Eighth Amendment Challenge to FBAR Fines as ‘Excessive’

Eighth Amendment Challenge to Excessive FBAR Penalties

Can the Eighth Amendment be Used to Challenge FBAR Penalties as Excessive?

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 (the penalty 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 and can try to argue that the FBAR penalties are excessive.

Were the FBAR Fines in Schwarzbaum Excessive?

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. The Taxpayer then argued that the penalties should be subject to the Eighth Amendment excessive fines clause because they were punitive. 

FBAR Willfulness Penalties

Willfulness penalties are harsh civil violations for Taxpayers who willfully fail to report their foreign accounts. 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 minimum willful FBAR penalty is $100,000.

Are FBAR Penalties Punitive?

There has been disagreement about whether FBAR penalties are designed to punish the Taxpayer or not. It is safe to say that any Taxpayer who gets assessed a 50% willful FBAR penalty would see it as punitive. 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 provides a good summary of why FBAR penalties may be 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 part to punish” is subject to analysis under the Excessive Fines Clause.”

The Court Ruled the Eighth Amendment May Apply

• • • “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.”

What This Means for Future Cases

In Schwarzbaum, the FBAR willfulness penalties were very high, and only a few of the accounts had lower values — so the total FBAR penalty was not reduced by much. But, in other cases, it could have a significant effect on the outcome. Take for example a Taxpayer who may have one account with $30,000. Based on this ruling, the Taxpayer may argue against being hit with a $100,000 willful FBAR penalty on an account that never reached more than $30,000 because the fine would be excessive.

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.