Fear of Incurring Large Tax Penalties if Taxpayer Loses in Court Does Not Constitute Duress

Howard Zaritsky's Estate Planning Update

April 01, 2021
Volume 21, No. 3

In Harrison v. IRS, 2021 WL 930266 (D.DC, March 11, 2021) (slip copy), a U.S. District Court held that taxpayers who entered into a settlement agreement relating to unfiled FBARs as part of their participation in the IRS “Offshore Voluntary Disclosure Program,” could not withdraw from the agreement just because the IRS told them what penalties they might be subject to if they contested their liability; such statements do not constitute legal duress. The court explained that, for federal purposes, duress occurs “[i]f a party's manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.” Restatement (Second) of Contracts § 175(1). The court stated that merely informing the taxpayers and their lawyer that they risked substantial penalties if they did not sign the Closing Agreement is insufficient for a claim of duress. Accurately informing a party of the legal risks resulting from non-settlement does not keep the party from exercising free will and judgment.
For more on the Offshore Voluntary Disclosure Program, which closed on September 28, 2018, see also:
Lowell & Martin, U.S. International Taxation: Practice and Procedure, ¶ 4.02 [3]

References:

Saltzman & Book, IRS Practice and Procedure, ¶ 12.05[11][f]
Tilton, U.S. International Tax Forms Manual: Compliance & Reporting, ¶ 5.08 [3]
Michaels & Gibson, “Voluntary Disclosure for People With Good Stories. Did Waiting Make Sense?” 27 J. Intn'l Tax'n 55 (Feb. 2016)
Michaels, Yates, Georgiev, Crivellaro, Walsh, O'Brien, and Agbayani, “IRS Modifies OVDP and Streamlined Filing Compliance Procedures,” 25 J. Intn'l Tax'n 61 (Sept. 2014)
Ketcham, “Can the IRS Be Trusted? A Troubling New Development in the Offshore Voluntary Disclosure Program,” 118 J. Tax'n 82 (April 2013)