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Maze v. Internal Revenue Service

United States District Court, District of Columbia

July 25, 2016

EVA MAZE, et al., Plaintiffs
v.
INTERNAL REVENUE SERVICE, et al., Defendants MARIE M. GREEN, et al., Plaintiff
v.
INTERNAL REVENUE SERVICE, et al., Defendants

          MEMORANDUM OPINION

          COLLEEN KOLLAR-KOTELLY UNITED STATES DISTRICT JUDGE.

         Plaintiffs are individuals who failed to report offshore income in foreign accounts, to file required documentation regarding these funds, and to pay the requisite amount of taxes associated with those funds. After they were made to see the error of their ways, each began to participate in a voluntary program of the Internal Revenue Service (“IRS”) to begin to unwind these errors. The program in which they began to participate is now one among a family of such programs designed to encourage delinquent taxpayers to correct their previous errors. Each of these programs encourages participation by providing benefits to would-be taxpayers, as well as replenishing the public fisc. Plaintiffs now seek injunctive and declaratory relief against the IRS and associated defendants in connection with these programs, including a declaration that certain rules regarding transitions between two of these programs are unlawful; an injunction against the enforcement of those rules; and a judgment that Plaintiffs can withdraw from one program and enter another, contrary to the existing rules governing those programs.

         Before the Court is Defendants’ [9] Motion to Dismiss filed in the case captioned Maze v. Internal Revenue Service (15-cv-1806).[1] Defendants first argue that this Court is deprived of subject matter jurisdiction over this case as a result of the Anti-Injunction Act and the tax exception to the Declaratory Judgment Act. They next argue that the United States has not waived its sovereign immunity over the claims in this case because the claims pertain to enforcement decisions that are committed to agency discretion by law. See 5 U.S.C. § 701(a)(2) (Administrative Procedure Act inapplicable when “(2) agency action is committed to agency discretion by law”). Upon consideration of the pleadings, [2] the relevant legal authorities, and the record for purposes of this motion, the Court GRANTS Defendants’ [9] Motion to Dismiss. As explained further below, the Court concludes that it has no jurisdiction over this action in light of the Anti-Injunction Act and the tax exception to the Declaratory Judgment Act. Therefore, the Court does not reach Defendants’ argument that this case must be dismissed because enforcement activities are committed to the agency’s discretion by law. This case is dismissed in its entirety for want of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1).

         I. BACKGROUND

         The Court limits its presentation of the background to the key facts that are necessary for the Court’s resolution of the fundamental issue presented in the pending motion: whether the Court is deprived of jurisdiction over this action in light of the jurisdiction-stripping provision of the Anti-Injunction Act and in light of the tax exception to the Declaratory Judgment Act.

         A. Statutory and Regulatory Context

         The United States tax system has a broad reach. Notably, “[t]he United States income tax system reaches all U.S. citizens’ income no matter where in the world it is earned, ‘unless it is expressly excepted by another provision in the Tax Code.’ ” Rogers v. Comm’r of I.R.S., 783 F.3d 320, 322 (D.C. Cir.), cert. denied 136 S.Ct. 369 (2015) (citations omitted). In order to implement this system, as the Supreme Court has noted, “our tax structure is based on a system of self-reporting.” United States v. Bisceglia, 420 U.S. 141, 145 (1975); see also Florida Bankers Ass’n v. U.S. Dep’t of the Treasury, 799 F.3d 1065, 1073 (D.C. Cir. 2015) (Henderson, J., dissenting), cert. denied 136 S.Ct. 2429 (2016). Those reporting requirements are both detailed and complex, and they extend to certain foreign assets, accounts, and income. See, e.g., 26 U.S.C. § 6048(c) (reporting required by United States beneficiaries of foreign trusts). As the Supreme Court has further noted, “basically the Government depends upon the good faith and integrity of each potential taxpayer to disclose honestly all information relevant to tax liability.” Bisceglia, 420 U.S. at 145. In addition to depending on the honesty of each taxpayer, the system includes an array of civil and criminal penalties, including, but not limited to, accuracy-related penalties for the underpayment of taxes and penalties for failing to file certain required documentation. See, e.g., 26 U.S.C. §§ 6046, 6046A, 6048, 6677, 6679 (failure to file penalties); id. § 6662 (accuracy-related penalties). This scheme includes criminal penalties for willful failures to comply with tax obligations. See, e.g., Id. § 7201 (“Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100, 000 …, or imprisoned not more than 5 years, or both, together with the costs of prosecution.”); id. § 7206 (criminal penalties for willful false statements in tax materials submitted).

         The IRS engages in affirmative investigations of taxpayers suspected of non-compliance. However, in light of the limited resources available for such investigations, the IRS uses a variety of voluntary disclosure programs to encourage non-compliant taxpayers to come into compliance with the applicable law. Common to all such programs is that the IRS provides certain benefits for taxpayers in exchange for voluntary disclosure pursuant to the applicable guidelines. Providing some benefit for voluntary disclosure-even belated-encourages voluntary participation in those programs.[3] It is several such programs, all with respect to foreign assets, accounts, and income, that are central to this case.

         Two basic types of programs are at issue in this case: Offshore Voluntary Disclosure Programs (“OVDPs”) and Streamlined Filing Compliance Procedures (“SFCP or “Streamlined Procedures”). To participate in the 2012 OVDP, [4] which Plaintiffs entered, a taxpayer are required to comply with the following requirements, among others:

• file eight years of tax returns and Reports of Foreign Bank and Financial Accounts (“FBARs”);
• pay tax and interest for eight years; and
• pay accuracy-related penalties for eight years.

         Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers 2014 (“Revised 2012 OVDP FAQs”), https://www.irs.gov/individuals/international-taxpayers/offshore-voluntary-disclosure-program-frequently-asked-questions-and-answers-2012-revised (last visited July 18, 2016).[5]

         In return for full compliance with the applicable requirements, the IRS offers participants the following three primary benefits. First, with the exception of the accuracy-related penalties under section 6662(a) of the Internal Revenue Code, a compromise of all penalties for which a taxpayer may be liable by paying 27.5% of the aggregate value of the taxpayer’s foreign assets. Id. This compromise encompasses “FBAR and offshore-related information return penalties and tax liabilities for years prior to the voluntary disclosure period.” Id. The compromise penalty, which consists of 27.5% of the value of a taxpayer’s foreign assets, is referred to as the miscellaneous Title 26 offshore penalty. Id. Second, the IRS will not recommend to the Department of Justice criminal prosecution for any matter relating to tax noncompliance or failure to file a Report of Foreign Bank and Financial Accounts.[6] Id. As explained by the IRS, participation in an OVDP “generally eliminate[s] the risk of criminal prosecution for all issues relating to tax noncompliance and failing to file FBARs” for past tax years. AR 170, FAQ No. 4. Third, the IRS and the taxpayer sign a closing agreement, which constitutes a final settlement of all matters relating to the disclosure period and to years prior to the disclosure period. Id. Altogether these actions bar the IRS from taking action based on any tax delinquency in the years before the eight-year disclosure period.

         In 2014, the IRS introduced the 2014 Streamlined Procedures. The IRS explained that “[t]he expanded streamlined procedures are intended for U.S. taxpayers whose failure to disclose their offshore assets was non-willful.” AR 146. To participate in the 2014 Streamlined Procedures, a taxpayer is required to comply with the following requirements, among others:

• file three years of tax returns and six years of FBARs;
• pay tax and interest for three years; and
• pay a miscellaneous Title 26 offshore penalty equivalent to 5% of the value of the taxpayer’s foreign assets.

         Streamlined Filing Compliance Procedures, https://www.irs.gov/individuals/international-taxpayers/u-s-taxpayers-residing-in-the-united-states (last visited July 18, 2016) (“2014 Streamlined Procedures (U.S.)”). A compromise miscellaneous offshore penalty payment is not required for non-U.S. residents. See U.S. Taxpayers Residing Outside the United States, https://www.irs.gov/individuals/international-taxpayers/u-s-taxpayers-residing-outside-the-united-states (last visited July 18, 2016) (“2014 Streamlined Procedures (Outside)”). In return, these filings and payments serve as a compromise for all penalties not involving willfulness for the three years covered by the program. See id.; 2014 Streamlined Procedures (U.S.). However, the IRS can pursue the taxpayer for fraud-related penalties for all years and for willful FBAR penalties for all years, as well as other penalties from the years prior to the three years subject to this program. See Id. The Streamlined Procedures do not involve any assurance regarding a decision not to refer the matter for criminal prosecution- as the OVDP does-nor do they involve a final settlement agreement resolving tax issues pertaining to prior years. See id.

         The relationship between these two programs is at the core of this case. A “taxpayer who submits an OVDP voluntary disclosure letter pursuant to OVDP FAQ 24 on or after July 1, 2014, is not eligible to participate in the streamlined procedures.” AR 151; see also Streamlined Filing Compliance Procedures, https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures (last visited July 18, 2016) (“Streamlined Procedures Overview”). “A taxpayer eligible for treatment under the streamlined procedures who submits, or has submitted, a voluntary disclosure letter under the OVDP (or any predecessor offshore voluntary disclosure program) prior to July 1, 2014, but who does not yet have a fully executed OVDP closing agreement, may request treatment under the applicable penalty terms available under the streamlined procedures.” AR 151 (emphasis added). “A taxpayer seeking such treatment does not need to opt out of OVDP, but will be required to certify, in accordance with the instructions set forth below, that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct.” AR 151-52. Finally, the IRS would consider a request for such treatment “in light of all the facts and circumstances of the taxpayer's case and will determine whether or not to incorporate the streamlined penalty terms in the OVDP closing agreement.” AR 152.

         In short, a taxpayer that enters an OVDP after July 1, 2014-shortly after the 2014 Streamlined Procedures were introduced-is categorically barred from the Streamlined Procedures. A taxpayer that had already entered an OVDP before that deadline, such as Plaintiffs in this case, may be able to receive the favorable penalty terms of the Streamlined Procedures, but must remain in the OVDP in order to do so. The Court will refer to this option, as do Defendants, as the “Transition Treatment.” An applicant is not automatically afforded the benefits of Transition Treatment. See Transition Rules: Frequently Asked Questions (FAQs), https://www.irs.gov/individuals/international-taxpayers/transition-rules-frequently-asked-questions-faqs (last visited on July 18, 2016) (“Transition FAQs”). Among other requirements for qualifying for this treatment, the IRS “must agree that the available information is consistent with the taxpayer’s certification of non-willful conduct.” Id. A taxpayer afforded the Transition Treatment will only be required to pay the miscellaneous Title 26 offshore penalty required under the Streamlined Procedures rather than the penalty required under the OVDP. Id. That is, for a domestic taxpayer, only a 5% penalty will be required as opposed to the 27.5% penalty mandated under the 2012 OVDP, as explained above. There is no alternative path for a taxpayer participating in an OVDP to leave such a program and enter the Streamlined Procedures on the terms applicable to new participants in that program.

         Lastly, the treatment of participants in these several programs differs with respect to the availability of criminal non-prosecution letters. As noted above, under the OVDP, participants can receive a criminal non-prosecution letter, which provides assurance that the IRS will not refer related tax matters to the Department of Justice for criminal prosecution. Def.’s Mot. at 7. This benefit is not available under the 2014 Streamlined Procedures. See generally 2014 Streamlined Procedures (U.S.). By contrast, the benefit of non-prosecution letters remains available under the Transition Treatment because the participants never exit the OVDP itself; instead, they remain bound by the rules of that program, except that they are eligible to receive beneficial treatment regarding certain penalties, as detailed above. See generally Transition FAQs.

         B. Plaintiffs’ Claims and Relief Sought

         Each plaintiff’s claims emerges from a similar factual background: after a number of years of failing to report funds held in foreign bank accounts, each plaintiff entered the IRS’s 2011 or 2012 Offshore Voluntary Disclosure Program.[7] Compl. ¶¶ 82 (Eva Maze); 90 (Suzanne Batra); 97 (Margot Lichtenstein). Each subsequently sought to “directly enter” the 2014 Streamlined Procedures, and each was told that doing so was not possible. Id. ¶¶ 83-84 (Maze); 91-92 (Batra); 98-99 (Lichtenstein). Having received this response, they joined together to bring this action. The parties have not suggested any material differences among the experiences of the several plaintiffs.

         Based on these underlying allegations, Plaintiffs further allege that the “IRS blocked the Plaintiffs from withdrawing from the 2012 OVDP and entering the 2014 SFCP through any route other than the Transition Rules.” Id. ¶ 103. Plaintiffs then claim that they were harmed by the IRS’s “decision to deny Plaintiffs entry into the 2014 [Streamlined Procedures] through any route other than the Transition Rules.” Id. ¶ 104. Plaintiffs further claim that “the IRS’s failure to provide a direct method of entry into the 2014 SFCP imposed upon the Plaintiffs a greater offshore penalty, exposure to additional civil penalties, increased filing burdens, a disparate standard of review, and a longer case-review time (and thus attorneys’ fees) as compared to other similarly situated applicants.” Id.

         On the basis of this claim of injury, Plaintiffs claim that Defendants actions violated two provisions of the Administrative Procedure Act. First, they claim that “Defendants actions in promulgating the Transition Rules were arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” Id. ¶ 106 (citing 5 U.S.C. § 706(2)(A)). Second, they claim that the “Transition Rules” were procedurally defective because they “were contrary to the notice-and-comment rulemaking requirements” of the Administrative Procedure Act and were “without observance of procedure required by law.” Id. ¶ 107 (citing 5 U.S.C. §§ 553, 706(2)(D)).

         The Court presents in full the relief requested by Plaintiffs through the Complaint, as it pertains directly to the legal question before the Court. Plaintiffs request:

A. A holding by the Court setting aside the Transition Rules as unlawful under 5 U.S.C. § 706(2);
B. A judgment by the Court that, under 5 U.S.C. § 706(2)(A), the Transition Rules are arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, and are therefore invalid;
C. A judgment by the Court that the Transition Rules did not comply with the notice-and-comment rulemaking requirements of 5 U.S.C. § 553, were without observance of procedure required by law under 5 U.S.C. §706(2)(D), and are therefore invalid;
D. A judgment that Plaintiffs may withdraw from the 2012 OVDP [Offshore Voluntary Disclosure Program] and directly enter the 2014 SFCP [Streamlined Procedures] where the IRS must treat ...

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