The U.S. Court of Appeals for the District of Columbia Circuit, affirming a district court, has concluded that the Anti-Injunction Act barred the suit of taxpayers who didn’t meet the requirements of a streamlined compliance program but who nonetheless sought to have the court allow them to participate in that program.

The voluntary program was for persons who hadn’t properly complied with foreign account reporting requirements.

The Anti-Injunction Act does not bar all legal claims pertaining to taxation, but it does bar suits seeking to restrain the assessment or collection of taxes. Taxpayers have, however, a number of other ways to challenge the assessment and collection of taxes, including, for example, paying and suing for a refund.

Foreign account voluntary compliance programs

Since 2009, the IRS has had programs in place to encourage compliance by persons who aren’t complying with reporting requirements linked to foreign assets, accounts and income. Two of those programs are the Offshore Voluntary Disclosure Program (OVDP) and Streamlined Filing Compliance Procedures.

In 2014, the IRS introduced the streamlined procedures. To participate, a taxpayer had to comply with the following requirements, among others:

  • File three years of tax returns and six years of Reports of Foreign Bank and Financial Accounts (FBARs).
  • Pay tax and interest for three years.
  • Pay a miscellaneous Title 26 offshore penalty equivalent to 5% of the value of the taxpayer’s foreign assets.

The streamlined procedures are aimed at U.S. taxpayers whose failure to disclose their offshore assets was nonwillful.

Under transition rules or treatment, taxpayers already in an OVDP before July 1, 2014, were able to receive the favorable penalty terms of the streamlined procedures provided they remain in the OVDP. Specifically, a taxpayer is liable for only the 5%, not the 27.5%, miscellaneous offshore penalty. The benefit of nonprosecution letters remains available under the transition treatment because the participants never exit the OVDP.

Facts of this case

After a number of years of failing to report funds held in foreign bank accounts, the taxpayers in the case at hand each entered the OVDP. Beginning in 2014, they tried to withdraw from that program and apply for the streamlined procedures. The IRS told them that they could enter the streamlined procedures only through transition rules.

The taxpayers didn’t claim that they’d paid all of the taxes and penalties they owed with respect to all the years relevant to the voluntary programs considered in this case. They claimed that they’d paid taxes for the three years covered by the streamlined procedures.

In addition, they argued that the IRS’s actions harmed them, so they sued to have the court allow them to directly enter the streamlined program. They also sought to retain benefits that are available only under the OVDP — specifically, assurances from the IRS that it wouldn’t refer matters for criminal prosecution for past tax years.

The court decisions

The U.S. District Court ruled that it didn’t have jurisdiction to hear the taxpayers’ suit. Because the taxpayers sought to restrain the assessment or collection of taxes and they had alternative remedies, the court held that the Anti-Injunction Act stripped it of jurisdiction.

The appeals court determined that the Anti-Injunction Act barred the taxpayers’ suit. It reasoned that the taxpayers, as participants in the 2012 OVDP, were required to pay eight years’ worth of accuracy-based penalties. These penalties were treated as taxes under the Anti-Injunction Act and any lawsuit that sought to restrain their assessment or collection was therefore barred.

This lawsuit, in which the taxpayers sought to qualify to enroll in the streamlined procedures, did just that because those procedures don’t require a participant to pay any accuracy-based penalties for the three years covered by the program. Accordingly, the taxpayers’ lawsuit, if successful, would have the effect of stopping the IRS from collecting accuracy-based penalties for which they’re currently liable. The appeals court concluded that this fact alone demonstrated that the Anti-Injunction Act barred their suit.

Court rejects two contentions

The court rejected two of the taxpayers’ contentions:

  1. They argued that their claim didn’t fall under the act’s scope because they sought only to apply for the streamlined procedures and that their eligibility to enroll alone had no immediate tax consequences. However, the court noted that it recognized the need to engage in a careful inquiry into the remedy sought and any implication that the remedy may have on assessment and collection. Here, the taxpayers conceded that they would enroll in the streamlined procedures if they were deemed eligible, thereby stopping the IRS from collecting the OVDP accuracy-based penalties.
  2. The taxpayers also argued that their eligibility for, or enrollment in, the streamlined procedures wouldn’t necessarily prevent the IRS from collecting the accuracy-based penalties, because they would be liable for all taxes and penalties if the IRS determined that they’d either acted willfully in failing to report their overseas assets or had failed to comply with the requirements of the streamlined program. But the court found that the taxpayers’ attempt to take advantage of the streamlined program’s more lenient tax treatment might be thwarted by the possibility of an adverse IRS determination. This didn’t make their lawsuit one that was not brought for the purpose of restraining the assessment or collection of any tax.

The appeals court acknowledged that the Anti-Injunction Act doesn’t apply where the taxpayer has no other remedy for its alleged injury. As the district court noted, the taxpayers can pay their taxes and file a refund suit. This adequate “alternative avenue” means that the Anti-Injunction Act applies to them.

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