The Moore FBAR Case: non-willful FBAR penalty litigation; court orders remand

The area of FBAR litigation is incredibly scant. The two recent FBAR penalty cases, Williams and McBride all involved willful FBAR penalties. And now, for the first time, in the case of James Moore, Plaintiff v. United States of America , Defendant, we finally get a look at some non-willful FBAR penalty litigation.

My first impression is this. The IRS made some significant errors and Mr. Moore’s legal team is on top of things.  The district court made a few errors, yet stated some parts of the law exactly correct and reached a hopefully surprising conclusion — one that may turn the tide against the terror of IRS FBAR penalty wins.

District Court implies incorrect FBAR triggers

The court seemed to muff up the FBAR reporting requirement threshold and then didn’t even acknowledge it later on: pg. 1, sec. II, “Essentially any person residing in the Unites States with foreign accounts totaling more than $550,000 .”

In legal terms, the proper follow up question is “WTF?”

The court later states in its decision, pg. 2, Sec. II.A. “All all relevant times, the balance in the account exceeded $300,000, but was less than $550,000.”

You see, the actual FBAR reporting requirement is $10,000 in the aggregate. I can’t figure out where Judge Jones got this $550,000 figure or, if he decided that the filing threshold was $550,000, why he wouldn’t be compelled to rule that Mr. Moore did not have an FBAR filing obligation and, thus, deserved no penalties.

So isn’t it fair to ask, that if a federal district court, presided over by a judge that must be fairly smart, and obviously well-rounded, after being briefed on this issue and having a staff of highly motivate legal clerks to assist him, can’t recite the actual FBAR reporting requirement correctly, what does this say about the burden placed on regular taxpayers?

Mr. Moore did not make a soft-disclosure and likely saved himself a big headache

Had Mr. Moore made a soft-disclosure, I would expect the IRS to be aiming for willful FBAR penalties. Luckily he was correctly advised not to do this. In the case, the IRS is only seeking the much milder non-willful FBAR penalties. His attorney advised him well. Instead of arguing over $40,000, Mr. Moore could be facing at least willful FBAR penalties that would exceed the account value.

Yet, it doesn’t appear that Mr. Moore is in the opt-out portion of any OVDP/OVDI where he could argue for a penalty lower than the standard offshore penalty, but rather took a different path. My guess is (based on clients we have had in similar situations) that he got tired of the IRS taking their time, so he left the program, and was audited under normal rules.

District Court exposes why  the Bank Secrecy Act of 1970 (BSA) needs to go

Mr. Moore only owed only $18,000 in additional tax but was assessed a penalty of $40,000. The court said that “this is beside the point.”Guess what? I agree. He is completely correct. Someone who owes no income tax could be, and in some cases should be, assessed FBAR penalties.

Hear me out.

Tax non-compliance and BSA non-compliance should be two separate inquiries. The income tax is located in Title 26 of the US Code and the BSA is in Title 31. The purpose of Title 26 is to make sure people pay their taxes “or else.” And the purpose of the BSA portions of  Title 31 is to make sure that criminals have a difficult time using the global banking system to fund their criminal enterprises.

So, yes the court is right. Tax compliance should be beside the point.

Let’s not talk about tax non-compliance when assessing FBAR penalties. Shouldn’t our inquiry be what factual basis exists that Mr. Moore was related in any type of criminal activity? That he was using international banking to fund some sort of criminal enterprise?

Mr. Moore isn’t even alleged to have committed tax evasion. Yes, he underreported income. But underreporting income is a far cry from tax evasion. Tax evasion requires a specific intent to defraud. Millions of American file amended returns to include income they didn’t realize was actually taxable. Millions of American I bet right now haven’t included all their income. Not because they want to commit tax evasion,  but simply because they didn’t know.

District Court correctly reaffirms that the Internal Revenue Manual is not the law

Many times we are confronted with IRS employees claiming that the Internal Revenue Manual (IRM) is the law. It is not the law, but rather what the IRS is trained on. The Court indicated in Footnote 5 (without actually “deciding” it because neither party contested this) that the IRM does not carry the force of law and the IRS is not legally required to follow it.

Schedule B haunts us again

The IRS specifically states that the mere fact of checking “no” on Schedule B Part III Line A should not result in an automatic FBAR penalty. It appears at first glance as if that is what happened here with Mr. Moore.

Mr. Moore admitted to seeing the question on Schedule B but didn’t think it applied to him (and didn’t answer it). That is a very different scenario than not seeing it at all, like many of our clients (or seeing it but not reading it). Schedule B follows the signature page of a 1040, so for many of our clients, they actually don’t see it and we are able to avoid even non-willful penalties.

Why FBAR penalties? The IRS had slam-dunk Form 5471 penalties at $10,000 per year and blew its chance to assess them!

As more than a 10% owner of a foreign corporation, Mr. Moore (who actually owned 100%) had a Form 5471 reporting obligation. Our guess is that he didn’t file these fairly onerous forms. What is the penalty for not filing a Form 5471. Why it’s $10,000 per year!

If you don’t file a Form 5471, the IRS has forever to assess them, unless of course, they close out your tax audit, which the IRS did.

What does this prove?

  • International tax compliance is so hard it appears, unless there are facts we are not aware of, that the IRS agents can’t keep track of everything it really should know.
  • There are already onerous off-the-shelf penalties the IRS could assess for tax non-compliance if it wanted to. But maybe they wanted an FBAR headline?

The IRS will probably lose this assessment

Despite everything, the federal court did do a huge favor to Mr. Moore. It looks like the court will be remanding this case because the IRS failed to explain its actions — that is, the IRS did not tell Mr. Moore WHY he was being assessed these penalties. That’s sort of a big deal. Also, the court basically said, “you are totally off the farm” to the IRS about the 2005 assessment. The IRS may well lose on that year when the court decides on that it was “arbitrary and capricious” for jumping the gun and making the assessment earlier than it said it would for no reason.

This FBAR litigation is likely for the principle

Yet, the IRS is determined to win at any cost on these FBAR cases.

The IRS is trying to make an example of Mr. Moore. Again, they must have had slam-dunk Form 5471 penalties they could have easily slapped him with and for more years. But Form 5471 doesn’t have the same zing as FBAR I suppose. The IRS is throwing all of its resources to making these penalties stick. Recall in Williams, they went after the defendant even though he went to jail for tax evasion on the exact unreported foreign accounts he did not file an FBAR on (that is the IRS knew full well of the foreign accounts even though an FBAR was not filed), and in McBride, that defendant didn’t even have control over the accounts, and in fact the money in the accounts was stolen from him!

On the other side, I can’t imagine that Mr. Moore and his legal team are fighting this because they think it is financially worth it. I doubt it could be. Rather it is Mr. Moore who is suing the federal government and not the other way around; they are taking a stand. See — Mr. Moore was the one to bring the fight to the government:

To which, we tip our hats to Mr. Moore and his legal team of Anthony V. Diosdi, Esq. and Keith Allen Kemper, Esq.

Case Site:

James Moore v. US Government Summary Judgment U.S. District Court, W.D. Washington, at Seattle; 2:13-cv-02063-RAJ, April 1, 2015