Written by Kamil Turkmani and Joshua Wu
The United States Court of Appeals for the D.C. Circuit recently affirmed the district court’s decision in Maze v. Internal Revenue Service on July 14th, 2017. In citing the Anti-Injunction Act (“AIA”) of 28 U.S.C. §7421(a), the court held that the federal courts lacked subject matter jurisdiction to hear the case. Specifically, the AIA details that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.”
Plaintiffs are individuals, currently participating in the Offshore Voluntary Disclosure Program (“OVDP”) of 2012, who failed to correctly report offshore income in foreign accounts. In exchange for a closing agreement from the Internal Revenue Service (“IRS”) confirming that it will not refer taxpayers for criminal prosecution for tax evasion of previous years, the OVDP allows taxpayers to reduce their liability of unaccounted for income tax by voluntarily self-reporting their previous eight tax years and paying a 27.5% offshore penalty on the value of their unreported foreign assets. For the purposes of this case and the AIA, this “penalty” functions as a “tax.”
In 2014, the IRS introduced the Streamlined Filing Compliance Procedure (“Streamlined Procedures”). Although the Streamlined Procedures do not offer the same immunity against criminal prosecution as the OVDP, participation only requires three years of tax reporting and a 5% offshore penalty for domestic taxpayers. The Streamlined Procedures are not available under certain circumstances (e.g., where the taxpayer willfully misreported or conducted foreign affairs to avoid U.S. taxes).
Both the D.C. District Court and Court of Appeals held that the plaintiffs were barred from filing their suit, in which they sought an injunction allowing them to transition from OVDP to Streamlined Procedures, because doing so would “restrain the assessment or collection of any tax” under the AIA. The Court of Appeals posited that “restrain” encompassed litigations both completely barring and partially inhibiting the assessment or collection of any tax. Moving from a 27.5% to a 5% offshore penalty, eight to three years of tax recording, and potentially eliminating accuracy-related penalties, was a sufficient reduction in “assessment or collection” for the court to uphold the AIA’s barring application. Even so, the AIA does not apply where a plaintiff has “no other remedy for its alleged injury.” The Court of Appeals noted that plaintiffs had the ability to initiate a refund suit – an adequate “alternative avenue” – allowing the AIA to bar their current suit.
Maze likely impacts taxpayers with foreign assets by narrowing the scope in which they may bring legal disputes into federal court, hinting at the notion that federal courts will be reluctant to hear disputes affecting the assessment or collection of any tax even if only marginal monetary amounts. Further, suits that try to shift the burden onto the IRS within the context of an administrative disclosure program will likely again constitute a “restraint” on the assessment of any tax, thereby allowing the court to dismiss based on lack of subject matter jurisdiction.
Although OVDP and Streamlined Procedures encourage taxpayers to correct their previous tax reporting errors, as a principle purpose to effectively collect taxes “without judicial intervention,” the AIA suggests that taxpayers should not turn towards the courts for initial relief.
Moving forward, taxpayers retain the option to fully (or partially in certain cases) pay their liabilities first, then initiate a refund suit to recover disputed amounts as an illegal exaction. While not a “substantive right,” the Tucker Act creates a jurisdictional avenue and provision for the Court of Federal Claims to hear disputes generating “liquidated or unliquidated damages not sounding in tort,” while the Little Tucker Act addresses disputes not exceeding $10,000.
Taxpayers with unreported foreign assets should take care and consider hedging their tax delinquency by participating in one of the IRS’s disclosure procedures. Because the IRS programs are administrative in nature, they can be modified or terminated at any time. Thus, taxpayers should move quickly to consider their options to become fully tax compliant.