United States v. Schwarzbaum, No. 20-12061 (11th Cir. 2022)
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Taxpayer conceded that he failed to report his foreign bank accounts to the IRS, but contested the IRS's determination that his violations were willful and argued for vacatur of his civil penalties. The district court held that taxpayer's violations were reckless, and therefore willful, in most of the tax years at issue. The district court also held that the IRS had miscalculated taxpayer's civil penalties and set them aside under the Administrative Procedure Act (APA), and then sua sponte calculated and imposed a fresh set of penalties.
The Eleventh Circuit concluded that the district court applied the correct legal standard in analyzing whether taxpayer willfully violated the FBAR reporting requirements. The court explained that willful conduct in the FBAR context includes knowing and reckless conduct. Reckless conduct is action that objectively entails a high risk of harm, which is the standard the district court applied. Nevertheless, the court concluded that the civil penalties assessed by the IRS were unlawful under the APA and must be recalculated. In this case, the IRS erred by using the wrong foreign bank account balances to calculate taxpayer's penalties, contravening the relevant statute and regulations. The district court further erred by calculating and imposing new penalties instead of remanding to the agency, as required by the APA. The court explained that, even though the district court ultimately arrived at the same total penalty amount the IRS did originally, the IRS's original errors were not harmless. Accordingly, the court vacated and remanded for recalculation.
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