In Moore v. United States, the court in the Western District of Washington held that the IRS needs to comply with the Administrative Procedure Act (APA) when they are making a determination regarding the amount of penalties assessed for failure to file a Report of Foreign Bank and Financial Accounts (FBAR). The court also held that the Eighth Amendment prohibition on excessive fines was not violated in this particular case.
Moore had an account that was subject to FBAR reporting for more than 20 years. In 2011, the IRS assessed a penalty of $10,000 per year for tax years 2005 through 2008. The unreported account was worth between $300,000 and $550,000. In allowing the penalty, the court rejected Moore’s reasonable cause defense. Additionally, the court determined that reasonable cause, in the context of FBAR reporting, meant exercising ordinary business care and prudence. The court didn’t think that Moore was exercising ordinary business care and prudence by being unaware of these foreign accounts.
On compliance with the APA, the court stated that a de novo review of the amount of the penalty is proper. The IRS stated that a de novo judicial review on the imposition of the penalty was proper, but wanted to limit the review on the amount of the penalty to an abuse of discretion review. This standard would have made it more difficult on the taxpayer to challenge the penalty.
In addition to making the decision on the APA, the court also made a determination on the application of the Eighth Amendment with regard to FBAR. In determining the appropriateness of the penalty, the government was comparing the $10,000 per year penalty to the $400,000 amount that was unreported. Using this comparison the penalty is only 2.5% of the account, which sounds more reasonable than the 10% figure considered by the court. In coming up with the 10% figure, the court compared the total $40,000 penalty to the $400,000 unreported amount in the account. In either case, it was not in violation of the Eighth Amendment restriction.
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