FBAR Penalties – US v. Molyneux and the Big Fat Money Grab

The United States Supreme Court has just set the stage for sky high FBAR penalties. How did this happen? Let’s take a look –

The case of United States v. Toth, No. 21-1009 (1st Cir. 2022) was on appeal to the US Supreme Court.  The focus of the appeal was that the FBAR penalty was in constitutional violation of the Eighth Amendment’s Excessive Fines Clause. The First Circuit in deciding Toth held that the Excessive Fines Clause does not apply to civil FBAR penalties because the assessment against Ms. Toth by the Internal Revenue Service (IRS) was “not tied to any criminal sanction” and served a “remedial” purpose (as opposed to a “punitive” purpose). 33 F. 4th 1, 16, 17–19 (2022).

Unfortunately, on January 23, the United States Supreme Court denied Monica Toth’s petition for certiorari, letting the First Circuit decision stand.  There is plenty of reason to worry about the First Circuit decision and the Supreme Court’s refusal to take the case.

Excessive Fines Clause

The Amicus Curiae brief of Professor Beth A. Colgan provides an excellent discussion of the history and purpose of the Excessive Fines Clause and provides cogent arguments in support of the position that the Clause should apply to civil FBAR penalties. I provide a summary of some of the points made in Professor Colgan’s brief:

The Excessive Fines Clause applies when a penalty serves at least “in part to punish.”   She disagreed with the First Circuit decision in Toth holding that the $2 million penalty imposed for Ms. Toth’s failure to file the FBAR is not punitive even in part because it “is not tied to any criminal sanction.”  The professor’s brief put forth the argument that the US Supreme Court should grant certiorari to revisit the First Circuit’s faulty analysis of the Excessive Fines Clause’s history and to ensure that the Clause remains a safeguard against abusive forfeiture actions.  She noted that from the infancy of the United States’ history, governments at all levels have relied on civil forfeitures and penalties as revenue-raising tools, often out of proportion with their penal interests and at the expense of those who can least afford to pay.  Professor Colgan urged the Court’s intervention stating it was needed to ensure that the Excessive Fines Clause remains a potent shield against such abusive practices.

Justice Gorsuch was not happy that the Justices did not grant certiorari in Toth. He dissented and gave his view that the Court should have taken on the case. I provide some brief detail on the dissent here.  Justice Gorsuch mentioned Professor Colgan’s brief and seemed to find merit in her stated positions. One can read Justice Gorsuch’s 3-page dissent here.  I believe Justice Gorsuch invites lower courts to fully consider this issue if an FBAR penalty case is presented and as he so poignantly stated “one can only hope that other lower courts will not repeat its mistakes”.

United States v. MolyneuxWill the District Court Take Heed?

Now that the US Supreme Court has denied review in Toth, I believe the IRS will be emboldened to keep on hitting taxpayers with the highest possible FBAR penalties.  Here’s a very recent case in point: United States v. Pilar Molyneux No. 1 22-cv-10654.  The case has been brought by the government before the district court in the Southern District of New York and while the complaint does not contain much information, I have gleaned further factual background from LinkedIn.

Ms. Pilar Molyneux is a dual Chilean-US citizen.  She had some unspecified ownership interest in a US entity, JP Molyneux Studio Ltd. (Studio), along with the internationally known designer, Juan Pablo Molyneux, who I assume is her husband.  Studio undertakes architectural and design work for high-profile projects including the design of the Pavilion of Treaties at the Konstantinovsky Palace in St. Petersburg, the Russian Rooms of the Palais des Nations in Geneva, restoration of the early 12th Century Château de Pouy-sur-Vannes in Bourgogneas, a royal palace in Qatar and many more fascinating projects.

Ms. Molyneux had only signature authority over 2 foreign accounts maintained at Banque Neuflize in France. The accounts were owned by Studio and were not large accounts. In 2014, the maximum aggregate value of the accounts was only $29,000. In 2015, the maximum aggregate of both accounts was only $65,000.

Ms. Molyneux failed to file an FBAR for 2014 and 2015 reporting her signature authority over these accounts and the government is seeking “willful” FBAR penalties. IRS contends that Ms. Molyneux “was familiar with the FBAR filing requirements because she had previously timely filed an FBAR for calendar year 2013. In addition, in 2014, Molyneux filed delinquent FBARs for calendar years 2005 through 2012.”  For this reason, as well as taxpayer signing documentation that her transgression was “willful”, the “willful” penalty amount was assessed.

The FBAR willful penalties are $200,000 per year representing $100,000 per account. IRS is also seeking interest and legal costs. So, the taxpayer is looking at penalties of $400,000 on 2 accounts whose aggregate values each year never exceeded $65,000. The penalty is over 400% of the maximum aggregate – all for a case in which (i) Ms. Molyneux had no ownership of the accounts and (ii) the government has not lost any tax dollars or other revenue.

Sound excessive?  Hopefully counsel for Ms. Molyneux will raise the Excessive Fines Clause issue. If so, let’s see if the district court will heed what Justice Gorsuch had to say.

Watch this space.  Listen to my podcast with attorney John Richardson on the interplay between Toth and Molyneux.

Need FBAR Help?

Remember FBAR problems can be sorted out with proper tax help so long as the noncompliance was not “willful”.  Since that is such a slippery concept taxpayers should get the proper help in making the determination and choosing their path to regaining compliance.  In “nonwillful” cases FBAR delinquencies and errors can be fixed without imposition of penalties using one of the IRS special programs.


Posted February 2, 2023

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