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APA and FBAR Skirmishes Continue in Schwarzbaum v US

Posted on Apr. 13, 2022

A couple of months ago in 11th Circuit Remands Willful FBAR Penalty Case Back to IRS Due to APA Violation I blogged about Schwarzbaum v United States, where the Eleventh Circuit held that Schwarzbaum willfully violated his FBAR reporting obligations for three years but that the IRS miscalculated the FBAR penalties. As I discussed, the FBAR statute itself pegs the maximum penalty to each account’s balance as of the date that the taxpayer failed to file the FBAR, a date that IRS neglected in calculating his penalty.

The court considered the IRS’s actions as not in accordance with the law and arbitrary and capricious under the APA. It ordered that the case be remanded to the IRS for the purpose of recalculating the penalties.

Following the decision, the government filed a motion with the 11th Circuit asking that the district court retain jurisdiction pending the outcome of the remand. Schwarzbaum  opposed the motion.  What is at stake with this skirmish?

It appears the parties are gearing up over a possible SOL issue. The 11th Circuit’s opinion suggested that a remand for purposes of recalculating the willfulness penalty would not trigger a new assessment. That was important, because a new assessment would be barred under the under the six-year statute of limitations on FBAR assessments. See 31 U.S.C. § 5321(b)(1).

In its reply brief filed last week, the government suggests that by opposing the government’s motion, Schwarzbaum is teeing up for a different SOL challenge:

Perhaps recognizing the statute of limitations does not prevent the IRS from recalculating the penalties, Schwarzbaum intends to employ a different, albeit equally spurious, strategy. If this Court were to decline to retain jurisdiction, Schwarzbaum will likely assert that the Government is time-barred from bringing a new suit to collect the recalculated penalties. See 31 U.S.C. § 5321(b)(2)(A) (collection action must be brought within two years after assessment). That argument directly contradicts the Eleventh Circuit decision, which recognized that Schwarzbaum was not entitled to a judgment in his favor and that the IRS had a right to recalculate the FBAR penalties.

In arguing that the court should retain jurisdiction, the government acknowledges that in typical APA cases courts do not retain jurisdiction when there has been a remand. The government’s reply brief distinguishes more typical APA challenges to agency action from the APA’s role in evaluating IRS FBAR penalty calculations:

As the United States noted in its moving papers, APA cases often involve a party challenging government agency action and typically the plaintiff is requesting that a court set that action aside. The challenger prevails when the court sets aside the agency action and remands the case to the agency. In such cases, courts generally do not retain jurisdiction during remand because once the action is set aside there is nothing left to review. Any post-remand proceeding would essentially start from scratch and focus on the action the agency took on remand.

Continuing to contrast the typical APA cases, the government argues that what is at stake in FBAR cases is very different:

Here, the remand is limited to the narrow issue of recalculation of the FBAR penalties consistent with the Eleventh Circuit decision. The IRS has not been instructed to develop a new administrative record or conduct a new willfulness analysis. Unlike in the typical APA case brought by a challenger to agency action, the United States brought a common-law action to reduce a liability to judgment. There is an outstanding question, not about whether Schwarzbaum must pay, but rather about how much Schwarzbaum must pay. Unlike an APA case in which the parties’ claims are resolved when the court either upholds or sets aside the agency action with a remand, this case is not resolved until the Court enters a monetary judgment.

As the government suggests, the APA’s role differs considerably in this case as compared to typical actions to set aside agency conduct. This case, and others like it, will assist in clarifying the somewhat different ways that the APA is likely to apply to evaluate IRS conduct in the types of its actions that are subject to APA scrutiny.

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