First Circuit Court Says 8th Amendment Excessive Fines Clause Doesn’t Apply to FBAR Penalties

Courtroom, Gavel And Law Books

How large a penalty is too large, constitutionally speaking? Many people are shocked to learn that the maximum amount for a willful FBAR penalty is one half the balance of the account at the end of the reporting year. This can easily add up to millions of dollars. But is that amount unconstitutional? Recently, the First Circuit Court became the first circuit court of appeals in the country to weigh in on the issue, and it said no.

Was Toth’s $2.1 Million FBAR Penalty Unconstitutional?

Monica Toth, a U.S. citizen, has owned a foreign financial account at the Union Bank of Switzerland (UBS) since at least 1999. By 2005, that account had more than $10,000 in it. Under the U.S. Bank Secrecy Act, U.S. taxpayers are required to file a separate Foreign Bank Account Report (FBAR) any time they have at least $10,000 in an overseas account. But Toth didn’t do that until 2010.

After Toth filed her first FBAR, the IRS audited her. Ultimately, the government determined that she had failed to file FBARs between 2005 and 2009, and that at least in 2007, her failure to file had been willful. It imposed willful FBAR penalties in the amount of $2,173,703, an amount equal to half the value of the UBS account at the end of 2007. When Toth didn’t pay, the IRS brought a civil suit against her in the United States District Court of Massachusetts. Among her defenses, Toth claimed that the $2.1 million penalty violated the 8th Amendment Excessive fines clause of the United States Constitution.

First Circuit Joins Lower Courts Saying 8th Amendment Excessive Fines Clause Doesn’t Apply to FBAR Penalties

The 8th Amendment says:

“Excessive bail shall not required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.”

However, the Circuit Court explained that monetary penalties don’t always fall within that definition. They must function as punishment for some offense for the 8th Amendment to apply. This doesn’t only apply to criminal cases. Sometimes a civil penalty can count as a “punishment.” However, the Circuit Court relied on a U.S. Supreme Court case, Austin v. United States, in finding that a civil sanction must be either retributive or deterrent, not just remedial, to count as a punishment. In Austin, the Supreme Court said civil forfeiture in a drug case was punishment because it could only be imposed after a drug-trafficking conviction. In a later case, United States v Bajakajian, a different type of civil forfeiture imposed after criminal money laundering conviction, was also considered a “fine,” allowing the 8th Amendment to apply.

Here, the Circuit Court didn’t believe that FBAR penalties were punishments for constitutional purposes. It said:

But, unlike the civil forfeitures held to constitute “punishment” in both Austin and Bajakajian, this civil penalty is not tied to any criminal sanction. Rather, it was imposed following an administrative tax audit in which the IRS determined that Toth had failed to report a foreign bank account. Nor has the government conceded any punitive purpose.

The Court found that the FBAR penalties were more like early customs laws, which did not constitute punishments that would trigger the Excessive Fines Clause. They served “the remedial purpose of reimbursing the government for the losses accruing from the evasion of customs duties.”

Similarly, the Court said, in passing the Bank Secrecy Act,

Congress authorized the imposition of a penalty of this size for willfully failing to comply with the Act’s reporting requirements to address the fact that “[i]t had been estimated that hundreds of millions in tax revenues [were] lost” due to the secret use of foreign financial accounts.

The Court held that FBAR penalties were a remedy to the cost of international tax law enforcement by the IRS. Thus, they were not a punishment, and the 8th Amendment prohibition of excessive fines did not apply.

US v Toth and the Importance of Hiring a Tax Lawyer

While the main issue in US v Toth was the constitutionality of the willful FBAR penalty, it also is a good example of what happens when taxpayers try to solve their problems with the IRS by themselves. Toth told the District Court that she had dodged service and hadn’t responded to the IRS’s complaint against her because she “didn’t know what it was” and that the law is “a world that … [she] d[doesn’t know about.” But even after the District Court strongly urged her to hire a lawyer twice, Toth attempted to represent herself. She ended up violating several discovery rules – including failing to file mandatory initial disclosures – before hiring a lawyer to help her. Ultimately, the District Court imposed severe sanctions, penalizing her for her failure to cooperate with the legal process. One of those sanctions legally determined that her conduct was willful, cutting her off from a legal defense that could have saved her over a million dollars in FBAR penalties.

Tax law is too serious, and too complicated, to handle on your own. In fact, tax is one of the few areas of law to require additional training and certification by the attorneys who work in the field. If you are facing FBAR penalties or collections by the IRS, you need to work with an experienced tax attorney, right from the start. Otherwise, you could miss valuable defenses that could save you a lot of money.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding the constitutionality of FBAR penalties, contact Joe Viola to schedule a consultation.