In more detail
In 2022, the First Circuit considered the issue of whether an FBAR penalty was a “fine” and therefore subject to the Eighth Amendment. United States v. Toth2. It concluded that a civil penalty imposed was not a “fine” and, as such, the Excessive Fines Clause of the Eighth Amendment did not apply. Ms. Toth petitioned the Supreme Court for review of the decision which was denied with Justice Gorsuch dissenting. In his dissent, Justice Gorsuch criticized the First Circuit’s decision and urged lower courts “not [to] repeat [the First Circuit’s] mistakes.” He argued that civil penalties are not immune from constitutional scrutiny simply because they are not connected to a criminal proceeding or partially serve a remedial purpose. In its opinion, the Eleventh Circuit cited Justice Gorsuch’s dissent. “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.”
In reaching its decision, the Eleventh Circuit focused on the disconnect between the harm suffered by the government and the amount of the penalty, the severity of the penalty being tied to an individual’s culpability, and the legislative history which shows that a portion of the purpose of the penalty is to promote compliance. The court considered primarily whether the penalty which is assessed on an account by account basis was proportional to the offense. One of Mr. Schwarzbaum’s unreported foreign accounts during the years at issue had a maximum balance of less than USD 16,000. The court found that the IRS’s assessment of a USD 100,000 penalty related to this account for each year was “grossly disproportionate” and therefore constitutionally excessive. With respect to the remainder of Mr. Schwarzbaum’s unreported foreign accounts the court upheld the FBAR penalties finding that the IRS properly assessed penalties which included both 50% of the balance in the account and USD 100,000 penalties. The court found that these penalties were constitutionally proper because they were “proportionally tied to the amount in the account . . . .”
The court “engage[d] in a careful investigation of the FBAR penalties assessed against Schwarzbaum’s accounts, one by one.” Ultimately, the court found that with respect to the other unreported foreign accounts the FBAR penalties were not “grossly disproportional to the gravity of [Schwarzbaum’s] offense” and upheld approximately USD 12 million in penalties. It noted that “it [had] no trouble imagining situations where such [penalties] would be clearly excessive.” Apart from the amount held in the account, the court did not give any further indication of what those situations may look like.
Because the FBAR penalty is punitive and not solely remedial the Eleventh Circuit’s view is that it warrants constitutional scrutiny. This gives litigants in courts outside the First Circuit a basis to contest the FBAR penalties assessed against them. Due to the circuit split created by the conflicting Schwarzbaum and Toth decisions, this issue may also now reach the Supreme Court.
Click here to read our previous client alert regarding an earlier Eleventh Circuit decision in this case
1 United States v. Schwarzbaum, No. 22-14058, 2024 WL 3997326 (11th Cir. Aug. 30, 2024).
2 United States v. Toth, 33 F.4th 1, 15 (1st Cir. 2022), cert, denied,143 S. Ct. 552, 214 L. Ed. 2d 458 (2023), reh’g denied,143 S. Ct. 2604, 216 L. Ed. 2d 1205 (2023).
