In United States v. Isac Schwarzbaum, No. 9:18-cv-81147, the U.S. District Court of the Southern District of Florida found the taxpayer liable for nearly $13M in penalties for his willful failure to file FBARs for 2007 through 2009.
As usual with high-dollar FBAR penalty cases, it involves unreported Swiss accounts; nothing surprising there.
More notably, the Court completely rejected the taxpayer’s Eight Amendment argument, finding that the Eight Amendment does not ever apply to FBAR penalties.
Sure it’s cruel, but cruel and unusual?
“Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.” – Eight Amendment of the U.S. Constitution
This case was originally remanded back to the IRS when the Court found that an incorrect penalty base had been used to determine FBAR penalties. The Court had deferred the Taxpayers’s Eight Amendment argument, but addressed in its recent order.
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.
The Government argues that FBAR penalties are not “fines” subject to the Eight Amendment, and that even if they were, that Taxpayer did not meet his burden of showing that the penalties were constitutionally excessive.
To fine, or not to fine, that is the question
In order to evaluate whether a penalty violates the Eighth Amendment, the Court must first determine whether the penalty is a “fine” subject to the Eighth Amendment, before deciding whether it is excessive.
Under United States v. Bajakajian, 524 U.S. 321 (1998), “fines” that are subject to the Eight Amendment are those that serve primarily punitive, retributive, or deterrent purposes, rather than being remedial.
While lawyers (but not tax lawyers) love open-for-interpretation words like ‘primarily’, ‘sometimes’, or ‘maybe’, they don’t make for good bright line tests. Fortunately, Austin v. United States, 509 U.S. 602 (1993) has us covered:
a fine that serves purely remedial purposes cannot be considered excessive in any event.
The Court opines:
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)
Is an FBAR penalty really a tax fine? The penalty statute is under Title 31, Money and Finance, and not Title 26, Internal Revenue Code. Imposition of the penalty also does not require unreported income or any tax violation.
Well, that settles that for now. As long as it’s a tax fine, the Government can fine as much as it wants (within the tortured interpretations of the applicable statute). There’s no need to show any harm caused to the Government, or anything other than that the taxpayer failed to report a foreign bank account on an FBAR, and willfully in the case of willful penalties.
What should non-compliant taxpayers do?
If taxpayers are non-compliant with their foreign asset and income reporting requirements, they should consider applying to one of IRS’ voluntary disclosure programs:
- Voluntary disclosure program
- Streamlined domestic offshore program
- Streamlined foreign offshore program
- Delinquent international information return submission procedures
- Delinquent FBAR Submission Procedures
We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.