Court Miscalculated Schwarzbaum FBAR Penalty (Violated APA)

Court Miscalculated Schwarzbaum FBAR Penalty (Violated APA)

District Court FBAR Penalty Calculation Violated APA

As we have written about extensively here and here, the international tax law FBAR case of US v. Schwarzbaum is an important case for two primary reasons. First, the Court ordered Defendant to repatriate foreign money in order to satisfy an FBAR penalty debt (which is currently stayed on appeal). The second issue is how the IRS calculated the foreign account penalties. The District Court ruled that the IRS miscalculated the willful penalties and set them aside, but then the District Court, sua sponte (on its own motion) re-calculated and imposed a new set of FBAR penalties (in which the Court reached the same valuation that the IRS initially did). The Appellate Court ruled that the District Court’s preparation of the independent FBAR Penalty calculation was in violation of the APA (Administrative Procedure Act). That is because while under 5 U.S.C. § 706(2)(A): the court may (2) hold unlawful and set aside agency action, findings, and conclusions found to be — (A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law  — the District Court is not empowered to prepare its own FBAR penalty computation, which amounts to the Court taking over the role of the IRS on FBAR penalty calculation. The Court of Appeals vacates that portion of the ruling and remands it back to IRS to recalculate – since they were held to be “not harmless.” Let’s review how the court arrived at this finding involving the miscalculation of the Schwarzbaum FBAR Penalty:

APA and FBAR Penalties

In the case of Schwarzbaum, Petitioner disagrees that his actions were willful, but the Court concluded he was in fact willful. The government then sought to force him to repatriate his foreign money to satisfy the FBAR penalty debt, which is stayed on appeal. Currently at issue is how the penalties were calculated. Petitioner disagrees with the penalty computation. The District Court agreed, and then took the further step of recalculating the penalty sua sponte, and the Appellate Court concluded the District Court violated the Administrative Procedure Act.

In general, the purpose of the APA is to facilitate the enforcement of administrative law  (5 U.S.C. § 551 et seq.) The key issue involving the APA was whether the District Court overstepped its authority by actually recalculating the FBAR penalty (which is the responsibility of the IRS) and not the Court, noting that when the District Court recalculated the penalty, it came to the same value that the IRS did. The concern for the Appellate Court is whether District Court can take the reigns and actually perform its own calculation (although the District Court disputes that it actually “recalculated” the penalty).

The Court’s Conclusion in Schwarzbaum

The Court provides a very thorough explanation as to why it is important that the IRS (and not the District Court) is tasked with calculating the penalty. It boils down to the APA and that the District Court just does not have the right to do so. Rather, it is up to the IRS to determine the penalties and make sure it was all handled properly — using the proper factors, dates, and potential mitigation circumstances. The penalty may be determined to be less (or more) than the Court calculated and that having the District Court compute the penalty was not harmless and therefore the Court of Appeals ordered it remanded back to the IRS to calculate the penalty.

As provided by the Appellate Court’s Ruling

      • “The APA does not, however, direct the court to do the agency’s job for it. The court “must judge the propriety of [the agency’s] action solely by the grounds invoked by the agency.

      • If those grounds are inadequate or improper, the court is powerless to affirm the administrative action by substituting what it considers to be a more adequate or proper basis.” SEC v. Chenery Corp. (II), 332 U.S. 194, 196 (1947); see also Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416 (1971) (“The court is not empowered to substitute its judgment for that of the agency.”).

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