In its recent decision in United States v. Leeds, the United States District Court for the District of Idaho upheld the application of willful penalties against a deceased husband for failing to report certain foreign bank accounts to the U.S government but balked at applying those penalties to the nonculpable surviving wife.
Facts
Husband was a U.S. citizen.[1] After being on a plane that was hijacked by Yemeni terrorists during a flight to Saudi Arabia in 1984, husband allegedly decided to set up a foreign account to ensure that that he had cash available if he ever needed to pay a ransom in the future.[2]
Husband maintained Swiss bank accounts for over three decades after that (although there was apparently some dispute as to whether husband opened one of these accounts before the hijacking).[3] Husband didn’t report these accounts to the U.S. government, and wife denied having any knowledge of these accounts until the IRS began investigating husband in about 2014.[4] Husband used pseudonyms when signing documents in connection with these accounts, and the accounts had “hold mail” instructions which ensured that husband wouldn’t receive documents relating to the account other than in person.[5] Any documents that were provided husband in person were destroyed after each visit.[6] Husband held one of these accounts in the name of an entity formed in the British Virgin Islands that husband admitted acted as his alter ego.[7]
Husband used a CPA to prepare the couple’s federal income tax returns.[8] Husband would complete tax organizer each year to assist in preparing the returns.[9] The tax organizer would ask whether husband had foreign income or any interest or signature authority over a foreign financial account.[10] Husband consistently answered “no” to these questions.[11] Husband also signed federal income tax returns claiming that he did not have an interest in a foreign account.[12]
The CPA recalled one instance in which disclosed that someone overseas owed him money and asked whether he would have to report the money if he brought it back to the United States.[13] The CPA reportedly told husband that he would have to speak with a tax attorney who dealt with foreign issues.[14]
In 2014, the Swiss bank contacted husband to inform him that it was required to transmit information to the United States regarding active accounts going back to 2008.[15] Also in 2014, the IRS began investigating husband.[16] In 2020, the IRS asserted willful penalties against husband in the amount of $1,518,883 for failing to file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”) for the years in question.[17]
Husband passed away in 2021.[18] The government filed suit against wife seeking over $2 million in willful FBAR penalties, late-payment penalties, and interest.[19] Wife was named a defendant in the suit in her capacity as a potential successor-in-interest to the estate of husband, as personal representative of the estate, and as a potential distribute of the estate.[20]
FBAR Penalties
Every U.S. person with 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.[21] Types of foreign financial accounts subject to FBAR reporting generally include bank accounts, securities accounts, accounts with persons in the business of accepting deposits as a financial agency, accounts that are cash-value insurance or annuity policies, accounts with persons acting as a broker or dealer for certain commodity futures or options transactions, and accounts with mutual funds or other similar funds.[22]
The Secretary of the Treasury may impose a civil money penalty on any person who fails to file an FBAR when required.[23] If the failure to file was non-willful, the maximum penalty that may be imposed is $10,000.[24] If the failure to file was willful, the maximum penalty is the greater of $100,000 or 50 percent of the balance of the accounts at the time of the violation.[25]
Willfulness for Purposes of FBAR Willful Penalties
The Court in Leeds noted that, under controlling precedent of the United States Court of Appeals for the Ninth Circuit, willfulness with respect to failure to file FBARs “can be shown by proof of objective recklessness as well as subjective intent.”[26] Under this objective standard, willfulness exists if there’s a finding that the filer clearly should have known there was a grave risk that the filing requirement was not being met and was positioned to easily find out for certain.[27] Moreover, “[c]ourts may infer willfulness from (1) ‘conduct meant to conceal or mislead sources of income other than financial information’ or (2) ‘a conscious effort to avoid learning about reporting requirements.’”[28]
In finding that husband’s failure to file FBARs was willful, the Court looked to the following facts:
- husband represented on multiple occasions, including to his accountant, that he did not have any foreign accounts;
- husband denied having a foreign account on his federal income tax returns for the years in question;
- husband used an entity formed in the British Virgin Islands to hold one of his foreign accounts;
- husband gave “hold mail” instructions to the bank in which he held his foreign accounts, under which instructions the bank would only release any documentation relating to the accounts to husband in person;
- husband apparently ignored his accountant’s advice to seek legal advice in connection certain foreign tax issues; and
- for the years in question, the foreign accounts held more than half of husband’s total income.[29]
The Excessive Fines Clause
Along the same lines, the Court found that the application of willful FBAR penalties against husband didn’t violate the Eighth Amendment’s prohibition against “excessive fines.” However, the application of these penalties against wife would violate the Eighth Amendment.
For purposes of the Eighth Amendment, a “fine” is an exaction by the government that is punitive rather than remedial in nature.[30] The District Court followed a recent decision from the United States Court of Appeals for the Eleventh Circuit in holding that “FBAR penalties are in substantial measure punitive in nature” and “subject to review under the Eighth Amendment’s Excessive Fines Clause.”[31] Central to the Eleventh Circuit’s analysis were its observations that “the text of the statute [with regards to the willful FBAR penalty] mandates that the penalty is calculated ‘irrespective of the magnitude of the financial injury to the United States, if any”; “the severity of penalty is tied directly to culpability” and “bears no relationship to the government’s costs”; and the legislative history indicates “the very design and purpose of the FBAR penalties is to deter.”[32]
The District Court also noted that a fine violates the Eighth Amendment “if it is ‘grossly disproportional’ to the gravity of the offense.”[33] To determine proportionality, the court looked to the (1) the nature of the conduct, (2) the resulting harm, and (3) whether other penalties may be imposed.[34]
Under Ninth Circuit precedent, a review of excessiveness “must consider the individualized culpability of the owner of the property subject to the fine.”[35] Thus, the District Court was required to examine the application of penalties to husband and wife separately.
The District Court found that the willful FBAR penalties were excessive when applied to wife in her personal capacity, because the wife had no knowledge of the accounts and that the imposition of penalties against her would be financially ruinous. But, for the reasons that supported the application of willful FBAR penalties, the court found that these penalties were not excessive when applied to husband.
FBAR Penalties Survive Death
The District Court also ruled that the FBAR penalties survived husband’s death. Somewhat counterintuitively based on its decision with respect to the Excessive Fines Clause, the District Court based its ruling on the survival issue on its finding that the FBAR penalties are remedial rather than punitive in nature.[36] The court didn’t discuss the basis for this finding, instead citing a number of decisions from other district courts that had found FBAR penalties to be remedial.[37]
By way of explaining how its conclusion as to survival wasn’t inconsistent with its conclusion as to the Excessive Fines Clause, the District Court pointed out that the “test in the Excessive Fines context remains whether the purpose of the penalty is solely compensatory.”[38] However, the court didn’t further elaborate on this purported distinction.
[1] United States v. Leeds, Case No. 1:22-cv-00379-AKB, 2025 WL 743996 at *2 (D.C. Idaho March 7, 2025).
[2] Leeds, 2025 WL 743996 at *2.
[3] Id.
[4] Id.
[5] Leeds, 2025 WL 743996 at *3.
[6] Id.
[7] Leeds, 2025 WL 743996 at *2, 3.
[8] Leeds, 2025 WL 743996 at *4.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Id.
[14] Id.
[15] Leeds, 2025 WL 743996 at *5.
[16] Id.
[17] Id.
[18] Id.
[19] Id.
[20] Id.
[21] See 31 C.F.R. §§ 1010.306(c), 1010.350(a); I.R.M. 4.26.16.2(1) (Nov. 6, 2015); see also 31 U.S.C. § 5314(a) (requiring the Secretary of the Treasury 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).
[22] Id. § 1010.350(c).
[23] 31 U.S.C. § 5321(a)(5)(A).
[24] Id. § 5321(a)(5)(B)(i).
[25] Id. § 5321(a)(5)(C), (D)(ii).
[26] Leeds, 2025 WL 743996 at *7 (quoting United States v. Hughes, 113 F.4th 1158, 1160 (9th Cir. 2024)).
[27] Id. (citing Hughes, 113 F.4th at 1162).
[28] Leeds, 2025 WL 743996 at *8 (quoting United States v. Goldsmith, 541 F. Supp. 3d 1058, 1084 (S.D. Cal. 2021) (quoting United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991))).
[29] Id.
[30] Leeds, 2025 WL 743996 at *10.
[31] Id. (quoting United States v. Schwarzbaum, 127 F.4th 259, 265 (11th Cir. 2025)).
[32] Id. (quoting Schwarzbaum, 127 F.4th at 271-72).
[33] Leeds, 2025 WL 743996 at *11 (citing United States v. Bajakajian, 524 U.S. 321, 334 (1998)).
[34] Id. (citing Bajakajian, 524 U.S. at 336-38).
[35] Id. (citing United States v. Ferro, 681 F.3d 1105, 1107 (9th Cir. 2012)).
[36] Leeds, 2025 WL 743996 at *13.
[37] Id. (citing United States v. Wolin, 489 F. Supp. 3d 21, 27 (E.D.N.Y. 2020); United States v. Green, 457 F. Supp. 3d 1262, 1272 (S.D. Fla. 2020); United States v. Estate of Schoenfeld, 344 F. Supp. 3d 1354, 1375-76 (M.D. Fla. 2018); United States v. Park, 389 F. Supp. 3d 561, 575 (N.D. Ill. 2019)).
[38] Id. n.7 (quoting Schwarzbaum, 127 F.4th at 275 (emphasis in original)).
