Williams Court Yields To Government’s Claims That It Be Given Expansive Discretion For Asserting Willful FBAR Penalties

In Zwerner, the jury imposed multiple-year willful FBAR penalties at the maximum. Recall that the maximum willful FBAR penalty is the greater of $ 100,000 or 50% of the undisclosed account’s balance on the key date (June 30, as interpreted).

The jury was not asked to review the IRS’s assertion of the maximum willful FBAR penalty. Thus, a key issue left unresolved was whether the IRS’s decision to assert maximum willful FBAR penalties is reviewable. Assuming so, what standard would the trier of fact – here, the jury – apply in determining whether something less than the maximum penalty should apply? And what should that lesser penalty be? At this point, you might be asking yourself, “Don’t the mitigation guidelines answer this question?” If so, you’re thinking along the right lines. Of course, there are mitigation guidelines in the IRM. But as tax practitioners know all too well, the IRM is not the law even under relaxed notions of Chevron deference.

A federal court recently weighed in, ending the continuing saga (unless appealed) with this issue. See United States v. Williams, 2014 U.S. Dist. LEXIS 105666 (ED VA 2014).

While the Court did not give the IRS carte blanche to arbitrarily assert maximum FBAR penalties anytime it felt like it and without any oversight, it bowed deeply to the Government’s claims that it be given expansive discretion for asserting willful FBAR penalties. As you will soon see, this is a distinction without a difference.

Let’s set the stage. 31 USC 5321(a)(5) is the statute that sets the ceiling for willful and nonwillful FBAR penalties. As written, it does not require either the willful FBAR penalty or the non-willful FBAR penalty to be the maximum.

The Government argued that the statute should be interpreted to give the IRS unreviewable discretion with respect to the penalty up to the maximum permitted by the statute. Thus, the Government argued that there should be no review regardless of whether the penalty asserted was $ 1 or $ 10,000,000. Thankfully, the Court disagreed, holding that the IRS’s decision was reviewable.

On the issue of what standard of review applies, however, the Court ruled in favor of the Government. Williams argued that the standard was “de novo.” The Government, on the other hand, argued that the standard was “abuse of discretion.” For those new to standards of review, some background information may be helpful.

The standard of review is the amount of deference given by one court in reviewing a decision of a lower court. Under de novo review, the appellate court acts if it were considering the question for the first time, affording no deference to the decisions below. Legal decisions of a lower court on questions of law are reviewed using this standard. This is sometimes called the “legal error” standard. It allows the appeals court to substitute its own judgment about whether the lower court correctly applied the law.

Abuse of discretion is a lower standard of review than de novo review. A decision is reviewed under the abuse of discretion standard when a lower court makes a discretionary ruling, such as in the case where a lower court allows a party claiming a hardship to file a brief after the deadline. It will not be reversed unless the decision is “plain error.”

In Williams, the Court agreed with the Government, holding that the standard of review was abuse of discretion. Here is what the Court had to say on the proper standard:

Although the Government argues that the amount of the penalty assessed may not be considered on remand, this Court does review the penalty amount for abuse of discretion under the “arbitrary and capricious” standard of the Administrative Procedure Act. 5 U.S. § 706. The Court rejects Defendant’s contention that the Fourth Circuit’s remand for “further proceedings” is an invitation to engage in de novo review of the penalty amount. Although some courts have held in similar contexts that de novo review is appropriate when the issue of a defendant’s underlying tax liability is at issue, see, e.g., Dogwood Forest Rest Home, Inc. v. United States, 181 F. Supp. 2d 554, 559-60 (M.D.N.C. 2001) (collecting cases), the Fourth Circuit has already ruled on the issue of Mr. Williams’s liability in this case. On remand, it has been established that Williams is eligible for the FBAR penalties, including the penalties for willful violations. Because review of the penalty amount is the only remaining issue in this case, the appropriate standard of review is abuse of discretion. n1

n1 Although the only other court to have considered the appropriateness of an FBAR penalty amount did not specifically identify a standard of review, it reviewed the penalty with great deference to the judgment of the agency. In United States v. McBride, 908 F. Supp. 2d, 1186, 1214 (D. Utah Nov. 8, 2012), the court affirmed two maximum penalties after determining that they were within the range authorized by Congress. The court did not consider the propriety of the penalty amounts, simply stating that the penalties were authorized by the statute and “[a]ccordingly . . . were proper.”

I do not follow the Court’s distinction. It seems to me that liability has two strands that are inextricably tied – one being liability and the other being amount. They are one and the same. Thus, where liability is in issue de novo, the IRS should not be able to prevail by getting the benefit of a more relaxed burden of proof on this issue – i.e., abuse of discretion standard – merely because it can prove a specific dollar amount of liability. Rather, the amount of liability is in issue and must be determined de novo. Therefore, I am not convinced that the abuse of discretion standard is justified by the court’s reasoning.

The Court then moved to broad generalizations about an administrative agency’s decision to assert penalties, saying that courts should not substitute their own judgments for that of the IRS’s. The Court deferred to the IRS:

In this case, the two $100,000 penalties issued by the IRS were within the range authorized by Congress in 31 U.S.C. § 5321(a)(5)(C) for willful violations. Although the IRS may impose a lower penalty where the violating taxpayer meets certain criteria, see U.S. Br. at 6, such departures are within the discretion of the agency. The Internal Revenue Manual states that in assessing penalties, examiners “exercise discretion” in determining “the total amount of penalties to be asserted,” and also states that examiners are to consider the facts and circumstances of each case when making that determination. The Manual clarifies that the penalties are determined “per account,” and not per person or per unfiled FBAR. IRM § 4.26.16.4. The Manual specifically lists “[t]he nature of the violation and the amounts involved” and “[t]he cooperation of the taxpayer during the examination” as among the factors that an examiner should consider. However, it also warns that “given the magnitude of the maximum penalties permitted for each violation, the assertion of multiple penalties . . . should be considered only in the most egregious cases.” IRM § 4.26.16.4.7.

Although Defendant argues that the imposition of two maximum penalties is not warranted in this case, the Court finds that there is sufficient evidence in the record to demonstrate that the $200,000 penalty was the product of reasoned decision-making and consideration of the appropriate factors. While there is no evidence from which the Court can conclude that the penalties were assessed for an improper purpose, the IRS’s letter to Mr. Williams bolsters the conclusion that the agency made a reasoned decision after considering the relevant factors. See Def. Ex. 29. Reviewing the IRS’s decision under an abuse of discretion standard, this Court cannot simply substitute its judgment for that of the agency. Although the Internal Revenue Manual does state that multiple maximum penalties are for “egregious” cases, it would not be arbitrary and capricious for the IRS to find that the amount of money involved in this case justified the imposition of maximum penalties.

Note that the Court says that there is no evidence that the assessment was made for an improper purpose. But that misses the mark. Williams argued that there was such evidence – either for an improper purpose or based on no criteria at all other than liability for the willful penalty, which does not per se address what the amount of the penalty should be.

This is from Williams’ opening brief (pp 5-6):

And looming over the entire record is evidence that, as a subjective matter, the FBAR assessment underlying this action was issued by the IRS for the improper purpose of coercing Mr. Williams’s agreement to a separate but related audit, and then punishing his non-agreement by imposing, without analysis, the most onerous financial penalty that could be structured under the FBAR law as it then existed. See Gov’t Response to Contention Interrogatories (Defendant Trial Exhibit 2) at 4.3

* * * In response to an Interrogatory requesting the criteria that informed the IRS’s assessment of double maximum penalties in this matter (criteria that, if persuasive to the Court, could have been adopted and applied by it in its de novo review of the penalty assessment), the government acknowledged that it could offer no justification other than the bare assertion that Mr. Williams willfully violated the FBAR reporting requirement. See Exhibit B at 1-2. n4 And in its evidentiary presentation at trial, the government offered no testimony regarding justifications for double maximum penalties in this case, other than Mr. Williams’s testimony that in 2000 his company had “bank accounts” in Switzerland that were not reported (4/26/10 Tr. 13-14).

n4 In particular, in response to Interrogatory No. 1, which asked for the “criteria” used to impose the FBAR penalties against Mr. Williams, the government asserted only that Mr. Williams had willfully failed to file a timely FBAR for the year 2000 reporting his interest in foreign bank accounts.

Original Post By:  Michael DeBlis