Background and facts
Pursuant to the Bank Secrecy Act, every US citizen with over USD 10,000 in foreign financial accounts (such as bank accounts, brokerage accounts, and mutual funds) must maintain records for each account and report those accounts to the IRS on a Report of Foreign Bank and Financial Accounts (FBAR). Failure to do so may lead to civil monetary penalties (or even criminal penalties), as in the case of Isac Schwarzbaum, who did not report his foreign bank accounts to the IRS for the years 2006 through 2009 and was sued by the government in 2019 to collect more than 13.7 million dollars in civil penalties. The 13-million-dollar penalties consist of FBAR penalties, interest, and late payment penalties.
District Court decisions
The issues before the District Court for the Southern District of Florida were: (i) whether Schwarzbaum's failure to file FBARs was willful; and (ii) whether the IRS properly calculated the civil penalties it sought to collect.
The district court, in March 2020, held that: (i) although Schwarzbaum's FBAR violation for tax year 2006 was non-willful (attributing it to his reliance on his accountants' advice), his FBAR violations for 2007 through 2009 were reckless and therefore willful; and (ii) the IRS miscalculated the applicable penalties because it used the highest aggregate balance in the foreign bank accounts rather than the balance at the time of the violations, which should be the balance as of June 30 of each applicable year (the filing deadline for the various FBARs). See United States v. Schwarzbaum, 2020 BL 104132, (S.D. Fla. Mar. 20, 2020).
The district court then re-calculated the FBAR penalties against Schwarzbaum based on the parties' supplemental briefs and entered an August 2020 judgment against him of over USD 15.7 million in FBAR penalties, late-payment penalties, and interest (an amount higher than the IRS originally imposed). See United States v. Schwarzbaum, 2020 BL 327679 (S.D. Fla. Aug. 26, 2020). Because the government filed a motion to alter or amend the judgment, the district court reduced the penalties to the same amount that the IRS initially proposed for years 2007 through 2009. Schwarzbaum appealed the case to the Eleventh Circuit.
Circuit Court holding
On appeal, Schwarzbaum argued that (i) the district court violated the APA by recalculating and imposing new FBAR penalties on its own; (ii) the district court erred in finding that recklessness constitutes willfulness in the context of FBAR violations; and (iii) the circuit court should direct a judgment in his favor rather than remand the case to the IRS because the IRS would be time-barred on remand from recalculating the FBAR penalties.
The circuit court sided with Schwarzbaum on his first argument but rejected the other two. More specifically, it determined that the district court lacked the power to recalculate the FBAR penalties. So instead of substituting its judgment for the IRS's, the district court should have remanded the case back to the agency for a recalculation of the penalty. That said, the circuit court held that the willfulness standard applied by the district court is correct. Citing recent precedent in United States v. Rum, 995 F.3d 882 (11th Cir. 2021), the Eleventh Circuit agreed with the district court that "willful conduct in the FBAR context includes reckless conduct" and that "although Schwarzbaum did not knowingly violate the FBAR reporting requirements, he acted recklessly when he reviewed the FBAR instructions in 2007 and then, for the next three years, failed to report the foreign assets those instructions directed him to report." Finally, the circuit court rejected the argument that on remand an agency could be time-barred from reevaluating its original actions.
As such, the circuit court vacated the district court's judgment against Schwarzbaum and ordered the case back to the IRS for recalculation of his FBAR penalties.
