Eighth Amendment FBAR Penalty Defense & the Courts

8th Amendment & FBAR Penalties

Eighth Amendment FBAR Penalty Defense

For U.S. Taxpayers with unreported foreign accounts, assets, and investments, one of the key hurdles with getting into IRS offshore tax compliance is determining whether their non-compliance was willful or non-willful. The difference between being classified as willful vs. non-willful can mean the difference between submitting to the Streamlined Filing Compliance Procedures or Delinquency Procedures (which will avoid or minimize FBAR penalties) or submitting to the IRS Offshore Voluntary Disclosure Submission (which typically results in a 50% penalty for taxpayers on the maximum value of their unreported foreign accounts). And, with the IRS aggressively pursuing taxpayers who falsify non-willful certification statements, taxpayers should be careful to understand the distinction between willful and non-willful before submitting an FBAR offshore disclosure to the IRS.

What is the Eighth Amendment?

The 8^th Amendment provides that:

• • • “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.”

8^th Amendment Violation Against Mr. Schwarzbaum

 The court disagreed that FBAR penalties violate the 8^th amendment as follows:

• • • “The FBAR penalties are not subject to the Eighth Amendment Schwarzbaum has argued that the FBAR penalties in this case violate the Eighth Amendment. Although the Court did not address this argument in its Decision, the Court recognized the eventual need to consider it upon recalculation of the penalties. See ECF No. [92] at 26.

    • While Schwarzbaum contends that it is not “the statute itself [31 U.S.C. §5321(a)(5)] that must be struck down as unconstitutional,” he argues that “the IRS’s interpretation and application of the statute, and the resulting $15.6 million assessment” in this case violate the Eighth Amendment. See ECF No. [83] at 49.

    • The USA argues that FBAR penalties are not “fines” subject to the Eighth Amendment, and that in any event, Schwarzbaum fails to meet his burden of showing that the penalties are unconstitutionally excessive.

    • In arguing that the FBAR penalties are subject to the Eighth Amendment, Schwarzbaum contends that the penalties serve primarily punitive, retributive, or deterrent purposes, rather than being remedial, relying on United States v. Bajakajian, 524 U.S. 321 (1998), Austin v. United States, 509 U.S. 602 (1993), and Kokesh v. Securities and Exchange Commission, 137 S. Ct. 1635 (2017).

    • As such, Schwarzbaum argues that because FBAR penalties are not solely remedial, they are subject to the Eighth Amendment. See Austin, 509 U.S. at 610 (“a civil sanction that cannot fairly be said solely to serve a remedial purpose, but rather can only be explained as also serving either retributive or deterrent purposes, is punishment”) (citation omitted); see also Bajakajian, 524 U.S. at 328 (“The Excessive Fines Clause thus limits the government’s power to extract payments, whether in cash or in kind, as punishment for some offense.”) (quoting Austin, 509 U.S. at 609-10) (quotations omitted).

    • Upon review, however, the Court is not persuaded that these cases are particularly helpful with respect to FBAR penalties and concludes that extending such reasoning to civil FBAR penalties is not warranted and would be ill-advised. See McNichols v. Comm’r of Internal Revenue, 13 F.3d 432, 434 (1st Cir. 1993) (characterizing proposed extension of rule from Austin to tax penalties as a “giant leap” the court was unwilling to make).

    • The cases relied upon by Schwarzbaum are inapposite to this case. In Bajakajian, the respondent failed to report all money in excess of $10,000.00 in his possession upon traveling to a destination outside of the United States, and the question raised was whether forfeiture of the entire sum of money that the respondent failed to declare violated the Eighth Amendment. 524

    • U.S. at 325-25. Similarly, in Austin, the Supreme Court was tasked with determining whether the Eighth Amendment applies to forfeitures of property arising from convictions for violations of drug laws. 509 U.S. at 604-05.

    • In Kokesh, the Supreme Court examined whether disgorgement under securities laws is subject to the same statute of limitations as a fine, penalty, or forfeiture. 137 S. Ct. at 1642-43. In contrast, the FBAR penalties in this case cannot be properly characterized as forfeitures, as in Bajakajian and Austin, or disgorgement, as in Kokesh. 3 Importantly, none of these cases relied upon by Schwarzbaum suggest either explicitly or impliedly that their holdings should apply outside of the contexts in which they were decided.4 See, e.g. Cole v. United States Dep’t of Agric., A.S.C.S., 133 F.3d 803, 807 (11th Cir. 1998) (recognizing that there is no “comprehensive test to determine whether an in personam civil penalty violates the . . . Eighth Amendment” although Austin “did articulate a bright line rule in one category of cases: a fine that serves purely remedial purposes cannot be considered excessive in any event.”) (citations and internal quotations omitted). Tax penalties traditionally have been held to fulfill remedial purposes, as opposed to punitive purposes relevant in the Eighth Amendment.

    • Indeed, the Supreme Court recognized as early as 82 years ago, specifically in the tax context, that “[t]he remedial character of sanctions imposing additions to a tax has been made clear by this Court in passing upon similar legislation. They are provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer’s fraud.” Helvering v. Mitchell, 303 U.S. 391, 401 (1938); see also Dewees v. United States, 272 F. Supp. 3d 96, 101 (D.D.C. 2017) (collecting additional cases in which lower courts “have erected ‘an insurmountable wall of tax cases’ to support this proposition.”). Indeed, “the payment of fixed or variable sums of money are other sanctions which have been recognized as enforceable by civil proceedings since the original revenue law of 1789.” Helvering, 303 U.S. at 400.

    • Moreover, a finding that the FBAR penalty does not fall within the purview of the Eighth Amendment is consistent with the purpose for the FBAR. See Dewees, 272 F. Supp. 3d at 101 (penalty for failure to file Form 5471 disclosing certain ownership and financial information about a foreign corporation authorized by Congress for a legitimate remedial purpose and not a “fine”).

    • The purpose of the FBAR is to identify persons who may be using foreign financial accounts to circumvent United States law and to identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.” United States v. Estate of Schoenfeld, 344 F. Supp. 3d 1354, 1372 (M.D. Fla. 2018) (citations and quotations omitted). Indeed, Congress enacted the Currency and Foreign Transactions Reporting Act, referred to as the Bank Secrecy Act (BSA), 31 U.S.C. §§ 5311, et seq. See Pub. L. No. 91-508, 84 Stat. 1114 (1970).

    • The primary purpose of the BSA was to require the making of certain reports that “have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.” Id. § 202.

    • In enacting the BSA, Congress noted the following: Secret foreign bank accounts and secret foreign financial institutions have permitted proliferation of ‘white collar’ crime; have served as the financial underpinning of organized criminal operations in the United States; have been utilized by Americans to evade income taxes, conceal assets illegally and purchase gold; have allowed Americans and others to avoid the law and regulations governing securities and exchanges; have served as essential ingredients in frauds including schemes to defraud the United States . . . ; and have served as the cleansing agent for hot or illegally obtained monies.

    • The debilitating effects of the use of these secret institutions on Americans and the American economy are vast. It has been estimated that hundreds of millions in tax revenues have been lost. [. . .] One of the most damaging effects of an American’s use of secret foreign financial facilities is its undermining of the fairness of our tax laws. Secret foreign financial facilities, particularly in Switzerland, are available only to the wealthy. To open a secret Swiss account normally requires a substantial deposit, but such an account offers a convenient means of evading U.S. taxes.

    • In these days when the citizens of this country are crying out for tax reform and relief, it is grossly unfair to leave the secret foreign bank account open as a convenient avenue of tax evasion. The former U.S. Attorney for the Southern District of New York has characterized the secret foreign bank account as the largest single tax loophole permitted by American law. H.R. Rep. No. 91-975, at 4397-98 (1970). Congress also recognized the cost to law enforcement— “[m]any of the cases have been in the investigative stage for years. United States law enforcement agencies are often delayed or totally frustrated when wrongdoers cloak their activities in the shield of foreign financial secrecy.” Id. at 4397.

    • When law enforcement personnel are confronted with the secret foreign bank account or the secret financial institution they are placed in an impossible position. In order to receive evidence and testimony regarding activities in the secrecy jurisdiction they must subject themselves to a time consuming and oftimes fruitless foreign legal process. Even when procedural obstacles are overcome, the foreign jurisdictions rigidly enforce their secrecy law against their own domestic institutions and employees. Id.

    • Furthermore, the statute itself indicates that it should not be regarded primarily as punitive, and therefore considered a fine subject to the Eighth Amendment, in that the penalty provision is titled “Civil penalties.” See 31 U.S.C. § 5321; see also United States v. Ward, 448 U.S. 242, 249 (1980) (“where Congress has indicated an intention to establish a civil penalty, we have inquired further whether the statutory scheme was so punitive either in purpose or effect as to negate that intention. . . .

    • In regard to this latter inquiry, we have noted that ‘only the clearest of proof could suffice to establish the unconstitutionality of a statute on such a ground.’”) (citations omitted). Although the FBAR penalty provision undoubtedly promotes deterrence, the Supreme Court has recognized that “all civil penalties have some deterrent effect,” such that none are “‘solely’ remedial (i.e., entirely nondeterrent).” Hudson v. United States, 522 U.S. 93, 102 (1997) (citations omitted). In fact, “the FBAR penalty serves the additional alternative purpose of reimbursing the Government for the cost of investigating and recovering the funds.” Estate of Schoenfeld, 344 F. Supp. 3d at 1372.

    • Thus, the assessment of the FBAR penalty, in addition to the collection of taxes owed, is properly viewed as compensating the Government for a loss. The direct result of a taxpayer’s filing of a fraudulent income tax return which understates his true tax liability is to deprive the sovereign of money it is entitled to receive and obligated to collect. It also makes it necessary for the Government to expend other public funds in order to uncover the fraud and collect the proper amount of tax due. These are monetary losses.

    • Consequently, we feel that the taxpayer’s wrongful act is in the nature of an injury to the property of the United States. Reimer’s Estate v. Comm’r of Internal Revenue, 12 T.C. 913, 920-21 (1949). At least one other decision in this district has already taken this view. See United States v. Green, — F. Supp. 3d —, 2020 WL 1980859, at *6 (S.D. Fla. Apr. 27, 2020) (finding that FBAR penalty has a remedial purpose, recognizing that “the Government itself has suffered a monetary harm as a result of Defendants’ conduct,” and that “FBAR violations may deprive the Government of taxes on investment gains and the Government likely expends significant resources on investigating foreign accounts.”).

    • Thus, the statutory amounts of $100,000 or 50% of the account balance at the time of the FBAR violation were “selected to ensure that the Government would be made completely whole.” Id. at *7.

    • As a result, the Court determines that the FBAR penalty in this case is not a “fine” subject to the Eighth Amendment.”

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and 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.