Tax Notes logo

Procedural Due Process and FBAR

Posted on May 4, 2015

Last month I wrote about Moore v US, a case involving an assessment of the nonwillful FBAR penalty. In the post, I discussed how the district court held that the taxpayer violated the law by not filing FBARs and did not have reasonable cause for the nonfiling but that the record before it was inadequate for it to determine whether the amount of the penalties was appropriate. Moore stands out as there is little law surrounding the penalty and defenses to the penalty

I left for another day the court’s discussion of the constitutional issues. Those issues involve the Fifth Amendment’s procedural due process clause and the Eighth Amendment’s excessive fines clause. In today’s post I discuss the procedural due process issues.

(I note that a number of articles have considered the excessive fines issue, including this excellent piece in the Journal of Tax Practice and Procedure a few years ago by Steven Toscher and Barbara Lubin; Jack Townsend’s coverage of  the Zwerner  case from last year has lots of insightful coverage on that issue).

In this post I provide some context on procedural due process and then a review of the Moore court’s approach to the issue.

The district court opinion in Moore sets the stage nicely when it notes that in the world of administrative agency informal adjudications procedural protections are rooted in three main places: organic agency procedures, the APA and the constitution. When it comes to informal adjudications, as the opinion discusses, the APA provides very little in the way of protections when it comes to protections and rights before the agency (essentially the APA says that informal adjudications trigger prompt notice rights when an agency denies something).

The APA has a robust package of protections for formal adjudications, including a role for administrative law judges. Informal adjudications are like the redheaded step-child, neglected and left to their own devices. Over time, Congress or agencies come up with rules that apply to those agency determinations. It is those statutes or administrative procedures and not the APA that parties look to ensure a fair shake when the agency takes actions that may impact say a regulated person’s property interests.

Yet Congress and the agencies themselves do not have unlimited discretion in setting procedural protections. In the backdrop is the constitution and procedural due process. At its root procedural due process is concerned with whether the procedures in place provide enough protection against the risk of a possible erroneous determination relating to a person’s property (or other protected interest). There are two main ways to protect against erroneous determinations: adequate notice and the presence of a hearing (substantive due process on the other hand looks to whether the government has sufficient justification to deprive a person of life, liberty, or property).

When it comes to hearing rights, the inquiry often revolves around the timing of the hearing, with many cases in the past 50 years or so cutting back on the older norm which allowed for the adequacy of post-deprivation hearings. Also at stake in procedural due process cases may be the nature of the hearing rights, including how much formality needs to attach to the hearing in order to ensure against an undue risk of error. (A 1975 article by Henry Friendly entitled Some Kind of Hearing is a classic discussion of the elements of a fair hearing).

The Supreme Court’s analysis of whether hearing rights that an agency provide are consistent with procedural due process generally requires a balancing test as set forth in the case of Mathews v Eldridge. Moore discusses that test as follows:

Determining what process is necessary requires a consideration of the private interest at stake, the risk that the procedures will lead to an erroneous deprivation of that interest, the probable value of different procedures, and the governmental interest in avoiding unnecessary fiscal or administrative burdens.

That balancing test has become the norm for most procedural due process inquiries.

Thus, the inquiry that courts must take in most nontax procedural due process cases requires a balancing of interests. The idea is that context matters. We may, for example, forgive a risk of governmental error if the government’s action is justified by its interest in protecting public health. That is why we may be willing to cut the government more slack in taking immediate action without formal pre-deprivation hearing rights if there is a health risk that would warrant say quick action to destroy contaminated food or poultry that may be infected with a virus.

What is interesting about Moore is that its approach in analyzing the procedural due process issues differs from many tax cases. Tax cases tend to stand outside the Mathews balancing norm, however, as the Supreme Court has generally provided in tax cases that prompt post deprivation hearing rights suffice; that is any procedural protections Congress may provide pre-deprivation (say Tax Court pre-assessment deficiency review rights) are not rooted in the constitution.

There is a deep history to these tax cases (I discuss it all in a 2004 law review article at page 1177 looking at the constitutional pedigree of the CDP provisions). While I think the courts should re-examine the lack of a constitutional hook for taxpayer pre-deprivation protections it is generally thought that the procedural due process clause may not provide much protection when it comes to pre-deprivation taxpayer rights.

How does this fit in with Moore? Recall that the FBAR is not a penalty rooted in Title 26. It is a Title 31 penalty. Moore argued broadly that the procedures violated his due process. He did not, however, make an argument based on the Mathews balancing test:

Mr. Moore offers no cogent argument that these procedures are inadequate. He neither cites Mathews nor attempts to conduct the analysis it requires. His invocation of the Due Process Clause consists of just four objections: (1) that the IRS’s use of its own employees to assess penalties means that their decisions are biased, (2) that even the explanation Agent Tjoa provided in the Summary Memo is inadequate support for the penalties she assessed, (3) that the IRS’s terse notice of the denial of his “appeal” violated due process, and (4), that the IRS’s attempts to collect on its penalties before judicial review violated due process.

The Court easily dispensed with Moore’s first three arguments. What I find interesting is that even though Moore did not make a Mathews argument, the court applied the Mathews test anyway. In applying the test, the court found that the IRS’s notice and the limited hearing rights were sufficient:

The IRS used two procedures. As to the 2006, 2007, and 2008 penalties, it conducted an interview with Mr. Moore and his counsel to determine his reasons for not filing FBARs, issued a notice proposing to assess $40,000 in FBAR penalties and the opportunity to internally “appeal” that decision before assessment, conducted an “appeal” process where Mr. Moore presented his arguments against imposition of the penalty both in writing and by telephone, and issued a notice of assessment of the penalty. As to the 2005 penalty, the IRS provided no meaningful pre-deprivation review. It nonetheless allowed him to contest the assessment through its internal “appeal” process. Mr. Moore also had the opportunity to seek judicial review of all of the IRS’s decisions.

The IRS’s penalty assessment procedures served all of the purposes of due process. It ensured that Mr. Moore received notice of the penalty and an opportunity to contest it. See Memphis Light, Gas & Water Div. v. Craft, 436 U.S. 1, 13 (1978). No formal trial-like hearing is necessary, it suffices that the Government provided “some kind of hearing” at some time before “finally depriv[ing]” Mr. Moore of his property. Id. at 16 (quoting Wolff v. McDonnell, 418 U.S. 539, 557-58 (1974)). The opportunity that the IRS gave Mr. Moore to present his arguments in writing and by telephone is adequate, under the circumstances. Id. at 16 n. 17 (noting that the “opportunity for informal consultation with designated personnel empowered to correct a mistaken determination” is sufficient in some circumstances); Buckingham v. Sec’y of Dep’t of Agriculture , 603 F.3d 1073, 1082 (9th Cir. 2010) (noting that due process does not always require an adversarial hearing, a full evidentiary hearing, or a formal hearing). (emphasis added)

That the court framed the pre-deprivation hearing rights as part of its procedural due process rights stands apart from many tax cases where those rights are not contextualized in constitutional protections.

Moore did however also root its conclusions in a more traditional tax context, looking to the adequacy of post-deprivation protections:

The opportunity for judicial review after assessment of the penalties is further insurance against a deprivation of due process. Even as to the 2005 penalty that the IRS assessed without an opportunity for pre-deprivation review, the availability of both the opportunity to contest that assessment in the administrative “appeal” and to obtain later judicial review satisfies due process. See Memphis Light, 436 U.S. at 19-20 (explaining that post-deprivation review suffices in some circumstances).


The justification for post-deprivation hearing rights as adequate in some contexts often turns on a compelling interest in prompt governmental action. I have felt that the Supreme Court has too readily accepted the IRS’s argument that tax should stand outside the mainstream of procedural due process protections. That argument has essentially turned on judiciary’s acceptance that  taxes are the life blood of government and that interposing a constitutional check on the IRS is dangerous. That analysis often also understated the individual’s interest in pre-deprivation hearing rights. The pedigree of those cases is rooted in English common law and mid-19th century cases when the concerns of the sovereign differed from those of today.

While Moore finds the IRS’s FBAR procedures as constitutionally adequate, its use of the Mathews test recognizes that not all the IRS does should get a blanket exemption from mainstream due process jurisprudence. That conclusion is perhaps easier to reach when IRS, as in Moore, is administering a penalty that is not solely related to revenue raising nor found within the IRC.

Subject Areas / Tax Topics
Copy RID