By: Anthony N. Verni Attorney at Law, CPA
September 5, 2024
©2024
Eleventh Circuit Sustains Willful FBAR Penalty, But throws the Taxpayer a Bone
On September 4, 2024, the United States Court of Appeals for the 11th Circuit in United States v. Schwarzbaum, ___ F.4th ___ (11th Cir. 2024), held that(a) the FBAR civil FBAR willful penalties are “fines” within the meaning of the Eighth Amendment; (b) the minimum $100,000 penalties applying to to the taxpayer’s accounts with small amounts (those $16,000 or less) are disproportional and excessive; (c) the penalties on the accounts with significantly larger amounts are not disproportional and thus not excessive; and (d) the District Court should determine the effect of the $300,000 reduction in the willful FBAR Penalty with respect to the accounts with small amounts. The instant matter is the second time the 11th Circuit has addressed these penalties.
The Taxpayer was born in Germany and became a naturalized citizen of the United States. During the relevant tax periods, Mr. Scwarzbaum maintained numerous financial accounts in Switzerland and Costa Rica, which obligated him to file FBARS and to report his foreign financial accounts.
According to the facts, although the Taxpayer read the FBAR filing instructions and engaged accountants to assist with his filings, he failed to report his foreign bank accounts for the tax years 2007–2009. In turn, the IRS assessed willful FBAR penalties against the Taxpayer.
In the Government suit against Scwarzbaum to reduce the assessments to Judgment, the District Court found that the Taxpayer willfully violated the FBAR statutes by virtue of his reckless conduct. However, in reaching its decision the District Court determined that the IRS erred in calculating the willful FBAR penalties, finding that the IRS used the wrong numbers in finding the maximum penalty.
Consequently, the Court set aside the penalty. However, rather than remanding the matter back to the IRS for calculation of the penalty, the Court performed its own penalty calculation. Schwarzbaum then appealed.
The first appeal resulted in the 11th Circuit sustaining the District Court’s finding that the Taxpayer’s reckless failure to file FBAR reports satisfied the statute’s “willfulness” requirement. However, the Court found that the lower court erred in performing its own calculation of the penalty and, accordingly, vacated the District Court’s judgment with instructions for the IRS to recalculate the penalties.
The IRS recalculated the willful FBAR penalties, resulting in higher penalties. The Government once again moved to reduce the penalties to Judgment and the District Court entered the same Judgment it previously had prior to the remand.
YEAR BANK BALANCE PENALTY
2007 Aargauische $11,872 $100,000
2008 Aargauische $10,601 $ 100,000
2009 Aargauische $ 9,966 $100,000
YEAR BANK BALANCE PENALTY
2007 UBS 6308 $8,615,602 $4,307,801
2007 UBS 9250 $ (5,571) $ 100,000
2007 UMB Unknown $ 100,000
2007 Scotiabank de
Costa Rica 0588 Unknown $ 100,000
2008 Bank Lint Unknown $ 100,000
2008 BSI Unknown $ 100,000
2008 Clariden Leu $ 4,106,132 $2,053,066
2008 Raiffeisen $3,137,728 $1,568,864
2008 St. Galler Unknown $ 100,000
2008 UBS 6308 Closed $ 100,000
2008 UBS 9250 Closed $ 100,000
2008 UMB Unknown $ 100,000
2008 Scotiabank de
Costa Rica 0588 Unknown $ 100,000
2008 Scotiabank de
Costa Rica 1472 Unknown $ 100,000
2009 Banca Arner $3,078,492 $1,539,246
2009 Bank Linth Unknown $ 100,000
2009 BSI Unknown $ 100,000
2009 Clariden Leu $4,504,702 $2,252,351
2009 Raiffeisen Closed $ 100,000
2009 St. Galler Unknown $ 100,000
In the second Appeal, the 11th Circuit summarily disposed of a number of questions raised by the Taxpayer and found that: (1) the United States, as plaintiff in a civil case, had the discretion to seek a lower penalty amount than the IRS assessed; (2) the Eleventh Circuit in the first appeal already disposed of and rejected Schwarzbaum’s statute-of-limitations argument; and (3) the District Court did not err by retaining jurisdiction during a remand to the IRS.
The significant and novel issue for the 11th Circuit addressed in the second appeal is whether the FBAR penalties are fines within the meaning of the Eighth Amendment’s Excessive Fines Clause. In deciding the question the 11th Circuit rejected the finding by the 1st Circuit holding in United States v. Toth, 33 F.4th 1 (1st Cir. 2022)that the Eighth Amendment’s Excessive Fines Clause does not apply to FBAR penalties.
In rejecting the 1st Circuits decision, the 11th Circuit adopted the principle of proportionality. In other words, the amount of the fine must bear some relationship to the seriousness of the offense that it is designed to deter.
Based upon this principle, the Court determined that the $100k willful FBAR penalties assessed with respect to the Aargauische’s Accounts, all with balances of less than $16k for the years 2007-2009, was excessive and violated the Eleventh Amendment’s Excessive Fines Clause.
The Court sustained the remaining willful FBAR penalties related to the large accounts.
Based upon the 1st and 11th Circuit Decisions, the question that remains is whether the Supreme Court will take up this question.
