USA v. Kerr – Do It For The Caselaw

Holding: The Ninth Circuit affirmed the district court's decision to remand miscalculated FBAR penalties to the IRS for recalculation without vacating the underlying assessments, rejecting the argument that the recalculated penalties were time-barred.
Standard: abuse of discretion
Vote: Unpublished memorandum disposition affirming the district court.
Practical effect: This decision clarifies that when an agency makes a clerical or calculation error in assessing penalties, courts may order a recalculation without vacating the original assessment to prevent taxpayers from escaping liability due to the statute of limitations.

The Ninth Circuit affirmed a district court judgment upholding civil penalties assessed by the Internal Revenue Service for failure to file foreign bank account reports. The court held that remanding the case for recalculation without vacating the original assessments was appropriate to avoid a windfall for the defendant.

Background

The Internal Revenue Service assessed approximately three point eight million dollars in civil penalties against Stephen Kerr for failing to file Reports of Foreign Bank and Financial Accounts for the years two thousand seven and two thousand eight. The IRS later admitted to a calculation error regarding account balances and the district court remanded the case for recalculation, resulting in penalties of approximately one point nine million dollars. Kerr appealed, arguing the court should have vacated the original assessments and that the recalculated penalties were time-barred.

The court’s reasoning

The court reviewed the district court’s choice of remedy for abuse of discretion. While the default remedy for unlawful agency action is vacatur and remand, federal courts have discretion to decline vacatur when equity demands. The court found that equity demanded remand without vacatur because Kerr was undisputedly liable and the IRS had simply miscalculated the amount owed. Vacatur would have posed a risk that the government would forfeit significant revenue and Kerr would reap a windfall. The court further held that the remand was only for recalculation of penalties that were otherwise timely assessed, not for issuing new penalties, so the statute of limitations did not bar the recalculated amounts.

What it means going forward

This decision clarifies that when an agency makes a clerical or calculation error in assessing penalties, courts may order a recalculation without vacating the original assessment to prevent taxpayers from escaping liability due to the statute of limitations.