United States v. Hughes

Background

The United States sued Timberly E. Hughes, who represented herself, to enforce civil penalties for failing to file reports of foreign bank accounts, commonly called FBARs. After a bench trial, the court previously ruled that the United States had not proved willfulness for 2010 and 2011, but had proved that Hughes willfully failed to file FBARs for 2012 and 2013 under a recklessness standard. The court therefore addressed only whether the penalties assessed for 2012 and 2013 were valid. The penalties for those years totaled $440,509.

Penalty calculation errors

The court reviewed the IRS’s assessment under the Administrative Procedure Act’s arbitrary-and-capricious standard. It found that the IRS used account maximums for certain 2010 and 2011 accounts that were lower than the maximum balances shown in the bank records. Because the IRS’s calculation method allocated the overall penalty among the years, those discrepancies shifted more of the penalty to 2012 and 2013, the years for which willfulness had been established. The United States did not provide a sufficient explanation for the discrepancies.

The court also found that the IRS improperly relied on a 2013 balance of $1,372,375 NZD in one account. The bank statement showed a loan-payment reversal and another identical loan-payment entry in a sequence indicating that the inflated balance resulted from a bank error. The court concluded that using that balance was an abuse of discretion, even though the total penalty was below the statutory maximum. The court rejected Hughes’s broader argument that funds held briefly or connected to a loan can never be included in a penalty calculation.

Mitigation issue

Hughes argued that she qualified for mitigation under IRS procedures. The parties had not sufficiently addressed how a later tax-court settlement affected eligibility for mitigation. Because the penalty had to be recalculated for other reasons, the court did not decide that issue and instructed the United States to consider it during the remand proceedings.

Ruling and disposition

Judge Joseph C. Spero held that the United States established willful FBAR violations for 2012 and 2013 but abused its discretion in setting the penalties. The court remanded the matter for further administrative proceedings to calculate an appropriate penalty using account balances reflected in Hughes’s bank statements that were not obviously attributable to a bank error, or to provide valid reasons for using another amount that does not exceed the statutory maximum. The clerk was directed to enter judgment and close the case.