In United States v. Schwarzbaum, the Eleventh Circuit recently held that certain penalties for failure to file FBARs violated the Excessive Fines Clause of the Eighth Amendment.
The district court in this case had agreed with the IRS’s assessment of $12,555,813 in penalties against the taxpayer for willful failure to report certain foreign bank accounts. The taxpayer argued to the Eleventh Circuit that these penalties were unconstitutional.
Each U.S. person who has a financial interest in, or signature or other authority over, one or more foreign financial accounts is required to report such relationship if the aggregate value of such accounts exceeds $10,000 at any time during the calendar year.[1] The Secretary of the Treasury may impose a civil money penalty on any person who fails to file an FBAR when required.[2] If the failure to file was non-willful, the maximum penalty that may be imposed is $10,000.[3] If the failure to file is willful, the maximum penalty is the greater of $100,000 or 50 percent of the balance with regard to each unreported account at the time of the violation.[4]
The Excessive Fines Clause of the Eighth Amendment to the U.S. Constitution provides that “[e]xcessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.” The U.S. Supreme Court has held that the Excessive Fines Clause only “limits the government’s power to extract payments, whether in cash or in kind, ‘as punishment for some offense.’”[5] Thus, if the penalty serves “either retributive or deterrent purposes, [it] is punishment” and thus subject to the Excessive Fines Clause.[6] On the other hand, a penalty is not subject to the Excessive Fines Clause if it may “fairly be said solely to serve a remedial purpose.”[7]
The Eleventh Circuit held that willful FBAR penalties are punitive in nature and therefore “fines” within the meaning of the Excessive Fines Clause. In this, the Eleventh Circuit reached a different conclusion than the First Circuit, which found that the Excessive Fines Clause does not apply to FBAR penalties.[8] The Eleventh Circuit rejected the government’s argument that the purpose of the willful FBAR penalty was to remedy the Government’s investigation and enforcement expenses associated with the violations by noting that the penalty is calculated “irrespective of the magnitude of the financial injury to the United States, if any.”[9] The Eleventh Circuit also noted that there was no indication how much time or money that the government spent in investigation each of the each of the accounts in question. The legislative history of the willful FBAR penalty also indicated that Congress intended the penalty to serve a punitive and deterrent, rather than remedial, purpose.
In determining whether a fine violates the Excessive Fines Clause, the Eleventh Circuit looks to “(i) whether the defendant is in the class of persons at whom the statute was principally directed; (ii) how the imposed penalties compare to other penalties authorized by the legislature; and (iii) the harm caused by the defendant.”[10]
The Eleventh Circuit held that the penalties assessed against one of the accounts at issue was constitutionally excessive for three years. A penalty of $100,000 was assessed against this account for each of these years. However, during this period of time, the maximum amount in the account was $16,000. The Eleventh Circuit found the penalties assessed in connection with the account for these years to be “‘grossly disproportionate’ to the culpability at issue—attempting to conceal, at most, roughly $16,000 from the IRS.”
No such proportionality issues affected the penalties assessed against the other accounts at issue, of which the account with the lowest maximum balance was $672,185.
[1] See 31 C.F.R. §§ 1010.306(c), 1010.350(a); see also 31 U.S.C. § 5314(a) (requiring the Secretary of the Treasury (the “Secretary”) to require certain persons to file reports regarding transactions or relations with foreign financial agencies); 31 C.F.R. § 1010.810(g) (delegating authority to enforce these reporting requirements to the Internal Revenue Service).
[2] 31 U.S.C. § 5321(a)(5)(A).
[3] Id. § 5321(a)(5)(B)(i).
[4] Id. § 5321(a)(5)(C), (D)(ii).
[5] Austin v. United States, 509 U.S. 602, 609-10 (1993).
[6] Id. at 610.
[7] Id.
[8] See United States v. Toth, 33 F.4th 1 (1st Cir. 2022).
[9] Yates v. Pinellas Hematology & Oncology, P.A., 21 F.4th 1288 , 1308 (11th Cir. 2021).
[10] Id. at 1314 (citing United States v. Chaplin’s, Inc., 646 F.3d 846 , 851 (11th Cir. 2011)).
