Eighth Amendment FBAR Penalty Defense
Eighth Amendment FBAR Penalty Defense: FBAR penalties are bad, and the IRS likes to enforce them. Even non-willful violations can reach upwards of $10,000 per account, per year (adjusted for inflation). And, FBAR fines are not even tax violations but rather “reporting” violations in accordance with Article 31 and the Anti-Money Laundering (AML) regime.
Thus, the IRS can enforce a very hefty penalty against U.S. persons, when there is not even an actual tax violation. Moreover, in recent years, the IRS has significantly increased enforcement of foreign accounts compliance violations. Compounding the problem is the fact that the courts have been siding on the side of the IRS, and issuing willful penalties in situations in which there was either no intent (reckless disregard) or no actual knowledge (willful blindness).
One of the questions presented to the District Court in Schwarzbaum, which we have summarized previously, is whether or not FBAR Penalties are considered excessive, or cruel and unusual under the eighth amendment to the U.S. Constitution?
In a recently issued ruling, the court held that FBAR Penalties are not excessive fines, or cruel and unusual punishment.
What is the 8th Amendment
The 8th Amendment provides that:
“Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.”
What are FBAR Penalties?
FBAR Penalties can be broken down into 3 main categories:
Willful penalties are 50% value of the maximum balance throughout the year, or $100,000 – whichever is greater.
Non-Willful penalties range from a warning letter in lieu of penalty, all the way up to $10,000 per account, per year (subject to a maximum penalty).
Criminal penalties may result in monetary fines and imprisonment.
*The $10,000 and $100,000 FBAR penalties adjust for inflation.
8th Amendment Violation Against Mr. Schwarzbaum
The court disagreed that FBAR penalties violate the 8th amendment as follows:
“The FBAR penalties are not subject to the Eighth Amendment Schwarzbaum has argued that the FBAR penalties in this case violate the Eighth Amendment. Although the Court did not address this argument in its Decision, the Court recognized the eventual need to consider it upon recalculation of the penalties. See ECF No.  at 26.
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. See ECF No.  at 49.
The USA argues that FBAR penalties are not “fines” subject to the Eighth Amendment, and that in any event, Schwarzbaum fails to meet his burden of showing that the penalties are unconstitutionally excessive.
In arguing that the FBAR penalties are subject to the Eighth Amendment, Schwarzbaum contends that the penalties serve primarily punitive, retributive, or deterrent purposes, rather than being remedial, relying on United States v. Bajakajian, 524 U.S. 321 (1998), Austin v. United States, 509 U.S. 602 (1993), and Kokesh v. Securities and Exchange Commission, 137 S. Ct. 1635 (2017).
As such, Schwarzbaum argues that because FBAR penalties are not solely remedial, they are subject to the Eighth Amendment. See Austin, 509 U.S. at 610 (“a civil sanction that cannot fairly be said solely to serve a remedial purpose, but rather can only be explained as also serving either retributive or deterrent purposes, is punishment”) (citation omitted); see also Bajakajian, 524 U.S. at 328 (“The Excessive Fines Clause thus limits the government’s power to extract payments, whether in cash or in kind, as punishment for some offense.”) (quoting Austin, 509 U.S. at 609-10) (quotations omitted).
Upon review, however, the Court is not persuaded that these cases are particularly helpful with respect to FBAR penalties and concludes that extending such reasoning to civil FBAR penalties is not warranted and would be ill-advised. See McNichols v. Comm’r of Internal Revenue, 13 F.3d 432, 434 (1st Cir. 1993) (characterizing proposed extension of rule from Austin to tax penalties as a “giant leap” the court was unwilling to make).
The cases relied upon by Schwarzbaum are inapposite to this case. In Bajakajian, the respondent failed to report all money in excess of $10,000.00 in his possession upon traveling to a destination outside of the United States, and the question raised was whether forfeiture of the entire sum of money that the respondent failed to declare violated the Eighth Amendment. 524
U.S. at 325-25. Similarly, in Austin, the Supreme Court was tasked with determining whether the Eighth Amendment applies to forfeitures of property arising from convictions for violations of drug laws. 509 U.S. at 604-05.
In Kokesh, the Supreme Court examined whether disgorgement under securities laws is subject to the same statute of limitations as a fine, penalty, or forfeiture. 137 S. Ct. at 1642-43. In contrast, the FBAR penalties in this case cannot be properly characterized as forfeitures, as in Bajakajian and Austin, or disgorgement, as in Kokesh. 3 Importantly, none of these cases relied upon by Schwarzbaum suggest either explicitly or impliedly that their holdings should apply outside of the contexts in which they were decided.4 See, e.g. Cole v. United States Dep’t of Agric., A.S.C.S., 133 F.3d 803, 807 (11th Cir. 1998) (recognizing that there is no “comprehensive test to determine whether an in personam civil penalty violates the . . . Eighth Amendment” although Austin “did articulate a bright line rule in one category of cases: a fine that serves purely remedial purposes cannot be considered excessive in any event.”) (citations and internal quotations omitted). 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); see also Dewees v. United States, 272 F. Supp. 3d 96, 101 (D.D.C. 2017) (collecting additional cases in which lower courts “have erected ‘an insurmountable wall of tax cases’ to support this proposition.”). Indeed, “the payment of fixed or variable sums of money are other sanctions which have been recognized as enforceable by civil proceedings since the original revenue law of 1789.” Helvering, 303 U.S. at 400.
Moreover, a finding that the FBAR penalty does not fall within the purview of the Eighth Amendment is consistent with the purpose for the FBAR. See Dewees, 272 F. Supp. 3d at 101 (penalty for failure to file Form 5471 disclosing certain ownership and financial information about a foreign corporation authorized by Congress for a legitimate remedial purpose and not a “fine”).
The purpose of the FBAR is to identify persons who may be using foreign financial accounts to circumvent United States law and to identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.” United States v. Estate of Schoenfeld, 344 F. Supp. 3d 1354, 1372 (M.D. Fla. 2018) (citations and quotations omitted). Indeed, Congress enacted the Currency and Foreign Transactions Reporting Act, referred to as the Bank Secrecy Act (BSA), 31 U.S.C. §§ 5311, et seq. See Pub. L. No. 91-508, 84 Stat. 1114 (1970).
The primary purpose of the BSA was to require the making of certain reports that “have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.” Id. § 202.
In enacting the BSA, Congress noted the following: Secret foreign bank accounts and secret foreign financial institutions have permitted proliferation of ‘white collar’ crime; have served as the financial underpinning of organized criminal operations in the United States; have been utilized by Americans to evade income taxes, conceal assets illegally and purchase gold; have allowed Americans and others to avoid the law and regulations governing securities and exchanges; have served as essential ingredients in frauds including schemes to defraud the United States . . . ; and have served as the cleansing agent for hot or illegally obtained monies.
The debilitating effects of the use of these secret institutions on Americans and the American economy are vast. It has been estimated that hundreds of millions in tax revenues have been lost. [. . .] One of the most damaging effects of an American’s use of secret foreign financial facilities is its undermining of the fairness of our tax laws. Secret foreign financial facilities, particularly in Switzerland, are available only to the wealthy. To open a secret Swiss account normally requires a substantial deposit, but such an account offers a convenient means of evading U.S. taxes.
In these days when the citizens of this country are crying out for tax reform and relief, it is grossly unfair to leave the secret foreign bank account open as a convenient avenue of tax evasion. The former U.S. Attorney for the Southern District of New York has characterized the secret foreign bank account as the largest single tax loophole permitted by American law. H.R. Rep. No. 91-975, at 4397-98 (1970). Congress also recognized the cost to law enforcement— “[m]any of the cases have been in the investigative stage for years. United States law enforcement agencies are often delayed or totally frustrated when wrongdoers cloak their activities in the shield of foreign financial secrecy.” Id. at 4397.
When law enforcement personnel are confronted with the secret foreign bank account or the secret financial institution they are placed in an impossible position. In order to receive evidence and testimony regarding activities in the secrecy jurisdiction they must subject themselves to a time consuming and oftimes fruitless foreign legal process. Even when procedural obstacles are overcome, the foreign jurisdictions rigidly enforce their secrecy law against their own domestic institutions and employees. Id.
Furthermore, the statute itself indicates that it should not be regarded primarily as punitive, and therefore considered a fine subject to the Eighth Amendment, in that the penalty provision is titled “Civil penalties.” See 31 U.S.C. § 5321; see also United States v. Ward, 448 U.S. 242, 249 (1980) (“where Congress has indicated an intention to establish a civil penalty, we have inquired further whether the statutory scheme was so punitive either in purpose or effect as to negate that intention. . . .
In regard to this latter inquiry, we have noted that ‘only the clearest of proof could suffice to establish the unconstitutionality of a statute on such a ground.’”) (citations omitted). Although the FBAR penalty provision undoubtedly promotes deterrence, the Supreme Court has recognized that “all civil penalties have some deterrent effect,” such that none are “‘solely’ remedial (i.e., entirely nondeterrent).” Hudson v. United States, 522 U.S. 93, 102 (1997) (citations omitted). In fact, “the FBAR penalty serves the additional alternative purpose of reimbursing the Government for the cost of investigating and recovering the funds.” Estate of Schoenfeld, 344 F. Supp. 3d at 1372.
Thus, the assessment of the FBAR penalty, in addition to the collection of taxes owed, is properly viewed as compensating the Government for a loss. The direct result of a taxpayer’s filing of a fraudulent income tax return which understates his true tax liability is to deprive the sovereign of money it is entitled to receive and obligated to collect. It also makes it necessary for the Government to expend other public funds in order to uncover the fraud and collect the proper amount of tax due. These are monetary losses.
Consequently, we feel that the taxpayer’s wrongful act is in the nature of an injury to the property of the United States. Reimer’s Estate v. Comm’r of Internal Revenue, 12 T.C. 913, 920-21 (1949). At least one other decision in this district has already taken this view. See United States v. Green, — F. Supp. 3d —, 2020 WL 1980859, at *6 (S.D. Fla. Apr. 27, 2020) (finding that FBAR penalty has a remedial purpose, recognizing that “the Government itself has suffered a monetary harm as a result of Defendants’ conduct,” and that “FBAR violations may deprive the Government of taxes on investment gains and the Government likely expends significant resources on investigating foreign accounts.”).
Thus, the statutory amounts of $100,000 or 50% of the account balance at the time of the FBAR violation were “selected to ensure that the Government would be made completely whole.” Id. at *7.
As a result, the Court determines that the FBAR penalty in this case is not a “fine” subject to the Eighth Amendment.”
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