In Moore v. United States (available here), the District Court found that the IRS’s decision to assess the maximum $10,000 FBAR penalty for each year was not arbitrary, capricious or an abuse of discretion, but the IRS’s refusal to explain the basis for the penalties was arbitrary and capricious.
Moore failed to file an FBAR reporting a foreign account for 2005 – 2008. On December 13, the IRS sent Moore a letter advising that the IRS planned to impose the maximum penalty for each year of $10,000. The letter did not explain why the IRS was proposing the maximum penalty. The letter advised that Moore could either accept the penalties or request a conference with an Appeals Officer by January 28. If Moore did nothing by January 28, the IRS would assess the penalties and begin collection procedures. On January 23, the IRS assessed the penalty for 2005. The IRS never provided Moore with an explanation of its decision to assess the maximum penalty.
Moore challenged the penalties in district court, arguing that the IRS’s decision to assess the maximum penalty for each year was arbitrary and capricious and an abuse of discretion.
The District Court found that the decision to impose the maximum penalty was not arbitrary and capricious or an abuse of discretion, but the IRS’s refusal to disclose the basis for its decision until forced to do so in litigation was arbitrary and capricious. In addition, the IRS abused its discretion in advising Moore that he could contest the 2005 FBAR penalty before January 28, but assessing the penalty on January 23.
Because the court found the IRS’s conduct in assessing the penalties was arbitrary and capricious, the court voided the IRS’s assessment of interest and other charges imposed on top of the FBAR penalties.
As a result of Moore, the IRS issued guidance (available here) that requires the written explanation of the decision to impose the FBAR penalty to be sent to the taxpayer.
If you have any questions about FBAR penalties or related issues, please contact one of the undersigned or any of the other Tax lawyers at Thompson & Knight.