The Tax Times: 11th Circ. Finds $300,000 of $12.6M FBAR Fine In Violation of Eighth Amendment, Causing a Split

Wednesday, September 4, 2024

11th Circ. Finds $300,000 of $12.6M FBAR Fine In Violation of Eighth Amendment, Causing a Split

According to Law360, $300,000 of the $12.6 million in penalties the IRS on imposed a man for willfully failing to report foreign bank accounts were in violation of the Eighth Amendment's bar on excessive fines, the Eleventh Circuit ruled, creating an apparent circuit split.

Examining the penalties assessed against Schwarzbaum account by account as the court concluded that $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.

The Court Upheld The Remaining $12.3 Million In
FBAR Penalties, Plus Late Fees And Interest.

"No matter how you cut it, it's apparent that this statute is designed to inflict punishment at least in part," Circuit Judge Stanley Marcus said in the court's opinion.

A federal court in 2020 found that Schwarzbaum willfully failed to file FBARs for 23 Swiss and Costa Rican accounts from 2007 through 2009, according to court documents. After initially miscalculating his penalty, the Internal Revenue Service assessed the $12.6 million fine against him, which Schwarzbaum appealed to the Eleventh Circuit.

The Eleventh Circuit disagreed with the First Circuit Court of Appeals in U.S. v. Toth, saying the penalties are at least partially punitive and subject to the Eighth Amendment because they greatly outstrip the cost of reimbursing the government for its investigations, the court said. The penalty also has a deterrent effect, according to the court.

Courts must review the constitutionality of the penalties on a case-by-case basis, the Eleventh Circuit ruled.

It Determined That In The Case Of One Particular Account, Three $100,000 Penalties ... Were Excessive Because They Were Six To Eight Times The Amount Schwarzbaum Had Deposited.

"There is little doubt in our mind that each of these penalties is grossly disproportionate," Judge Marcus said.

Regarding the remainder of the $12.3 million in penalties, the court said that although they were substantial, they were not disproportionate to the amount of funds Schwarzbaum failed to disclose. The court remanded the case in order for late fees and interest on those penalties to be calculated.

In 2022, the First Circuit Court of Appeals in U.S. v. Toth, held that a civil FBAR penalty was not a “fine” and therefore not subject to the Excessive Fines Clause. The U.S. Supreme Court declined to hear an appeal to the Toth decision.

The Schwarzbaum opinion creates a split between two different U.S. Circuit Courts of Appeal. Circuit splits make U.S. Supreme Court review of an issue more likely. It remains to be seen if the United States (or the taxpayer who was still subject to other hefty penalties) will appeal Schwarzbaum.

Regardless Of Whether The Excessive Fines Clause
Applies To FBAR Penalties, It Should Be Expected
That FBAR Penalties Will Remain Material.

If a taxpayer has exposure to FBAR penalties, there are numerous procedural avenues available to mitigate the exposure, both civil and criminal exposure.

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