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Federal Court Denies Government Excessive Tax Penalties

Federal Court Denies Government Excessive Tax Penalties
(Dollar Photo Club)

By    |   Monday, 23 July 2018 07:21 AM

It’s rare that a Federal Court tells the Internal Revenue Service they overstepped the bounds.

Especially where the taxpayers engaged in some behaviors which legally are out-of-bounds and a penalty is warranted.

What happened in this case-- United States of America v. Urayb Wadhan and Said Wadhan-- was the court deciding that although Messrs. Wadhan deserved to pay the penalty for their tax filing and reporting violations, the government wanted far too much.

Just what did Messrs. Wadhan do wrong?

The law requires that taxpayers file certain forms that disclose foreign bank accounts. Merely not filing the form, called the Foreign Bank and Financial Account Report (FBAR), is a violation.

The defendants had a bunch of accounts overseas that did not get disclosed. A real no-no. And when discovered, the IRS properly assessed penalties.

What Messrs. Wadhan objected to was not the government assessing the maximum penalty of $100,000 per account for not filing the disclosure form. Their beef with the government was being hit with penalties on three of the errant accounts in the amounts of $1,108,645.41, $599,234.54, and $599,234.54.  

The foreign bank account disclosure forms have been around for a long time before becoming applied far more extensively in 2010 with passing the Foreign Account Tax Compliance Act (FATCA).

While this foreign tax compliance regime has generated additional dollars for the treasury, nearly all of it comes in penalties and not an unpaid tax.

There are cases where massive penalties are imposed even though no tax is due or there may even be tax losses.

Was Judge Krieger troubled by the government’s method of determining additional penalties for merely failing to file a disclosure form?

The judge must have known that even without the FBAR violation, the defendants were exposed to plenty of penalties and interest just based on the potential tax avoided.

For Judge Krieger, the focus for deciding this case was in understanding the interplay between the applicable statutory and regulatory penalty law.

The statute provides for a maximum penalty for willful violations of failing to file an FBAR of the higher of $100,000 or 50% of the balance (meaning the highest balance during the tax year) of the relevant account.

Some courts have allowed the government to assert against a taxpayer the 50% penalty for multiple years. The result is a penalty which greatly exceeds the total amount of money in the financial accounts many times over.

Now some may see this constitutionally as an excessive fine or penalty, but the courts regularly seem to claim that anything related to tax is an exception to constitutional limitations.

Judge Krieger, however, took the position that while the statute says one thing, the regulations (written 31 years ago) used to implement the current statutory section could be read to say something else.

Judge Krieger found the regulations limit the government’s authority regarding penalizing taxpayers for an FBAR violation.

Some may see this as a victory for the taxpayer. But paying a penalty of $100,000 per financial account just for not filing a disclosure form separate from the tax return may not be all that joyful to the taxpayer doing the paying.

The case is remarkable because it is one of those rare federal court decisions where the judge decides the government lacks the authority to impose excessive penalties.

Denis Kleinfeld is known as a strategic tax and wealth protection lawyer, widely published author and creative teacher.

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The case is remarkable because it is one of those rare federal court decisions where the judge decides the government lacks the authority to impose excessive penalties.
federal court, denies, government, excessive, tax, penalties
Monday, 23 July 2018 07:21 AM
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