Appeals Court Rules: IRS Must Follow the Constitution Regarding FBAR Penalties
By Jeffrey M. Glassman on September 3, 2024
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Jeffrey M. Glassman
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The Eighth Amendment of the U.S. Constitution provides that excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted. The IRS has for many years calculated penalties related to foreign bank and financial accounts that many rational thinkers would view as excessive. Yet, courts have generally not ruled that the IRS’s FBAR penalties violated the Eight Amendment’s Excessive Fines Clause (underlined above). No more.
As background, the IRS has authority to determine penalties for FBAR violations (i.e., violations relating to the Report of Foreign Bank and Financial Accounts (FBAR) on Financial Crimes Enforcement Network (FinCEN) Form 114). With that authority the IRS can examine whether all foreign bank and financial accounts are properly reported on the FBAR form. If not, the IRS has authority to determine penalties up to $10,000 (subject to annual inflation adjustments) for each non-willful violation or, for willful violations, the greater of $100,000 (also subject to annual inflation adjustments) or half of the account balance at the time of the violation. Needless to say, multi-year violations can be financially ruinous.
Several years ago, in 2022, the First Circuit Court of Appeals in United States 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 (see link).
In United States v. Schwarzbaum, No. 22-14058 (11th Cir., Aug. 30, 2024), the Eleventh Circuit Court of Appeals held $300,000 of penalties to be “grossly disproportionate to the offense” of concealing an account.
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. Given the potential dollar amounts at issue alone, rectifying FBAR violations proactively is usually a wise decision.
If you have any questions about FBAR penalties, or any other civil or criminal tax issues, please contact me at (214) 749-2417 or jglassman@meadowscollier.com.
As background, the IRS has authority to determine penalties for FBAR violations (i.e., violations relating to the Report of Foreign Bank and Financial Accounts (FBAR) on Financial Crimes Enforcement Network (FinCEN) Form 114). With that authority the IRS can examine whether all foreign bank and financial accounts are properly reported on the FBAR form. If not, the IRS has authority to determine penalties up to $10,000 (subject to annual inflation adjustments) for each non-willful violation or, for willful violations, the greater of $100,000 (also subject to annual inflation adjustments) or half of the account balance at the time of the violation. Needless to say, multi-year violations can be financially ruinous.
Several years ago, in 2022, the First Circuit Court of Appeals in United States 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 (see link).
In United States v. Schwarzbaum, No. 22-14058 (11th Cir., Aug. 30, 2024), the Eleventh Circuit Court of Appeals held $300,000 of penalties to be “grossly disproportionate to the offense” of concealing an account.
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. Given the potential dollar amounts at issue alone, rectifying FBAR violations proactively is usually a wise decision.
If you have any questions about FBAR penalties, or any other civil or criminal tax issues, please contact me at (214) 749-2417 or jglassman@meadowscollier.com.
