Tax Lawyer's Blog

Joseph B. Williams, III v. Commissioner of Internal Revenue – The taxpayer filed a petition seeking to prevent the IRS’s assessment of interest on certain income tax deficiencies and seeking the abatement of certain penalties imposed on the him in connection with his failure to file FBARs (Foreign Bank Account Reports).

IRS counsel moved to dismiss each of the taxpayer’s claims on the grounds that the Tax Court lacked subject matter jurisdiction. The Court granted the motion to dismiss on both counts and stated,

The Tax Court is a court of limited jurisdiction. We may therefore exercise jurisdiction only to the extent expressly provided by statute. Breman v. Commissioner, 66 T.C. 61, 66 (1976). Congress has not conferred jurisdiction on this Court to consider the matters that are the subject of the motion.

Count One – Petitioner’s Request for Abatement of Future Interest

Judge David Gustafson first dismissed Williams’ request that the IRS be prevented from assessing interest against him on his unpaid tax debts stating that,

[P]etitioner invokes section 6404(h), which authorizes this Court, in certain circumstances, to “determine whether the Secretary’s failure to abate interest under this section was an abuse of discretion”. However, the petition seeks not an abatement of interest that has been assessed but rather an abatement of any interest which may be assessed. . . . [J]urisdiction under section 6404(h) for this Court to review the Commissioner’s determination under section 6404(e) is lacking unless and until an assessment of interest has occurred and the Secretary has mailed his “final determination not to abate such interest”.

In short, the Tax Court found that Congress had not empowered it to make pre-assessment reviews of interest assessments.

Practice Pointer:  Always exhaust your civil remedies (i.e. file a written request for an abatement of interest or penalties and, if that request is denied, file a written request for an appeal’s hearing) before petitioning the Tax Court.

Count Two – Petitioner’s Request for Abatement of Penalty for Failing to File Foreign Bank Account Reports (FBARS)

Section 5321(a) of Title 31 provides for civil penalties for failing to file a Form TD F 90-22.1 (FBAR). Section 5321(b)(1) provides that the Secretary of the Treasury may assess those penalties. Judge Gustafson noted that in the great majority of cases jurisdiction is conferred on the Tax Court by virtue of the issuance by the IRS of a Notice of Deficiency: 

The Secretary of the Treasury is authorized by 31 U.S.C. sec. 5321(b)(1) to assess the FBAR penalty; no notice of deficiency is authorized by section 6212(a) nor required by section 6213(a) before that assessment may be made; and the penalty therefore falls outside our jurisdiction to review deficiency determinations.

Significant criminal and civil penalties are imposed for failure to file Form TD F 90-22.1 and, as we have seen from the Tax Court’s ruling above, the Tax Court does not have jurisdiction to review the IRS’s assessment of FBAR penalties. This means that for the taxpayer to get judicial review of the FBAR penalty assessment he would have to first pay the penalty and then request a refund from the IRS. When the IRS denies the refund claim, the taxpayer can then file suit for refund in United States’ District Court.

Practice Pointer: Be sure to ask your clients whether or not during the year they had an interest (direct or indirect) in a foreign bank account or financial institution. If they did and the aggregate value of their holdings in such account or accounts exceeded $10,000, they must file a Form 90-22.1 by June 30th of the year following the year in which they held such interest.

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