4TH Cir DCA Denies Taxpayers Right to Switch from OVDP to Streamlined

July 14, 2017

On May 30, 2017 we posted Offshore Tax Suit To Switch From OVDP To Streamline Doesn’t Block Collection where we discussed that three taxpayers seeking to switch over to the IRS’ new “streamlined” compliance program for unreported offshore income argued to a D.C. Circuit panel that their lawsuit is not foreclosed by the Anti-Injunction Act's bar on pre-enforcement tax challenges, attacking the government’s key defense in the case. The case is Maze et al. v. Internal Revenue Service et al., case number 16-5265, in the U.S. Court of Appeals for the District of Columbia Circuit.

Eva Maze, Suzanne Batra and Margot Lichtenstein have asked the appeals court to reverse a lower court’s ruling dismissing their suit, which aims to allow the taxpayers to jump from an older compliance program, known as the IRS Offshore Voluntary Disclosure Program, to a streamlined procedure with several advantages by eliminating strict transition rules they claim run afoul of the Administrative Procedure Act.

U.S. District Judge Colleen Kollar-Kotelly held in July that the taxpayers’ consolidated suit would violate the Anti-Injunction Act that prohibits federal courts from taking actions that would restrict the collection of taxes. If the plaintiffs successfully jumped from one disclosure program to another, as they sued to do, it would prevent the IRS from collecting accurate penalties for the tax years at issue and make it more difficult for the agency to backtrack and collect penalties the agency was otherwise entitled to for previous years, Judge Kollar-Kotelly said.

Representing the taxpayers, George M. Clarke III of Baker McKenzie said that all the taxpayers’ suit aims to do is get an injunction blocking the rules that are preventing them from applying to the streamlined program, not stop the IRS from collecting taxes.

U.S. Circuit Judge Thomas B. Griffith seemed unconvinced by the argument. The lawsuit, he said, “seems to me to be in the wheelhouse of what the Anti-Injunction Act is talking about.”

Now the United States Court of Appeals for the Fourth District denied the taxpayers appeal of their denial to switch between the OVDP program and the Streamline Program on July 14, 2017.

The account holders’ lawsuit was barred under the Anti-Injunction Act, because it “would have the effect of restraining, fully stopping the IRS from collecting accuracy-based penalties for which they are currently liable,” the federal appeals court ruled.

If the account holders don’t like the situation, they could opt out of the IRS’s 2012 offshore voluntary disclosure program, allow the Internal Revenue Service to determine their liabilities by audit, pay the assessed liabilities, and file an administrative refund claim for the difference between the determined liability and what they would have owed under the 2014 streamlined procedure that the IRS wouldn’t let them into, Judge Karen LeCraft Henderson said, citing the trial court decision in the case.

LeCraft, added that the account holders could then file a refund lawsuit in federal court if the IRS denied their refund claim.

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4TH Cir DCA Denies Taxpayers Right to Switch from OVDP to Streamlined