United States v. Hughes

Background

The United States sued Timberly E. Hughes, who represented herself, to enforce civil penalties under the Bank Secrecy Act for failing to file reports of foreign bank accounts, commonly called FBARs. After a bench trial, the court had previously found that Hughes willfully failed to file FBARs for 2012 and 2013, using recklessness as the standard for willfulness. The court did not find that the United States proved willfulness for 2010 and 2011.

The court had also previously found that the Internal Revenue Service abused its discretion in setting the penalties and sent the matter back for further administrative proceedings. One significant error involved a 2013 account balance that resulted from a bank error and was quickly reversed. On remand, the Internal Revenue Service recalculated the penalties, removed the bank-error amount, and applied mitigation guidelines after determining that Hughes was eligible for mitigation. The government then moved for judgment in the amount of $343,298.24.

The parties agreed to resolve the remaining issues through briefing without another evidentiary hearing. The court treated the matter as a trial on written submissions and made factual findings under Rule 52 of the Federal Rules of Civil Procedure. It stated that the result would be the same if the government’s motion were treated as a summary-judgment motion under Rule 56.

Recalculated penalties

The Internal Revenue Service determined that Hughes qualified for mitigation because the record showed no relevant criminal convictions or prior FBAR penalty assessments, no illegal source or criminal purpose involving the money in the accounts, cooperation with the investigation, and no fraud penalty for the relevant tax years. Under the agency’s internal guidance, the aggregate adjusted account balances placed both 2012 and 2013 in the applicable Level III mitigation range.

Using the greater of ten percent of an account’s maximum annual balance or fifty percent of its balance on the violation date, the Internal Revenue Service calculated penalties of $147,299.59 for 2012 and $90,825.60 for 2013. The total was $238,125.19. The court found that the calculations were supported by bank records, accounted for certain transfers between accounts, and excluded the previously identified bank error.

Hughes argued that the Internal Revenue Service had double-counted or triple-counted several transfers. The court rejected those arguments. It found that one asserted transfer went in the opposite direction from the one Hughes described and that the agency had made an appropriate deduction. It also found that the agency properly accounted for the maturity of another account and that the records did not show the third asserted transfer between accounts. The court disregarded Hughes’s generally lower account balances because she did not support them with evidence.

Legal conclusions

The Bank Secrecy Act permits penalties for willfully failing to file an FBAR. The court explained that its current task was not to reconsider whether Hughes acted willfully; the case had been sent back only for recalculation of the penalties. The court declined to reconsider its earlier willfulness finding and concluded that Hughes had presented no new evidence or authority that changed it.

The court reviewed the Internal Revenue Service’s penalty decision under the Administrative Procedure Act. Under that standard, a court may set aside an agency’s decision if it is arbitrary, capricious, an abuse of discretion, or otherwise unlawful. The court concluded that, apart from the bank error already removed, the agency’s use of the account balances was not arbitrary or capricious.

The court rejected Hughes’s arguments that funds held as collateral or otherwise unavailable to her should have been excluded. It found no supporting evidence or legal authority and concluded that the statute focuses on the account balance. The court also rejected her argument about excluding “bank originated journal entries,” finding no authority for that position and no evidence that those entries reflected bank errors like the one already removed.

Motion to dismiss, interest, and final disposition

Hughes filed a motion to dismiss after briefing on the government’s motion had closed. The court found that the filing violated the procedure the parties had agreed to and the court had ordered, and that Hughes identified no procedural rule or other authority permitting it. The court therefore struck and disregarded the motion as an unauthorized supplemental brief. Alternatively, the court denied it because it repeated arguments that the Bank Secrecy Act did not apply to Hughes and that the court had already rejected.

The United States also requested $15,024.72 in pre-judgment interest and $90,148.33 in late-payment penalties through January 20, 2023, plus later statutory additions. The court denied that request. It concluded that the United States had not shown that the cited provisions applied to the earlier demand for a larger penalty that the court had set aside as arbitrary and capricious. The court also found that the United States had not proved that the interest and late-payment rates it sought were valid. The court stated that its ruling did not prevent the United States from seeking post-judgment interest that might accrue under applicable law.

The court granted the United States’ motion for judgment except as to pre-judgment interest and late-payment penalties. It ordered the clerk to enter judgment for the United States in the amount of $238,125.19 and close the case.