The case
The recent decision by the 11th Circuit Appellate Court in United States v. Isac Schwarzbaum introduces a significant constitutional restraint on penalties imposed for violations of Foreign Bank Account Reporting (FBAR) requirements. The ruling holds that FBAR penalties can be reviewed under the Eighth Amendment’s Excessive Fines Clause, which prohibits excessive fines and punitive measures by the government.
Source: Global Taxes & Paul Millen
The commentary
In a prior appeal in 2022 on this same case (“Schwarzbaum I“), the Eleventh Circuit had already held that the defendant had satisfied the “wilfulness” standard in the FBAR statutes by recklessly failing to report his non-US bank accounts from 2007 to 2009. Nonetheless, the same Court ruled here that FBAR fines are punitive (rather than remedial) and thus the defendant is entitled to protection under the eighth amendment. Furthermore, in this case, the fines were excessive and disproportionate to the offense and so in violation of those protections. (“Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted“).
In the aftermath of this ruling, individuals facing steep FBAR penalties will challenge the fines as unconstitutional. However, similar success is not certain because other courts may deviate from the Eleventh Circuit’s approach. As the Eleventh Circuit had not considered this specific question previously, it could not base its decision on precedent. Rather, it relied on reasoning from first principles and the historical context of the Excessive Fines Clause to determine that its protections extend to civil penalties like those in FBAR cases. Other US federal courts may differ. Nevertheless, this decision will encourage more scrutiny of how the IRS calculates penalties in FBAR cases and provide a defense for those subject to disproportionate fines.