FBAR penalties: 'Grossly disproportionate'

Last year's Supreme Court decision in Bittner v. U.S. dispelled the confusion regarding the "stacking" of FBAR penalties, making it clear that the penalty is to be imposed per FBAR return, not per account. But the Eleventh Circuit Court of Appeals has just added a new wrinkle to the penalty, holding on Aug. 30, 2024, that the FBAR penalty is a fine within the meaning of the Eighth Amendment's excessive fines clause. 

In this case, penalties were imposed on Isac Schwarzbaum, a wealthy naturalized citizen of the United States. He was born in Germany and holds significant wealth in a number of accounts in Switzerland and Costa Rica. Despite having read the FBAR filing instructions and hiring accountants to assist with his filings, he failed to report his foreign bank accounts to the Internal Revenue Service for the years 2007-2009. 

The Bank Secrecy Act of 1970 required the Treasury to promulgate regulations requiring United States citizens to report any "transaction" or "relation" with a "foreign financial agency." Consequently, the Treasury created the Report of Foreign Bank and Financial Accounts form, known as the FBAR. Each American citizen with interests in or authority over any foreign bank account with a balance exceeding $10,000 must file an annual FBAR with the IRS identifying and describing that account.

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The Eleventh Circuit noted that the only other circuit court to have addressed the question as to whether FBAR penalties are fines within the meaning of the Eighth Amendment was the First Circuit, which recently held that the Excessive Fines Clause does not apply to FBAR penalties. 

"After examining the historical development of the Excessive Fines Clause and the FBAR's text, structure and history, we decline to follow the First Circuit," the court wrote. "Rather, we hold that FBAR penalties are in substantial measure punitive in nature. Therefore, under controlling Supreme Court precedent, they are subject to review under the Eighth Amendment's Excessive Fines Clause. And in this case, examining the penalties assessed against Schwarzbaum account by account, as we must, we identify $100,000 in penalties levied against one account in each of the years 2007-2009, for a total of $300,000, that are grossly disproportionate to the offense of concealing that account, and are therefore in violation of the Excessive Fines Clause."

"We also hold, however, that the other penalties levied against the remaining accounts did not violate the Excessive Fines Clause because the penalties assessed against them were not grossly disproportionate to Schwarzbaum's willful concealment of tens of millions of dollars in overseas accounts," the court added.

Robbin Caruso, a partner at Top 100 Firm Prager Metis and co-manager of its National Tax Controversy practice, regularly represents taxpayers assessed with substantive and potentially financially devastating FBAR penalties. "I am hopeful that the Supreme Court will address this issue now that the Eleventh Circuit Court of Appeals has called such penalties 'grossly disproportionate to the offense' of concealing an account," she said. "Even in cases where reasonable cause exists, rectifying the penalties on these FBAR violations is a time-consuming and expensive endeavor for the taxpayers involved. Whether or not the excessive fines clause applies directly to FBAR penalties, these penalties will remain at front and center due to this split."

The court noted that even cases where the penalty is merely partially punitive would still be subject to review under the Eighth Amendment ban. But although the court trimmed Schwarzbaum's total penalties by $300,000, it remanded his case to the district court for the entry of a judgment in the amount of $12,255,813, plus the calculation of late fees and interest.