On February 28, 2023, the United States Supreme Court held that the Internal Revenue Service (“IRS”) exceeded its statutory authority by collecting excessive penalties on federal income taxpayers for their negligent failures to timely file accurate, annual foreign financial information reports, variously known as the Foreign Bank Account Report, or “FBAR,” FinCen Form 114 and its long-time predecessor, the TD F 90-22.1. Alexandru Bittner v. United States.
The legal question before the court was whether Congress’ 2004 amendment to the foreign financial information reporting penalty enacted in 1970 as 31 U.S.C. §5321, that increased the non-willful failure penalty from $0.00 to $10,000, did so with respect to the annual report per se or with respect to each and every foreign financial relationship or account that should have been timely reported for the year just past. American Jobs Creation Act of 2004 (P.L. 108-357). For example, if one Ms. Margarete Klerx, a Switzerland / United States dual citizen, had ordinary deposit accounts with two Swiss banks and two investment accounts with a single Swiss investment management firm, would her negligent failure to timely file reports for five of six years open to IRS penalty collection result in a $50,000 or a $200,000 penalty?
Justice Gorsuch who wrote the opinion for a 5-4 divided court came to the conclusion that the 2004 amendment to 31 U.S.C. §5321 properly construed and interpreted, including by reference to the wording of companion section 31 U.S.C. §5314, could only mean the penalty is $10,000 per untimely and/or inaccurate annual report. Consequently, the question is for taxpayers who paid more than $10,000 per annual report: Are they able to get the extra penalty money back?
We think some can, based primarily upon two supports. The first is the long-standing Supreme Court decision in Harper v. Virginia Department of Taxation, 509 U.S. 86 (1993). The case holds that when the Court construes and interprets a federal or state tax or tax-like statute in a certain way, that way applies to all other similar situations not yet cut off from relief by the application of other relevant laws. The second support is the quite old Tucker Act, 28 U.S.C. § 1491 et seq. Taxpayers who have paid the non-willful penalty at a rate than more than $10,000 per report year can sue the United States claiming an illegally collected amount in excess of $10,000 per year. Any claim for more $10,000 must be filed with the Court of Federal Claims (“Claims Court”).
While not entirely free from doubt, we do not think taxpayers will succeed who have paid excess penalties more than six years before filing a suit. The Tucker Act at 28 U.S.C. §2501 states that a claims suit is barred “… unless filed within six years after the claim first accrues”. Such cases as Venture Coal Sales Co. v. United States, 370 F3d.1102 (Fed. Cir. 2004), aff’g. Claims Court, construe and interpret §2501 in such ways that we foresee an eventual holding that excess penalty claims first accrues on the date a given year’s penalty had been paid to the IRS.
Maybe the IRS will open an administrative refund program for taxpayers who paid excess penalties. The program can take many forms, such as a cut-off date for excess penalty paid only within three years of a given refund claim date with the IRS. We don’t believe the IRS will open a program for a number of reasons, such as the IRS is not legally obligated to open what would be a voluntary program on its part, and Congress has been keeping the IRS very busy with a seemingly accelerating number of other projects such that Congress recently authorized the IRS to hire an extra 87,000 employees over the next few years.
We anticipate suits being filed with the Claims Court this year. There could be a large number such that court processing will become routine, assuming IRS does not voluntarily implement a satisfactory refund program. The IRS may argue that all those are barred from recovery who had signed agreements consenting to the collection of what we all now know are excess penalty amounts. Our view is that the governing state contract law is the most relevant consideration to the question. Among other such considerations, many states’ contract law, which is typically judge made, is to the effect contracts reflecting mutual mistakes of law are not always binding. In California, contracting parties’ mutual mistake of law that is the important to the essence of a contract renders a contact unenforceable. Cal. Civil Code §1578.1. Suffice it to remark, if all legal questions had pre-ordained answers, the many federal courts would need far fewer judges.
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At Herold Law, P.A., we skillfully guide individuals and business clients through all types of tax issues. Robert S. Schwartz, Esq. concentrates his practice on corporate transactions and all aspects of federal and state taxation. Michael J. Faul Jr., Esq. focuses on complex commercial litigation, insurance coverage disputes, and corporate fraud. Call 908-679-5011 or contact us online to schedule an initial consultation. Located in Warren, New Jersey, we serve clients throughout Pennsylvania, New Jersey, New York, and Florida.