A recent decision from the 11th Circuit in United States v. Isac Schwarzbaum brings a major development in FBAR (Foreign Bank Account Reporting) penalties and their relationship with the Eighth Amendment’s Excessive Fines Clause. The court’s holding that FBAR penalties are subject to this constitutional protection under the Excessive Fines Clause is significant, offering taxpayers a new line of defense against overly punitive civil fines imposed by the IRS.
This is the first case treating FBAR penalties as “fines” for constitutional purposes. The 1st Circuit previously held FBAR penalties are not “fines” in the case of United States v. Toth, No. 21-1009 (1st Cir. 2022) which was denied certiorari by the US Supreme Court. 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 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). Further discussion on the Excessive Fines Clause and FBAR penalties is here.
What Happened in Schwarzbaum?
In Schwarzbaum, the IRS sought penalties for Mr. Schwarzbaum’s willful failure to report various foreign bank accounts. Schwarzbaum’s penalty, originally calculated at over $12.9 million, was challenged under the Excessive Fines Clause. The court considered FBAR penalties related to each of the accounts and upheld the majority of the willful FBAR penalties.
The focus of this blog post is on two smaller accounts in which the IRS proposed fines that were quite hefty in relation to the value of the accounts. The court agreed that the part of the FBAR penalty with respect to these two smaller accounts, each of which never exceeded $16,000 (either on the due date of the FBAR or when measuring the largest balance ever held in the account), was disproportionate and violated the Excessive Fines Clause. The willful FBAR penalty for those two accounts was $100,000 per account per year and was found to be an excessive fine in this context.
With respect to one of the smaller accounts, the court stated: “A fine that is over eight times the amount in the account on the day of the assessment, and over six times the greatest amount ever held in the account, constitutes an excessive penalty.”
It’s important to remember that Mr. Schwarzbaum has a long history of non-compliance with FBAR requirements, and his actions in concealing numerous foreign accounts were determined to be willful. This did not, however, prevent the court from limiting the penalties under constitutional principles.
The Takeaway
I believe this case offers a potentially powerful tool for taxpayers facing excessive penalties, not only in FBAR cases but possibly also in other areas of international tax compliance. There’s much to explore here, particularly with regard to penalties for failing to file Form 3520, reporting foreign gifts and bequests and foreign trusts, which may capture foreign pension funds.
The 11th Circuit’s decision could possibly serve as a precedent for curbing IRS imposition of disproportionate penalties in these contexts as well. Taxpayers should view this ruling as a potentially powerful weapon against IRS aggressive penalties—especially when they are disproportionate to the actual value of the unreported accounts or transactions. There is surely much more to be developed on this issue as taxpayers and courts further define the limits of the Excessive Fines Clause in tax compliance cases.
Podcast with John Richardson
Attorney, colleague and good friend, John Richardson and I discussed this case in a podcast; have a listen!
Posted September 10, 2024
All the US tax information you need, every week –
Forbes Contributor, US International Tax
Named by Forbes, Top 100 Must-Follow Tax Twitter Accounts @VLJeker
Named by Bloomberg, Tax Professionals to Follow on LinkedIn
Subscribe to Virginia – US Tax Talk to receive my weekly US tax blog posts in your inbox. My blog specializes in foreign and US international tax issues.
You can access my papers on the Social Science Research Network (SSRN) at https://ssrn.com/author=2779920
Virginia - US TAX TALK 