 1004 (2009) and United States v. Gilbert, 266 F. 3rd 1180 (2001), both defined willful for purposes of the criminal trust fund recovery penalty under Internal Revenue Code sec. 7202 in a virtually identical way as it defines willful for purposes of the civil trust fund recovery penalty. And in Slodov v. United States, 436 US 238 (1978), the Court stated that the same conduct subjecting a taxpayer to liability for the civil trust fund recovery penalty subjects him to liability for the criminal penalty:
Also, §7202 of the Code, which tracks the wording of §6672, makes a violation punishable as a felony subject to fine of $10,000, and imprisonment for 5 years. Thus, an employer-official or other employee responsible for collecting and paying taxes who willfully fails to do so is subject to both a civil penalty equivalent to 100% of the taxes not collected or paid, and to a felony conviction.
436 US at 245. This would support an argument that willful should be construed in the same way for civil penalties for violating the Bank Secrecy Act provisions as it is for criminal penalties.
The Government has convinced the courts that willful for purposes of the civil FBAR penalty includes both reckless disregard and willful blindness. Under both Williams, 489 Fed. Appx. 655 (4th Cir. 2012) and McBride, 908 F.Supp. 2nd 186 (Utah 2012), a taxpayer’s failure to review a tax return is sufficient to establish a conscious attempt to avoid learning of the FBAR reporting requirements. Under this reasoning, every person with an offshore account who signs a tax return with a Schedule B and fails to file an FBAR would be liable for the willful penalty.
This interpretation appears to ignore what the Supreme Court held was required to show reckless disregard or willful blindness. In Safeco Insurance Co., the Court stated:
While “the term recklessness is not self-defining,” the common law has generally understood it in the sphere of civil liability as conduct violating an objective standard: action entailing “an unjustifiably high risk of harm that is either known or so obvious that it should be known.” Farmer v. Brennan, 511 U. S. 825, 836 (1994); see Prosser and Keeton §34, at 213–214. The Restatement, for example, defines reckless disregard of a person’s physical safety this way:
In Global-Tech Appliances, Inc. v. SEB SA, 563 U.S. 754 (2011), the Court held that in a civil case alleging inducement to violate a patent the defendant’s knowledge can be established by showing willful blindness, which requires more than negligence or recklessness. Relying on criminal cases, the Court stated:
While the Courts of Appeals articulate the doctrine of willful blindness in slightly different ways, all appear to agree on two basic requirements: (1) the defendant must subjectively believe that there is a high probability that a fact exists and (2) the defendant must take deliberate actions to avoid learning of that fact
According to the Court these “requirements give willful blindness an appropriately limited scope that surpasses recklessness and negligence. Under this formulation, a willfully blind defendant is one who takes deliberate actions to avoid confirming a high probability of wrongdoing and who can almost be said to have actually known the critical facts.” Deliberate indifference is insufficient to establish that the person acted knowingly or willfully.
This doesn’t square with the willfulness standard adopted in the reported FBAR cases, where several courts have deemed that a taxpayer has constructive knowledge of the contents of his tax return, which contains on Schedule B, Part III, a statement that if you have a foreign financial account you may have to file FinCen Form 114 and directs the taxpayer to the form and its instructions. Are the Courts saying that a taxpayer who fails to read every line on his return is willfully blind or acting with reckless disregard? If so, I think the courts are jettisoning the mens rea requirement of sec. 5321(a)(5).
Perhaps the courts are turning around. In Norman v United States, No. 15-872 (Court of Fed. Claims), the government moved for summary judgment on the ground that the fact that Ms. Norman signed a return that checked the No box to the question of whether she has a foreign return is enough to prove willfulness because a taxpayer has constructive knowledge of the contents of the return, and thus is deemed to know of the requirement for filing an FBAR and she thus willfully failed to do so. Convoluted, but it is a logical reading of Williams and McBride. The court in an order denied the motion on the ground that there were material facts in dispute requiring trial.
The Court in Garrity did not say would establish recklessness. I hope, after trial, the courts in Garrity and Norman will hold that willfulness requires at a minimum knowledge that the law requires a person knew he may have to report offshore accounts to the Government.
Posted in Uncategorized | Tags: 5321, BEDROSIAN, Form 114, garrity, Global-Tech Appliances, mcbride, norman
Posted by: Robert Horwitz | May 21, 2018
Section 5321(a)(5)(A) provides that the Secretary of Treasury “may impose a civil money penalty” on anyone who violates the FBAR reporting requirements. Originally, the penalty for willful violation was the greater of the amount in the account (not to exceed $100,000) or $25,000. In 2004, Congress amended the FBAR penalty provision to increase the maximum willful penalty from the amount in the account (up to $100,000) to the greater of $100,000 or 50% of the amount in the account. Section 5321(a)(5)(C)(i). Based on the statute, the IRS has routinely imposed FBAR penalties equal to 50% of the high balance in the taxpayer’s offshore accounts, sometimes for several years. As a result, taxpayers have been faced with millions of dollars in FBAR penalties.
Along with a handful of other commentators, I had pointed out that these confiscatory penalties violate a Treasury regulation issued after sec. 5321(a)(5(C)(i) was amended. That regulation, 31 C.F.R. sec. 1010.820, provides that the maximum FBAR penalty is $100,000. See “Is it Illegal for the IRS to Assess More than $100,000 for a Willful FBAR Violation?” posted November 17, 2017.
On May 16, 2018, a District Court held that a willful FBAR penalty of over $100,000 was illegal. United States v. Colliot, Docket No. 1:16-cv-01281 (W.D. Tex.). The Government sued Mr. Colliot to collect FBAR willful penalties assessed against him for 2007, 2008, 2009 and 2010. The penalties assessed were $548,773 for 2007 and $198,082 for 2008. The penalties for 2009 and 2010 were smaller. Mr. Colliot moved for summary judgment on the ground that the IRS improperly assessed penalties of over $100,000 in violation of the regulation. The Government opposed the motion on the ground that regulation was invalidated by the statute. The Court disagreed.
The Court found that there was “little reason to believe” the statute “implicitly superseded or invalidated” the regulation. The maximum penalty is discretionary and the regulation, issued by notice-and-comment rulemaking, “is consistent with § 5321’s delegation of discretion to determine the amount of penalties to be assessed.” The regulation was neither unreasonable nor contrary to the provisions of the statute. As a result the IRS acted “arbitrarily and capriciously” when it when it assessed penalties in excess of the regulatory cap.
The Court left open the issue of the appropriate relief in this situation: could the IRS still collect up to $100,000 per year if it proved willful violations or was the entire penalty invalid?
This case is a significant victory for taxpayers. Persons who did not go into the Offshore Voluntary Disclosure Program and are facing 50% penalties have a new weapon to defeat the IRS. The Government will have to consider whether it wants to appeal the decision or just promulgate a new regulation that authorizes a penalty of up to 50% of the maximum balance in the undisclosed offshore accounts.