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IRS may use taxpayer information for FBAR purposes

Hom, (DC CA 9/30/2013) 112 AFTR 2d ¶2013-839

A district court has found that the Internal Revenue Code authorizes IRS to use taxpayer information to conduct a Foreign Bank Account Report (FBAR) investigation.

Facts. IRS conducted an investigation of Mr. Hom’s tax returns. IRS then opened a FBAR investigation under 31 USC 5314 because it discovered Hom’s online gambling activity and use of foreign bank accounts. Hom filed suit in which he alleged that tax return information, discovered during the tax return investigation, was inappropriately disclosed for the purpose of the FBAR investigation.

Background. Under Code Sec. 6103, returns and return information are confidential and generally can’t be disclosed except as expressly authorized by the Code.

Code Sec. 6103(h)(1), one of the exceptions to the general rule of confidentiality, provides that return or return information can be open (without written request) to inspection or to disclosure to officers and employees of the Department of the Treasury whose official duties require the inspection or disclosure for tax administration purposes.

Tax administration is defined as “the administration, management, conduct, direction, and supervision of the execution and application of the internal revenue laws or related statutes … and includes assessment, collection, enforcement, litigation, publication, and statistical gathering functions under such laws, statutes, or conventions.” (Code Sec. 6103(b)(4))

IRS’s use of taxpayer’s information was authorized. The Court found that IRS did not violate Code Sec. 6103 and that therefore its use of Hom’s tax information was authorized.

The Court ruled that 31 USC 5314 was a related statute for purposes of Code Sec. 6103(b)(4). It said that Congress intended for 31 USC 5314 to fall under “tax administration.” It cited Joint Comm. on Taxation, 108th Cong., General Explanation of the Tax Legislations Enacted in the 108th Congress, which said, “The Congress … believed that improving compliance with this reporting requirement is vitally important to sound tax administration.” Therefore, the disclosures at issue were lawful.

Hom also made the following arguments that the Court disagreed with:
… First he argued that IRS did not follow the proper procedure pursuant to the Internal Revenue Manual (“IRM”). The IRM states: “[w]ithout a related statute determination, Title 26 information cannot be used in the Title 31 FBAR examination. Any such use could subject the persons making the disclosure to penalties for violating the disclosure provisions protecting Title 26 return information.” (IRM Hom argued that IRS failed to properly obtain a related statute determination because they did not follow the stated procedure for doing so. Citing Fargo, (CA9 2006) 97 AFTR 2d 2006-2381, the Court said that Hom’s argument failed because the IRM holds no legal significance. I.e., even assuming that IRS did not follow its own procedures, he had no claim for relief. … Then he argued that IRS’s reports on his tax information contained false statements and that these false statements were “actionable” under Code Sec. 6103. In support of this argument, he cited Aloe Vera, (CA9 2012) 110 AFTR 2d 2012-6654, a case which held that Code Sec. 6103(k)(4), which allows disclosure to a foreign government if that disclosure is provided for in a treaty, doesn’t apply to a knowing provision of false information. The Court in this case said that Aloe Vera was irrelevant here because neither Code Sec. 6103(k)(4) nor any treaty was at issue. … Finally, Hom argued the type of information at issue suggested that IRS’s purpose was “penalty assessment, not tax administration.” The Court said that that distinction was meaningless for the purposes of Code Sec. 6103 because Code Sec. 6103(b)(4) (see above) provides that the term “tax administration” includes collection and enforcement. The Court also said that if Hom was using the term “penalty” to mean that IRS was acting maliciously and without merit, his argument failed because he didn’t allege sufficient facts to support such an argument.

References: For confidentiality of return information, see FTC 2d/FIN ¶ S-6200 ; United States Tax Reporter ¶ 61,034 ; TG ¶ 1974 .