Court Erred under APA in Calculating FBAR Penalty, Schwarzbaum

Court Erred under APA in Calculating FBAR Penalty

As we have written about extensively here and here, the international tax law case of FBAR case of US v. Schwarzbaum is an important case for two primary reasons: First the Court ordered Defendant to repatriate foreign money in order to satisfy an FBAR Penalty Debt (which was stayed on appeal). The second issue is how the IRS calculated the foreign account penalties. The District Court ruled the IRS miscalculated the willful penalties and set them aside – yet the District Court then on its own motion (Sua Sponte) calculated and imposed new penalties (which matched the IRS penalties). The Court’s preparation of the independent FBAR Penalty calculation of the FBAR was the violation of the APA because while under 5 U.S.C. § 706(2)(A): the court may (2) hold unlawful and set aside agency action, findings, and conclusions found to be — (A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law  — the District Court is not empowered to prepare its own FBAR penalty computation, which amounts to the Court taking over the role of the IRS on FBAR penalty calculation (even if the District Court disagrees with that summation). The Court of Appeals vacates that portion of the ruling and remands it back to IRS to recalculate – since they were held to be “not harmless.” Let’s review how the court arrived at this finding:

Purpose of the Administrative Procedure Act (APA)?

The Administrative Procedure Act is used to oversee administrative law and the process agencies take in performing certain acts – and can be found in 5 U.S.C. § 551 et seq. 

Administrative Procedure Act & FBAR (FinCEN Form 114)

The APA refers to the Administrative Procedure Act – and as provided by the court ruling:

• • • When a party challenges agency action under the APA, we review the district court’s decision de novo and the underlying agency action under the standards set out in the APA. See Cigar Assoc. of Am. v. U.S. Food & Drug Admin., 964 F.3d 56, 61 (D.C. Cir. 2020).

    • Under the APA, a “reviewing court shall . . . hold unlawful and set aside agency action” that is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A).

    • In this case, Schwarzbaum has asserted that the IRS miscalculated his FBAR penalties under the relevant statute and regulations. Accordingly, we review whether Schwarzbaum’s FBAR penalties are “not in accordance with law.” Id

    • When a party challenges agency action under the APA, “the district court does not perform its normal role but instead sits as an appellate tribunal.” Cnty. of L.A. v. Shalala, 192 F.3d 1005, 1011 (D.C. Cir. 1999) (quotation omitted). And when an agency action is unlawful, the APA directs a reviewing court to “hold [it] unlawful and set [it] aside.” 5 U.S.C. § 706(2).

    • The APA does not, however, direct the court to do the agency’s job for it. The court “must judge the propriety of [the agency’s] action solely by the grounds invoked by the agency. If those grounds are inadequate or improper, the court is powerless to affirm the administrative action by substituting what it considers to be a more adequate or proper basis.” SEC v. Chenery Corp. (II), 332 U.S. 194, 196 (1947); see also Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416 (1971) (“The court is not empowered to substitute its judgment for that of the agency.”).

The Court Overstepped its Authority

• • • The district court lacked the power to recalculate Schwarzbaum’s FBAR penalties. Nonetheless, finding that the IRS had miscalculated, the district court prepared new penalties from scratch, substituting its judgment for the agency’s.

    • Courts do not have “original calculation” jurisdiction over FBAR penalties. That power belongs to the IRS. See 31 C.F.R. § 1010.810(g) (delegating to the Commissioner of Internal Revenue “the authority to: assess and collect civil penalties under 31 U.S.C. [§] 5321”); see also Vidiksis v. EPA, 612 F.3d 1150, 1154 (11th Cir. 2010) (“Regarding a penalty assessment, an agency’s determination is considered to be particularly within the agency’s competence.”). By replacing the IRS’s penalty calculations with its own, the district court invaded the agency’s turf. See SEC v. Chenery Corp. (I), 318 U.S. 80, 88 (1943) (“An appellate court cannot intrude upon the domain which Congress has exclusively entrusted to an administrative agency.”).

    • Given the agency’s error, the district court should have remanded Schwarzbaum’s FBAR penalties to the IRS for recalculation. “Remand is the appropriate remedy when an administrative

    • agency makes an error of law, for it affords the agency an opportunity to receive and examine the evidence in light of the correct legal principle.” Zhou Hua Zhu v. U.S. Att’y Gen., 703 F.3d 1303, 1315 (11th Cir. 2013) (quotation omitted). And, as the district court correctly found, the IRS’s original penalties were not in accordance with law. The statutory maximum penalty for a willful FBAR violation is the greater of $100,000 or 50% of “the balance in the account at the time of the violation.” 31 U.S.C. § 5321(a)(5)(C)(i), (D)(ii).

    • The “time of [an FBAR] violation” is June 30, the annual FBAR filing deadline. See 31 C.F.R. § 1010.306(c). Indeed, the government concedes that the IRS mistakenly calculated Schwarzbaum’s statutory maximum penalties using his foreign accounts’ highest annual balances rather than their June 30 balances. Because the IRS miscalculated Schwarzbaum’s penalties, a remand is in order to allow the IRS to fix the mistake.10

    • In calculating Schwarzbaum’s FBAR penalties, the IRS took a wrong fork in the road by starting with the wrong numbers. Recall that, for each tax year and for each account, the statutory maximum penalty for a willful FBAR violation is the greater of $100,000 or 50% of the account’s June 30 balance. See 31 U.S.C. § 5321(a)(5)(C)(i), (D)(ii); 31 C.F.R. § 1010.306(c). By using the wrong account balances, the IRS calculated the wrong statutory maximums for Schwarzbaum’s penalties, and from there mitigated the penalties across the board. The IRS’s error, it appears, flowed through its calculations from beginning to end.

    • Thus, we cannot say that the IRS’s error was harmless. On remand, if the IRS calculates Schwarzbaum’s penalties using his accounts’ June 30 balances rather than their highest annual balances, the statutory maximum penalties could very well be lower. If the IRS chooses to mitigate Schwarzbaum’s penalties, as it did originally, the mitigated penalties could be lower too.12 That is not to say the penalties will be lower.

    • We do not presume to guess what the IRS will do. But the fact that the IRS may reach a different result when it recalculates Schwarzbaum’s penalties in accordance with the FBAR civil penalty statute and regulations is enough to justify remand. See U.S. Steel, 595 F.2d at 215 (declining to find that agency error was harmless where “the Agency’s error plainly affected the procedure used, and we [could not] assume that there was no prejudice to petitioners”). Schwarzbaum has met his burden to show that the IRS’s error in calculating his civil penalties was not harmless.

International Tax Lawyer Specialist Team: Golding & Golding

Our attorneys have been featured in Forbes, Washington Post, and more.

Contact our firm today for assistance.