Maze v. Internal Revenue Serv.

• Decision Date: 25 July 2016
• Docket Number: 16-1085 (CKK),Civil Action Nos. 15-1806 (CKK)
• Citation: 206 F.Supp.3d 1
• Parties: 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.
• Court: U.S. District Court — District of Columbia

206 F.Supp.3d 1

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.

Civil Action Nos. 15-1806 (CKK)

16-1085 (CKK)

United States District Court, District of Columbia.

Signed July 25, 2016

Joseph Brant Judkins, George M. Clarke, III, Baker & McKenzie, LLP, Washington, DC, for Plaintiffs.

Geoffrey John Klimas, Joseph E. Hunsader, Richard Jeremy Hagerman, U.S. Department of Justice, Washington, DC, for 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 ––– U.S. ––––, 136 S.Ct. 369, 193 L.Ed.2d 291 (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, 95 S.Ct. 915, 43 L.Ed.2d 88 (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 ––– U.S. ––––, 136 S.Ct. 2429, 195 L.Ed.2d 780 (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, 95 S.Ct. 915. 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 is 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...