3:18-cv-05931
N.D. Cal.Mar 6, 2023Background
- The United States sued Timberly Hughes for failing to file FBARs for 2012 and 2013; after a bench trial the court previously found Hughes’s failures willful (recklessness standard) and remanded for recalculation of penalties.
- The IRS recalculated penalties on remand using its Internal Revenue Manual (IRM) mitigation guidelines, removed a 2013 bank-error amount the Court had identified, and adjusted certain account maximums to avoid double-counting transfers.
- The IRS treated Hughes as eligible for mitigation (Level III) and assessed per-account mitigated penalties using the greater of 10% of annual max balance or 50% of the violation-date balance, yielding $238,125.19 total.
- Hughes objected, arguing the IRS double‑counted transfers, included bank journal entries and collateralized funds, and challenged the applicability of the BSA; she also filed a motion to dismiss.
- The Court held the IRS did not abuse its discretion in its recalculation (any deviations favored Hughes), struck or denied Hughes’s later motion to dismiss, denied the government’s claim for pre‑judgment interest and late‑payment penalties for lack of proof, and entered judgment for $238,125.19 in favor of the United States.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Validity of willfulness finding for 2012–2013 | Past bench trial finding of willfulness (recklessness) should stand and be enforced in penalty proceeding | Hughes seeks reconsideration; says she lacked intent and was not reckless | Court declines to revisit willfulness; prior findings stand |
| Whether IRS abused discretion in penalty calculation | IRS followed IRM guidance, removed the court-identified bank error, and reasonably adjusted balances; assessed mitigated Level III penalties | Hughes contends IRS double-counted transfers, included journal entries and encumbered/collateral funds | Court finds IRS calculations are not arbitrary or capricious; penalties upheld |
| Treatment of inter-account transfers, journal entries, collateral | IRS properly deducted certain transfers and excluded the known bank error; journal entries and collateral do not require exclusion under statute/IRM | Hughes argues IRS failed to deduct several specific transfers and included bank-originated journal entries and collateral | Court rejects Hughes’s transfer claims for lack of evidence; declines to exclude journal entries or encumbered funds absent statutory/IRM support |
| Pre-judgment interest and late-payment penalties | Seeks 1% interest and 6% late penalty on earlier demand amount | Hughes opposes; argues initial demand was superseded by remand and recalculation | Court denies pre-judgment interest and late-payment penalties for lack of statutory proof and failure to show applicable rates/action by Treasury/agency |
| Procedural propriety of Hughes’s later motion to dismiss | United States treats it as untimely/unauthorized supplemental filing | Hughes reiterates merits of prior dismissal arguments (BSA inapplicability) | Court strikes (or alternatively denies) the February 21, 2023 motion; rejects BSA‑inapplicability arguments |
Key Cases Cited
- Motor Vehicle Mfrs. Ass’n v. State Farm, 463 U.S. 29 (agency must examine relevant data and articulate a satisfactory explanation)
- Lee v. City of Los Angeles, 250 F.3d 668 (9th Cir. 2001) (judicial notice of public records)
- Fargo v. Comm’r, 447 F.3d 706 (9th Cir. 2006) (IRM lacks force of law)
- Kimble v. United States, 991 F.3d 1238 (Fed. Cir. 2021) (standard for setting aside agency penalty selection)
- San Luis & Delta-Mendota Water Auth. v. Jewell, 747 F.3d 581 (9th Cir. 2014) (deference to agency findings where record permits)
- United States v. Rum, 995 F.3d 882 (11th Cir. 2021) (upholding FBAR penalties consistent with IRM)
- In re Ransom, 577 F.3d 1026 (9th Cir. 2009) (describing IRS use of IRM)
- Landa v. United States, 153 Fed. Cl. 585 (2021) (agency discretion in sanction selection)