Court Finds Willful FBAR Fines May Violate Eighth Amendment

Court Finds FBAR Fines May Violate the Eighth Amendment

In the never-ending court saga of Schwarzbaum, a key decision was reached on the issue of FBAR Fines and whether certain foreign bank account penalties can be considered under the Eighth Amendment as ‘Excessive Fines.’ While in the case of Toth (2022) the First Circuit determined that FBAR penalties were not subject to the Eighth Amendment excessive fines clause, the Schwarzbaum court in the Eleventh Circuit Court of Appeals disagreed and found that FBAR fines could be considered under the Eighth Amendment. While in this particular case even under the Eighth Amendment excessive fines clause, the penalties were not reduced by much relative to the overall penalty (which still exceeds $12 million), conceptually it is very important because many taxpayers may find themselves in a situation where they are subject to willfulness penalties for lower valued accounts.

The Ruling Summarized

In Schwarzbaum, there was lots of back and forth involving FBAR penalties, the statute of limitations, calculation and recalculation of the penalties, etc. but the Taxpayer was ultimately held liable for nearly $14M in willful FBAR penalties. Taxpayer then made the argument that the penalties should be subject to the eighth amendment excessive fines clause because they were punitive. Here, the Court held that certain penalties that were issued on accounts that had a smaller dollar value should not be hit with a $100,000 per violation penalty as provided by statute and regulation. The court determined that if, for example, a Taxpayer has $15,000 in their account and gets hit with a $100,000 penalty, that is nearly a 700% penalty for an account that did not come close to that value, and this is punitive.

*Generally, a person would only be penalized $100,000 for a violation if they had $200,000 in the account because $100,000 would be 50% of a $200,000 maximum value.

FBAR Willfulness Penalties

Willfulness penalties are harsh civil violations for Taxpayers who willfully fail to report their foreign accounts. It is important to note, that willful does not mean intentional and can include lesser standards such as willful blindness and reckless disregard.  Taxpayers subject to willfulness penalties will get hit with a 50% penalty based on the maximum value of the unreported account — but even if the value is below $100,000 the baseline penalty starts at $100,000. Thus, as in the current case, a taxpayer could have $12,000 in the account and still get hit with a $100,000 penalty because the floor is $100,000.

Are FBAR Penalties Punitive?

There has been disagreement about whether FBAR penalties are considered punishment or remedial. Any Taxpayer that gets assessed a 50% willful FBAR penalty, would see it as punitive – and thus the Eighth Amendment should apply. Previous cases and other circuits have stated that inherently the FBAR penalty is remedial and therefore should not be considered a fine and thus subject to the 8th amendment.

The dissent by Justice Gorsuch in Toth clearly explains why it is punitive:

• • • “This decision is difficult to reconcile with our precedents …. The government did not calculate [the FBAR] penalty with reference to any losses or expenses it had incurred. The government imposed its penalty to punish [the appellant] and, in that way, deter others. Even supposing, however, that [the appellant’s] penalty bore both punitive and compensatory purposes, it would still merit constitutional review. Under our cases a fine that serves even “in partto punish” is subject to analysis under the Excessive Fines Clause.”

Key Excerpts from the Court’s Ruling

• • • “After careful consideration of the historical development of the Excessive Fines Clause and the FBAR’s text, structure, and history, we decline to follow the First Circuit. Rather, we hold that  FBAR penalties are in substantial measure punitive in nature. Therefore, under controlling Supreme Court precedent, they are subject to review under the Eighth Amendment’s Excessive Fines Clause. And in this case, examining the penalties assessed against Schwarzbaum account by account as we must, we identify $100,000 in penalties levied against one account in each of the years 2007-2009, for a total of $300,000, that are grossly disproportionate to the offense of concealing that account, and are therefore in violation of the Excessive Fines Clause. We also hold, however, that the other penalties levied against the remaining accounts did not violate the Excessive Fines Clause because the penalties assessed against them were not grossly disproportionate to Schwarzbaum’s willful concealment of tens of millions of dollars in overseas accounts.

    • The IRS recalculated the penalties to correct the error in the original calculation and returned a corrected aggregate penalty in the amount of $13,521,328, approximately 7.7% higher than the original penalty. The Government then moved the district court to enter judgment against Schwarzbaum but asked that the district court forgo the difference in the revised penalty and limit judgment to the original penalty amount of $12,555,813 — plus interest and failure-to-pay penalties — asked for in the Government’s complaint. The district court granted the Government’s motion and entered judgment accordingly.

    • The question of whether FBAR penalties are “fines” falling within the meaning of the Eighth Amendment’s Excessive Fines Clause is a matter of first impression in this Court. We review first the history of the Excessive Fines Clause and its interpretation in the federal courts. We then turn to the meaning of the FBAR penalty itself, as it relates to the Clause. We conclude that FBAR penalties are “fines” within the meaning of the Excessive Fines Clause.

    • The question of whether the Excessive Fines Clause applies to civil cases was squarely presented to the Court, however, in Austin v. United States, 509 U.S. 602(1993). There, the Court concluded that because the Excessive Fines Clause “limits the government’s power to extract payments, whether in cash or in kind, ‘as punishment for some offense,'” the question is not whether a given fine is “civil or criminal, but rather whether it is punishment.”  at 60910 (quoting Browning-Ferris, 492 U.S. at 265). Consequently, the Supreme Court held that, in order to escape the command of the Excessive Fines Clause, a penalty must “fairly be said solely to serve a remedial purpose.” Id. at 610 (quoting United States v. Halper, 490 U.S. 435, 448 (1989)). A penalty can be considered “remedial,” the  Court further held, if it “removes dangerous or illegal items from society” or serves to compensate the government for a loss or the costs of enforcing the law. Id. at 621. Notably, however, if the penalty in any way serves “either retributive or deterrent purposes, [it] is punishment,” and thus subject to the Excessive Fines Clause. Id. at 610.

    • The Supreme Court expanded on this principle in United States v. Bajakajian, 524 U.S. 321 (1998). In Bajakajian, the respondent, upon leaving the United States, failed to report that he was carrying currency in excess of $10,000 to a customs inspector.  at 324-25. The Government then sought civil forfeiture of the entire $357,144 carried by the respondent. Id. at 325. The Supreme Court held this forfeiture was subject to the Excessive Fines Clause because the forfeiture of the unreported currency “serve[d] no  remedial purpose, [wa]s designed to punish the offender, and cannot be imposed upon innocent owners.” Id. at 332. In so doing, the Court distinguished older cases where the monetary penalty was purely remedial in nature or where the forfeiture was purely in rem because of “the fiction that the action was directed against ‘guilty property,’ rather than against the offender himself.” Id. at 330. The “early monetary forfeiture[]” cases, the Court reasoned, served “the remedial purpose of reimbursing the Government for the losses accruing from the evasion of customs duties,” and were “thus no different in purpose and effect than the in rem forfeitures of the goods to whose value they were proportioned.” Id. at 34243.

    • In particular, the Court in Bajakajiandistinguished its holding from its opinion in One Lot Emerald Cut Stones &One Ring v. United States, 409 U.S. 232 (1972) (per curiam). In Emerald Cut Stones, the Court, writing about Fifth Amendment double jeopardy, held that a tariff forfeiture provision was entirely remedial in nature, and thus non-punitive, because it “provide[d] a reasonable form of liquidated damages for violation of the inspection provisions and serve[d] to reimburse the Government for investigation and enforcement expenses.”  at 237. Distinguishing Emerald Cut Stones, the Court in Bajakajian wrote that “[t]he additional fact that such a remedial forfeiture also ‘serves to reimburse the Government for investigation and enforcement expenses,’ is essentially meaningless, because even a clearly punitive criminal fine or forfeiture could be said in some measure to reimburse for criminal enforcement and investigation.” Bajakajian, 524 U.S. at 343 n.19  (quoting Emerald Cut Stones, 409 U.S. at 237). Instead, the Court explained that the critical question remained whether the penalty “is designed to punish the offender” and thus serves as “punishment even in part.” Id. at 332, 331 n.6. If so, the penalty is subject to the Eighth Amendment Excessive Fines Clause. Id. at 331 n.6; see also id. at 329 n.4 (“We do not suggest that merely because the forfeiture of respondent’s currency in this case would not serve a remedial purpose, other forfeitures may be classified as nonpuni-tive (and thus not ‘fines’) if they serve some remedial purpose as well as being punishment for an offense. Even if the Government were correct in claiming that the forfeiture of respondent’s currency is remedial in some way, the forfeiture would still be punitive in part…. This is sufficient to bring the forfeiture within the purview of the Excessive Fines Clause.”).

    • Most recently, in Kokesh v. SEC, 581 U.S. 455 (2017), the Supreme Court said again, albeit in dicta, that a “modern statutory forfeiture is a ‘fine’ for Eighth Amendment purposes if it constitutes punishment even in part.” at 467 (quoting Bajakajian, 524 U.S. at 331 n.6).

    • We turn, then, to the purpose of the FBAR penalty. We begin, as we must, with the text of the statute itself. See Ross v. Blake, 578 U.S. 632, 638 (2016). This analysis leads us to the conclusion that the purpose of the FBAR penalty is — at least in part -punishment. 

    • As we have said, the maximum penalty for a willful failure to report a foreign bank account is “[t]he greater of . . . $100,000” or fifty percent of “the balance in the account at the time of the violation.” 31 U.S.C. § 5321(a)(5)(C)(i), (D)(ii). The Government argues that the purpose of this penalty is not to deter, but to remedy the Government’s investigation and enforcement expenses associated with violations of the FBAR statute. But the text of the statute mandates that the penalty is calculated “irrespective of the magnitude of the financial injury to the United States, if any.” Yates v. Pinellas Hematology &Oncology, P.A., 21 F.4th 1288, 1308 (11th Cir. 2021).”

What This Means for Future Cases

In this particular case, the FBAR willfulness penalties were so high and there were only a few accounts that had the lower values, so that even applying the standard would not reduce the penalty much. But, in other cases, it could have a significant effect. Take for example a taxpayer who may have one account with $$30,000. Maybe they were reckless in not reporting the account but not intentional. Based on this ruling, the Taxpayer may argue against being hit with a $100,000 penalty on an account that never reached more than $30,000 – so this ruling may have a very big impact on other willful cases.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.