Category Archives: criminal tax law

The Supreme Court declined again to take up a grandmother’s challenge of a $2 million penalty assessed by the IRS for a willful failure to not report a Swiss bank account on the grounds of excessive fines under the Eighth Amendment, despite pushback from one dissenting justice.

On June 5, the Supreme Court denied the petition for rehearing filed by Monica Toth, an 82-year-old taxpayer who had previously asked the Court to overturn the rulings of the First Circuit and the U.S. District Court for the District of Massachusetts. Both courts held that civil penalties applied under 31 U.S.C. § 5321(a)(5)(C)-(D) are not covered by the excessive-fine clause. Toth filed her initial cert petition in August 2022, which the Court rejected in January.

Toth had maintained that she did not purposefully avoid reporting to the IRS a foreign bank account left to her by her father, who took his family from Germany at the onset of World War II to Argentina. Monica eventually settled down in the United States but claimed she was unaware of the reporting rules under the Bank Secrecy Act.

The nondisclosed account had a balance of about $4.2 million. Because the IRS deemed the failure to disclose as willful, Toth was assessed penalties equal to half of the balance, plus interest and late fees. By contrast, the maximum penalty for non-willful failures to disclose is $10,000.

Supreme Court Justice Neil Gorsuch made it known in the Court's denial of Toth's petition for rehearing that he would have granted her request. He wrote in January in dissenting from the first denial that the "government did not calculate Ms. Toth's penalty with reference to any losses or expenses it had incurred."

Instead, the IRS "imposed its penalty to punish her and, in that way, deter others," wrote Gorsuch. "Even supposing, however, that Ms. Toth's penalty bore both punitive and compensatory purposes, it would still merit constitutional review." He closed in saying that the case "would have been well worth" the Court's time and that he hopes the lower courts do not repeat their "mistakes."

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According to Law360, The U.S. Supreme Court's groundbreaking decision to curb the U.S. Securities and Exchange Commission's in-house fraud enforcement could hamper the IRS' ability to assert certain penalties, including in contested conservation easement cases, and challenge the U.S. Tax Court's authority to review them.

In a 6-3 decision in a case known as SEC v. Jarkesy et al., a majority of the Supreme Court justices in June struck down the SEC's longtime use of tribunal administrative proceedings to impose securities fraud penalties on a hedge fund manager and his investment firm. They said the antifraud provisions the agency had sought to enforce mirrored common-law fraud, which warrants a federal jury trial to adjudicate them under the Seventh Amendment.

Although the underlying dispute in the Jarkesy case does not pertain to the tax code, the opinion's constraints on SEC enforcement may trickle down to other regulatory agencies, including the Internal Revenue Service. The effect could be a further restriction of tax administration amid other Supreme Court decisions this summer that have reduced agencies' powers, including in Loper Bright Enterprises v. Raimondo, Relentless Inc. v. Department of Commerce and Corner Post Inc. v. Board of Governors.

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In Report #2024-300-037, TIGTA’s systemic review of 103,460 NFTLs that were filed from July 1, 2022, to June 30, 2023, in which a CDP notice was required to be sent to the taxpayer, and a separate review of a statistical sample of 117 NFTLs from the same population, identified a total of 272 taxpayers that were potentially not timely mailed a CDP notice as required by I.R.C. § 6320(a). 

TIGTA also identified thousands of levies that were issued during the period when taxpayers had the right to request a lien CDP hearing.  TIGTA’s analysis of NFTLs filed from July 1, 2022, to June 30, 2023, identified: 

• 5,801 cases in which levies were issued during the 30-calendar-day period while the taxpayer had the right to elect a CDP hearing.

• 4 cases in which levies were issued while the taxpayer's appeal was pending.

In addition, taxpayer representatives should be provided copies of all taxpayer correspondence if designated by the taxpayer.  

From the statistical sample of 117 NFTLs, there were 41 cases in which the taxpayer designated their authorized representative to receive notices. However, in three of the 41 cases, the IRS did not provide CDP notices to the taxpayers’ authorized representatives.  

TIGTA also reviewed procedures for filing NFTLs in cases where taxpayers were in a disaster zone due to Hurricane Ian.  TIGTA determined that the IRS did not take any of the required preemptive steps that were available to it to suspend collection activity on taxpayers that were impacted by the hurricane on September 28, 2022. 

TIGTA recommended that the IRS:  

1. take corrective action on the cases identified in the statistical sample in which the lien notice was not mailed timely; 
2. ensure that the corrective actions initiated on the cases systemically identified are completed, and safeguards are implemented to protect against the recurrence of the causal issues; 
3. direct the Director, Collection, to establish Field Collection Internal Revenue Manual procedures that prohibit field employees from taking levy action during the 30-calendar-day period that the law provides taxpayers can elect lien CDP hearings; 
4. apply the retention standard when evaluating IRS Collection employees, managers, and executives who intentionally disregard IRS policies designed to protect taxpayers; and 
5. review disaster procedures for NFTL processing and consider updates, as needed, to reduce burden for taxpayers impacted by disasters. The IRS agreed with four of the five recommendations provided in this report.  

For recommendation 3, the IRS did not agree to establish Field Collection IRM procedures to prohibit field employees from taking levy action on taxpayers during the period the law provides taxpayers to elect a lien CDP hearing, which potentially impacted 5,801 taxpayers. 

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According to Law360, a woman who operates a New Zealand winery must pay $238,000 in penalties and an extra $105,000 in interest and fees for failing to report her New Zealand financial accounts to the U.S. government, the Ninth Circuit ruled.

Timberly Hughes, who represented herself, failed to show that a district court erred in determining that she willfully failed to file reports of foreign bank and financial accounts, the Ninth Circuit said in its opinion. However, the panel overturned the lower court's decision that the U.S. could not calculate interest from the date of the Internal Revenue Service's notification letter to her. While the letter contained an inaccurate calculation of the penalty, which the IRS later corrected, it put Hughes on notice that she failed to report, the panel said.

The California federal district court had held in March 2023 that Hughes was liable for $238,000 for failing to file FBARs in 2012 and 2013 for bank accounts in New Zealand, but it declined to add over $15,000 in interest and over $90,000 in late payment fees. The IRS originally sent Hughes a demand letter in 2016 with an incorrect amount. A second demand letter recalculated the amount but set interest and late fees from the original date. The district court said the government failed to show why the date of the erroneous letter should still be used for calculating interest and fees. Both sides appealed.

Hughes argued that the lower court conflated negligence with recklessness in determining that she willfully failed to file. If recklessness were sufficient to find willfulness, then nearly every violation of the FBAR rules could be deemed willful, she said in court documents.

The Ninth Circuit disagreed. Other circuits have clearly held that recklessness requires proof of something more than negligence, it said. It requires a finding that the filer ought to have known there was a grave risk that the filing requirement was not met, the panel said. 

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Read more at: Tax Times blog