Foreign Bank and Financial Accounts Reporting
United States v. Schwarzbaum
Date: Aug. 30, 2024
Issue: Whether the Eighth Amendment’s Excessive Fines Clause applies to willful Report of Foreign Bank and Financial Accounts penalties.
Case Summary: In a 3-0 decision, an Eleventh Circuit panel held that the Eighth Amendment’s Excessive Fines Clause applies to willful Foreign Bank and Financial Accounts Reporting (FBAR) penalties.
The Bank Secrecy Act requires American citizens and residents with foreign bank accounts to report those accounts to the Internal Revenue Service using FBAR forms. Isac Schwarzbaum held numerous bank accounts in Switzerland and Costa Rica. Although Schwarzbaum read the FBAR filing instructions and engaged accountants to assist with his filings, he failed to report his foreign bank accounts to the IRS from 2007 to 2009. The IRS determined that Schwarzbaum willfully violated the FBAR statutes and thus satisfied the requirements for higher penalties.
When Schwarzbaum failed to pay the penalties, the United States sued in Florida federal court. The district court agreed with the IRS and ruled that Schwarzbaum willfully violated the FBAR statutes. The district court rejected Schwarzbaum’s argument that the penalties were subject to review under the Eighth Amendment Excessive Fines Clause. Under the Excessive Fine Clause, “excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.”
On appeal, an Eleventh Circuit panel affirmed the finding of willfulness and the district court’s other conclusion ruling the penalties were not in accordance with the FBAR statute because the IRS used the wrong base numbers for its calculation. The Eleventh Circuit did not reach Schwarzbaum’s Excessive Fines Clause argument and remanded to the district court for recalculation of the penalties. The district court later denied Schwarzbaum’s motion for reconsideration.
On appeal in the Eleventh Circuit for a second time, the panel examined whether the Excessive Fine Clause applied to FBAR penalties. First, the panel reviewed the history of the Excessive Fines Clause and its interpretation in federal courts. Based on the history of the Excessive Fines Clause, and subsequent U.S. Supreme Court cases, the panel concluded that penalties considered “punishment” are subject to the Excessive Fines Clause, while penalties considered “remedial” are not. The panel explained that a penalty is considered punishment, and subject to the Excessive Fines Clause, if it is either retributive or serves a deterrent purpose. Conversely, if a penalty “removes dangerous or illegal items from society or serves to compensate the government for a loss or the costs of enforcing the law” it is considered remedial and therefore is not subject to the Excessive Fines Clause. In Schwarzbaum’s case, the panel concluded that even if the IRS were correct in claiming the forfeiture of his currency is remedial in some way, the forfeiture would still be punitive, which would trigger the Excessive Fines Clause.
Next, the panel found that the purpose of the FBAR penalty itself is at least in part punishment. While the IRS argued the purpose of the FBAR penalty is not to deter but to remedy its investigation and enforcement expenses associated with FBAR statute violations, the text mandates that the penalty is calculated “irrespective of the magnitude of the financial injury to the United States if any.” The panel explained in United States v. Dean, the Eleventh Circuit found that “where the value of forfeited property bears no relationship to the government’s costs, an inquiry into whether the forfeiture is remedial is not necessary; it is almost certain that a portion of the forfeited property will constitute punishment.” Thus, because FBAR penalties are unrelated to the magnitude of the financial injury to the IRS, the panel determined these penalties constitute punishment.
Additionally, the panel noted the design of the statute itself makes clear the severity of the penalty is directly tied to culpability. The panel explained that non-willful FBAR violations carry a penalty of $10,000 while willful FBAR violations carry a penalty of $100,000 or 50% of the account balance at the time of the violation. The panel reasoned provisions that focus on the culpability of a defendant make a statutory penalty “look more like punishment, not less.” As a result, the panel concluded the FBAR penalty is a fine subject to the Eighth Amendment’s Excessive Fines Clause. While the First Circuit ruled in Toth v. United States that the Excessive Fine Clause did not apply the clause to FBAR penalties, the panel declined to follow, creating a circuit split.
After determining that FBAR penalties fall within the scope of the Excessive Fines Clause, the panel examined whether FBAR penalties are excessive as applied to Schwarzbaum himself. According to the panel, penalties must be examined on an account-by-account basis, examining each penalty in proportion to each violation rather than the cumulative total. Further, a fine will violate the Excessive Fines Clause if it is “grossly disproportionate” to the gravity of a defendant’s offense. For Schwarzbaum’s account with Aargauische Kantonalbank, which operated from 2007-2009, there was a penalty of $100,000 per year, totaling $300,000. However, Schwarzbaum only had around $10,000-$16,000 in this account for each year. Therefore, the panel found the penalty to be “grossly disproportionate” and removed $300,000 from Schwarzbaum’s penalties. However, the other financial penalties were found to be valid and appropriate as they are not grossly disproportionate compared to the money that Schwarzbaum held in those other accounts.
Bottom Line: As of Oct. 1, the IRS has not filed for an en banc (full panel) petition for rehearing,
Documents: Opinion
