Moore v US / Western District of Washington Punishes IRS for Failing to Justify or Explain Itself in FBAR Case‏

In Moore v US  judges hold up IRS misconduct to the bright and sanitizing light of judicial review.  
One benefit that hopefully comes from decisions like Moore is that in addition to its impact on the party to the litigation, one hopes that the scathing court review has some impact on how the IRS goes about its business of administering the FBAR penalty regime.
The case is an important case for lots of reasons, including how it emphasizes that the IRS has a legal obligation to explain the underlying reasons for its actions when it proposes and assesses FBAR penalties. Taxpayers, even those who may have stashed cash overseas, have fundamental rights that the IRS should respect. If the IRS fails to respect those rights, cases like Moore provide an important precedent for checking what may be systemic abuses of power but which at a minimum raise troubling fairness concerns for the affected party.

As the IRS gets knee deep in determinations that move away from its traditional deficiency cases, especially when the review is on an abuse of discretion basis, courts are starting to take a more careful look at agency practices. A good example of this is in the FBAR area, where IRS administers the potentially draconian Title 31 penalty regime (See IRM 4.26.16.4.1  (07-01-2008) (discussing the delegation to IRS and how the Code does not apply to the FBAR regime).  IRS adopted a Taxpayer Bill of Rights and it stands to remind IRS employees alike of the importance of informing taxpayers.
Absent a remedy in court, however, sometimes those rights are illusory (or require parties to sue or pursue FOIA to find out what the IRS has done).

In the first Moore opinion, the judge was troubled by the IRS’s failing to explain why it penalized Moore:

The court can only guess, however, as to whether the IRS considered relevant factors or made a clear error of judgment. The record before the court contains no administrative explanation of the IRS's decision to impose penalties.

Moreover, the court was deeply troubled that one of its agents promised Moore that it would not assess the penalty pending an appeal of a proposed assessment but then the IRS assessed Moore anyway:

The Government may also choose to supplement the record to provide contemporaneous explanation of its decision to assess the 2005 penalty without providing the "appeal" it promised Mr. Moore. On the record before the court, that decision is baffling. The only reason the Government offered, its concern that the statute of limitations would expire, is nonsensical on the record before the court.

The opinion though hits hard when discussing the IRS’s failure to explain itself to Moore:

The IRS's refusal to disclose anything about the basis for its decision until this litigation, and in particular its decision to withhold Agent Batman's memorandum until after the court ordered it produced, was arbitrary and capricious. The IRS did not simply fail to disclose Agent Batman's memorandum, it opposed Mr. Moore's motion to compel its disclosure. Once the Government determined that it could point to no other evidence justifying its decision to impose the maximum penalties, the Government produced the memorandum. The IRS has offered no explanation for its apparent policy not to explain the assessment of FBAR penalties to citizens, and in particular for its apparent policy not to put that explanation in writing. It has also offered no explanation for its steadfast refusal to disclose Agent Batman's memo in this litigation until it was left with no other options. No citizen should have to sue his own Government to find out why he is being fined, or to find out why he is being fined $ 40,000 as opposed to a smaller amount. And once a citizen has sued, he should not have to fight over the most basic disclosures.

Apart from rulemaking, the other fundamental agency function in administrative law is adjudication. With the IRS that often involves making individualized determinations with respect to a liability issue. There is longstanding law that generally provides that when taxpayers challenge a deficiency determination, the courts do not look behind the notice of deficiency. Moreover, as I have also discussed in a prior post, the IRS gets a great deal of leeway when it comes to drafting notices of deficiency, and the Tax Court has in a number of orders now stated that the APA does not independently provide an independent basis for requiring explanation of agency action in its stat notices.
De novo review is in many ways a powerful check on agency abuses; after all, a taxpayer can take a deficiency case to Tax Court (or refund cases in district court or the Court of Federal Claims) and get the court to think anew about the issue. The flip side of de novo review for taxpayers is that while a court takes a fresh crack at the issue, it more or less ignores what the IRS did in it coming to its determination that there is a deficiency or in rejecting a refund claim (yes, this is a simplification but generally true). In a sense, courts can whitewash sloppy agency practice, as the court’s main role in liability cases is getting to the right result