Raking It In
You may recall that earlier this year the IRS launched an initiative to pursue 125,000 “high-income, high-wealth” taxpayers who have not filed taxes since 2017. These were cases where the IRS received third party information[i] indicating these individuals had received income in excess of $400,000 but had failed to file a tax return.
Last week, the IRS announced that during the first six months of this initiative, nearly 21,000 of these taxpayers filed returns and paid approximately $172 million in taxes.
You may also recall the IRS’s having launched another initiative last year to pursue high-income individuals with more than $1 million in income who failed to pay more than $250,000 in recognized tax debt.
After collecting $38 million from around 175 of such individuals last year, the agency expanded this effort last fall to include another 1,600 taxpayers. According to the IRS, almost 80 percent of these individuals with delinquent tax debt have now made a payment, leading to the collection of over $1.1 billion.
It’s not clear whether the above sums are inclusive of interest[ii] and penalties.
Penalties – In General
The Code provides for the imposition of penalties[iii] in the case of a taxpayer who fails to timely file a return (capped at 25 percent of the amount required to be shown on the return), or to timely pay the amount shown as tax on such return (capped at 25 percent of such amount).[iv] If both penalties reach their cap, the combined effect is a penalty of approximately 47.5 percent.[v]
In addition, a penalty will be imposed if the amount of tax required to be shown on a return, but not so shown, is not timely paid following the date of notice and demand for payment.[vi]
The foregoing penalties[vii] will be abated if the taxpayer demonstrates that the failure in question was due to reasonable cause and not due to willful neglect.
The Code also imposes a number of other penalties. For example, the so-called “accuracy-related penalty”[viii] is imposed on any portion of an underpayment of tax required to be shown on a return where the underpayment is attributable to “negligence or disregard of rules or regulations,” or to a substantial understatement of income tax, or to any undisclosed “foreign financial asset understatement.”[ix]
The accuracy-related penalty will not be imposed, however, with respect to any portion of an underpayment if it is shown there was reasonable cause for such portion and the taxpayer acted in good faith with respect thereto.[x]
Why Penalties?
The penalties described above represent only a handful of the penalties that the IRS may impose upon a taxpayer under the Code.[xi]
According to the Internal Revenue Manual, “[p]enalties exist to encourage voluntary compliance by supporting the standards of behavior required by the [Code].”[xii] Taxpayers, the Manual continues, “assess their tax liabilities against themselves and pay them voluntarily. This system of self-assessment and payment is based on the principle of voluntary compliance. Voluntary compliance exists when taxpayers conform to the law without compulsion or threat.”[xiii] The Manual adds that “[p]enalties support voluntary compliance by assuring compliant taxpayers that tax offenders are identified and penalized.”[xiv]
All told, the combined effect of the federal income tax,[xv] penalties, and interest imposed on an individual taxpayer with respect to their late filing and late payment for a particular tax year may be substantial.
From one perspective, the prospect or threat of such penalties, plus the interest thereon, may be said to encourage voluntary compliance, as stated in the Manual.[xvi]
However, is there any reasonable argument that the magnitude of the above penalties renders them punitive? If so, may the “Excessive Fines” Clause of the Eight Amendment to the Constitution be implicated?
The Supreme Court has said it doesn’t.
Information Returns
The foregoing penalties are concerned primarily with tax returns that accompany the payment of tax; for instance, returns on which a taxpayer reports their taxable income for a taxable year, and on which they determine the resulting income tax liability for such year.
However, there are other kinds of returns that must be filed by certain persons who engage in specified transactions or who hold certain types of assets during a taxable year. These information returns are used to report such transactions or assets to the IRS in order to assist the agency in monitoring compliance with and in enforcing the tax laws. When a person obligated to file an information return fails to do so, or files one that is inaccurate, the IRS may charge penalties for each information return such person fails to correctly file on time. Interest may also be charged until the penalty is paid in full.
International Information Returns
Of particular interest to today’s post are the international information return filing requirements with which certain U.S. individuals must comply.
The failure to timely file complete and accurate international information returns[xvii] may lead to the imposition of various penalties, though a “reasonable cause” exception applies to many of such penalties.[xviii]
What follows is a discussion of one individual’s failure to file FBARs[xix] for several years, and the IRS’s efforts – by and large successful – to collect substantial penalties from Taxpayer on account of such failure.
Taxpayer’s Situation
From 1993 to 2010, Taxpayer split his time between South America, Europe, and the U.S. Taxpayer became a legal permanent resident of the U.S. in 1995, and a U.S. citizen in 2000. Taxpayer lived full time in Switzerland from 2010 until he returned to the U.S. in 2016.
Gifts
Taxpayer’s assets were derived from his father’s gifts and bequests, made between 2001 and 2009. Between 2006 and 2009, Taxpayer had an interest in many foreign bank accounts.[xx]
As an American citizen, Taxpayer was subject to the FBAR reporting requirements for these foreign bank accounts; specifically, a U.S. person with a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year.
Failure to File
Taxpayer used CPA to prepare his U.S. tax returns. Although Taxpayer disclosed his foreign accounts and gifts to CPA, Taxpayer was advised (incorrectly) that he had no duty to report these assets because they were maintained outside of the U.S.
At various times, CPA filed incomplete FBARs on Taxpayer’s behalf or failed to file FBARs at all.
In 2008, however, Taxpayer opted to self-prepare and file an FBAR for the 2007 tax year. On this FBAR, Taxpayer disclosed only a single foreign account: the same one he had disclosed on the 2006 FBAR prepared by CPA. Taxpayer filed a late FBAR for 2008. For 2009, Taxpayer again self-prepared an FBAR and disclosed three foreign accounts, although he maintained many other undisclosed foreign bank accounts.
Voluntary Disclosure – or Not
Eventually, Taxpayer became aware that he was in violation of the FBAR requirements. In 2010, Taxpayer disclosed his foreign accounts through the IRS’s Offshore Voluntary Disclosure Initiative (the “OVDI program”), including seventeen Swiss bank accounts and four Costa Rican bank accounts for the years 2003 to 2010. Ultimately, however, Taxpayer chose to opt out of the OVDI program, and his case was referred to the IRS for investigation.
FBAR Violation
The IRS determined that Taxpayer willfully violated the FBAR reporting requirements for the 2006–2009 tax years. Consistent with the statute, the penalty for each tax year for each unreported bank account was the greater of $100,000[xxi] or fifty percent of the account balance “at the time of the violation.”[xxii] The time of each FBAR violation was the then reporting date; i.e., June 30 of the year after the tax year being reported.[xxiii]
Taxpayer appealed the IRS’s proposed penalties to the IRS Appeals Office, which sustained and timely assessed the penalties.
Taxpayer failed to pay the penalties, and the U.S. brought an action in federal district court to collect them. After conducting a bench trial, the district court issued an opinion concluding that Taxpayer had willfully violated the FBAR reporting requirements in 2007, 2008, and 2009, but not in 2006. The district court found that Taxpayer did not knowingly violate the FBAR reporting requirements, but that he did so with “willful blindness” or “recklessness” because, after reading the instructions and self-preparing his own FBAR in 2007, he “was aware, or should have been aware, of a high probability of tax liability with respect to his unreported accounts.”
Fast forward, the district court entered judgement against Taxpayer for an FBAR penalty in excess of $12.5 million.[xxiv]
Eighth Circuit
Taxpayer appealed to the federal Court of Appeals for the Eighth Circuit,[xxv] asserting that the judgment sought by the IRS violated the Excessive Fines Clause of the Eighth Amendment to the U.S. Constitution, which prohibits the imposition of “excessive fines.”[xxvi]
The question before the Court, then, was whether FBAR penalties are “fines” within the meaning of the Excessive Fines Clause.
Excessive Fines Clause
The Court considered the historical development of the Excessive Fines Clause in the federal courts, including their refusal to hold that it applied only to criminal cases. Indeed, the federal courts concluded that the relevant question was not whether a given fine was civil or criminal, but rather whether it was punishment for some offense. The Court explained that, “in order to escape the command of the Excessive Fines Clause a penalty must fairly be said solely to serve a remedial purpose.” A penalty can be considered “remedial,” the Court continued, if it serves to compensate the government for a loss or for the costs of enforcing the law.
The courts later expanded on this principle, distinguishing cases where the monetary penalty was purely remedial in nature or where the forfeiture of property was purely against “the ‘guilty property,’ rather than against the offender himself.” The courts reasoned that these actions served “the remedial purpose of reimbursing the Government for the losses accruing from the evasion of” taxes. Thus, they were non-punitive, because they “provide[d] a reasonable form of liquidated damages for violation of the [law] and serve[d] to reimburse the Government for investigation and enforcement expenses.”
Therefore, the critical question, according to the Court, was whether a penalty “is designed to punish the offender” and thus serves as “punishment,” in which case the penalty or “fine” is subject to the Excessive Fines Clause.
FBAR Penalty as Fine
The Court next considered the purpose of the FBAR penalty.
The maximum penalty for a willful failure to report a foreign bank account is “[t]he greater of … $100,000” or fifty percent of “the balance in the account at the time of the violation.”[xxvii] The Government argued that the purpose of this penalty is not to deter, but to compensate its investigation and enforcement expenses associated with violations of the FBAR statute.
But the text of the statute mandates that the penalty is calculated “irrespective of the magnitude of the financial injury to the United States, if any.” The Government can impose a $1 million penalty on a $2 million account regardless of whether the Government spent a million dollars investigating the case or whether it spent nothing at all. Indeed, the Court observed that in Taxpayer’s case there wasn’t any indication from the Government how much time or money it expended in investigating Taxpayer’s accounts. The Government did not make any argument that the investigation’s expenditures amounted to the millions of dollars it sought in penalties on some of the accounts. Instead, the Government assessed a penalty on each account for the maximum amount permitted under the statute in every instance.
The Court explained, in the context of applying the Excessive Fines Clause to civil forfeiture, that “[w]here the value of forfeited property bears no relationship to the government’s costs, an inquiry into whether the forfeiture is remedial is not necessary; it is almost certain that a portion of the forfeited property will constitute punishment.”
Moreover, the Court observed that the design of the statute itself makes clear that the severity of the penalty is tied directly to a violator’s culpability. FBAR penalties are capped at $10,000 for a non-willful violation,[xxviii] but are increased to the greater of $100,000 or fifty percent of the account balance at the time of the violation for a willful violation.[xxix] A willful violation of the FBAR statute thus has a ceiling limited only by the size of the violator’s bank account, regardless of the corresponding tax liability or the time or cost spent by the Government remediating the problem. The Court stated that the willful intent for which this high penalty is reserved is identical to that found in the FBAR statute’s criminal penalties.[xxx] In other words, this civil penalty only applies to those with a culpable mindset equivalent to that of a criminal under the same statute. Significantly, provisions that focus on the culpability of the defendant make a statutory penalty “look more like punishment.”
Furthermore, the FBAR penalty for willful violations is steep. Because the penalty is imposed each year and can constitute fifty percent of the account balance on the date of the violation, FBAR penalties imposed for willful violations over a series of years could consume an account of any size in its entirety in just two years.[xxxi]
So severe a penalty,[xxxii] the Court stated, that is applied only to those with a criminal intent, bears the hallmarks of punishment.
The Court pointed out that Congress believed the initial FBAR penalty scheme would encourage compliance. However, when it became clear, the Court continued, that greater compliance remained elusive, Congress adopted the current penalty scheme for willful violations; i.e., the penalty for a willful violation is $100,000 or fifty percent of the account balance at the time of the violation, for each account, whichever is greater. Based upon the stated “reasons for change” to the FBAR penalties, it appeared that instead of increasing compliance, Congress intended to deter violations of the reporting requirement.[xxxiii] Deterrence, the Court noted, is punitive in nature.
“No matter how you cut it,” the Court concluded, “it’s apparent that this statute is designed to inflict punishment at least in part. Whether we look at the text and structure of the statute – which inflicts substantial penalties on those with a criminal [intent], unconnected to the government’s costs and expenses – or at the deterrent reasons Congress has articulated for creating the penalty scheme, by every reasonable measure, the FBAR penalty has a powerful punitive purpose. We hold, therefore, that the FBAR penalty is a fine subject to the Eighth Amendment’s Excessive Fines Clause.”[xxxiv]
Were Taxpayer’s Penalties Excessive?
Next, the Court considered whether the FBAR penalties were excessive as applied to Taxpayer.[xxxv]
According to the Court, this exercise required an account-by-account examination and application of the constitutional standard because the statutory regime characterizes each failure to report a bank account as a separate violation.[xxxvi]
Before embarking on this task, the Court explained that “[t]he touchstone of the constitutional inquiry under the Excessive Fines Clause is the principle of proportionality: the amount of the forfeiture must bear some relationship to the gravity of the offense that it is designed to punish.” Stated differently, the gravity of the offense relative to the fine must be proportional. A fine will violate the Clause, the Court stated, if it is “grossly disproportional to the gravity of a defendant’s offense.”
The Court then enumerated the three factors it would consider in determining whether a fine was excessive: “(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.”
The Court also noted that Congress’s decision to create a penalty that is proportionally tied to the amount in the account is not irrational – “indeed, the principle that greater harm yields a greater penalty is reflected throughout our legal system.”
“The very fact that Congress based the willful FBAR penalty on the account balance and not the tax loss reflects the judgment that . . . the harm Congress seeks to ameliorate increases with the size of the amount hidden from the Government.”
Furthermore, Congress’s choice to tie the size of the penalty to the size of the account is particularly rational where, as here, a fundamental purpose of the penalty is deterrence. If Congress had not tied the FBAR penalty to the amount in the account, defendants would be increasingly incentivized not to comply with the reporting requirements as the amounts in the concealed accounts (and thus the harm to the government) grew larger, because the advantage from concealing the account would increasingly outweigh the potential risk of loss when the account is discovered.
Excessive
With that, the Court went through each of Taxpayer’s accounts for each year. Only with respect to one account did the Court find that the FBAR penalty was “grossly disproportional” to the culpability at issue.
In that case, the government sought to collect a $100,000 fine for each of the three violations, each of which involved an account that never exceeding $16,000.
The Court noted that the statute “dictates only the maximum penalty to be imposed on each account.”[xxxvii] The Court added that “[n]othing forbade the Government from assessing a penalty proportional to the nature and extent of the violation” on the account in each year.
However, the Government instead sought the statutory maximum of $100,000 each time. “There is little doubt in our mind,” the Court stated, “that each of these penalties is grossly disproportionate and, therefore, the $300,000 the Government sought to fine Taxpayer for this account was constitutionally excessive.”
Proportional
As for the remainder of Taxpayer’s accounts, however, the Court found that the FBAR penalties assessed – equal to fifty percent of the account balance – raised no proportionality problems. In fact, each of these bank accounts held from over one-half million to millions of dollars that Taxpayer willfully failed to disclose to the government.[xxxviii]
The Court observed that as the maximum balance concealed in a bank account during the tax year increases, “so does the gravity of failing to report that account to the IRS by the reporting date of the following year.”
With this principle in mind, the Court considered the three factors (described earlier) that it uses to determine excessiveness. Going account by account, the Court stated that it was “not persuaded that any of the remaining fines” were excessive as applied to Taxpayer.
First, there was no question, the Court stated, that the FBAR penalties were concerned with defendants precisely like Taxpayer. The purpose of the Bank Secrecy Act, the Court explained, is to require “U.S. citizens and others to report their ‘transaction[s]’ and ‘relationship[s]’ with ‘foreign financial agenc[ies]’ to the IRS.”
Taxpayer was a wealthy, naturalized U.S. citizen” who “held interests in foreign bank accounts in Switzerland and Costa Rica.”
Moreover, Taxpayer was “not an innocent victim:” he was only subject to the fifty percent penalty because he recklessly disregarded the law which required him to report foreign bank accounts. Taxpayer ‘s own willful blindness is what placed him “squarely in the [FBAR statute’s] crosshairs.”
Second, the Court compared the fines to other sanctions authorized by Congress. Under the facts of the present case, the Court noted, Congress authorized the Government to pursue criminal sanctions; the Government merely chose not to do so. As described above, the intent for the FBAR statute’s criminal penalties is willfulness, the same as for the FBAR’s heightened civil penalties.
Taxpayer satisfied that requirement.
Third, and finally, the Court considered the harm caused by Taxpayer. According to the Court, Congress considered the harm of unreported foreign bank accounts to be very serious. In passing the Bank Secrecy Act, Congress emphasized that the use of “secret foreign bank accounts” has been utilized by Americans to evade income taxes, conceal assets illegally and purchase gold; has allowed them to avoid the law and regulations governing securities and exchanges; has served as an essential ingredient in frauds including schemes to defraud the U.S.; has served as the ultimate depository of black market proceeds …; and has served as the “cleansing agent” for illegally obtained monies.
Before turning to Taxpayer’s accounts, the Court observed it would “have no trouble imagining situations where such a penalty would be clearly excessive.” However, the Court added, it was not considering the constitutionality of a hypothetical penalty; rather, it was considering only whether the penalties in the present case, looking at each penalty on each account in each year, were grossly disproportionate as applied to Taxpayer.
For the reasons described above, the Court could not say that the penalties imposed upon Taxpayer were grossly disproportionate to “the serious offenses of willfully concealing foreign bank accounts” containing millions of dollars. Congress “sought to deter precisely the harm for which Taxpayer” was culpable, Congress considered that harm to be a very serious one, and “Congress’s method of deterring that harm” was rational.
The Court concluded that Taxpayer’s penalties were simply not the types “that ran afoul of the Eighth Amendment’s Excessive Fines Clause.”
Parting Thoughts
When the IRS announced[xxxix] in September 2023 that it was shifting more attention onto high-income individuals, it observed that such taxpayers continue to utilize foreign bank accounts to avoid the disclosure of income and related taxes.
Indeed, the IRS’s analysis of taxpayers’ multi-year filing patterns identified hundreds of possible FBAR non-filers with account balances that averaged over $1.4 million.
In light of its findings, the IRS stated that it plans to audit the most egregious potential non-filer FBAR cases.
Stay tuned.
The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.
[i] For example, through Forms W-2 and 1099.
[ii] As you know, the Code provides for the payment of interest, at the underpayment rate, on any unpaid amount of tax from the last date prescribed for the payment of the tax to the date on which payment is received. IRC Sec. 6621(a)(2); IRC Sec. 6601. In general, such rate is equal to the sum of the federal short term rate for the first month of each calendar quarter plus 3 percentage points. IRC Sec. 6621(b). The interest is generally payable on notice and demand. IRC Sec. 6601(e). In computing the amount of interest to be paid, such interest is compounded daily. IRC Sec. 6222.
[iii] Which are generally payable upon notice and demand.
[iv] IRC Sec. 6651(a)(1) and (2). The former imposes the penalty on the amount required to be shown as tax on the return; the latter upon the amount shown as tax. The Code provides rules for the simultaneous imposition of these penalties.
The failure-to-file penalty is generally imposed at a rate of 5 percent per month of the amount of tax required to be shown on the return, with a maximum of 25 percent. The failure-to-pay penalty is imposed at a rate of 0.50 percent per month of the amount of tax shown on the return, with a maximum of 25 percent
With respect to any return, where the failure-to-file and failure-to-pay penalties apply for the same period, the amount of the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty. IRC Sec. 6651(c)(1).
[v] Again, this is in addition to the tax owing and without regard to interest accrued on such tax or on such penalties.
[vi] IRC Sec. 6651(a)(3).
[vii] Moreover, interest is imposed on a failure to pay penalty if the penalty is not paid within 21 calendar days from the date of notice and demand therefor. IRC Sec. 6601(e)(2). In such case, interest shall be imposed only for the period from the date of the notice and demand to the date of payment. Interest on a failure to file penalty begins on the due date of the return with respect to which such penalty is imposed IRC Sec. 6601(e)(2)(B).
[viii] IRC Sec. 6662(a).
[ix] IRC Sec. 6662(b)
[x] IRC Sec. 6664(c).
[xi] The Internal Revenue Manual states, “there were approximately 14 penalty provisions in the Internal Revenue Code” in 1955. “There are now more than ten times that number.” IRM 20.1.1.1.1.https://www.irs.gov/irm/part20/irm_20-001-001r#idm140719831404416.
[xii] IRM 20.1.1.2.
[xiii] IRM 20.1.1.2.1.
[xiv] IRM 20.1.1.2.1.
[xv] Ordinary income at 37%, long term capital gain at 20%, net investment income at 3.8%. Don’t forget the state and local equivalents.
[xvi] “Voluntary compliance is achieved when a taxpayer makes a good faith effort to meet the tax obligations defined by the Internal Revenue Code.” IRM 20.1.1.2.1.
[xvii] Among other purposes, such returns provide a vehicle for verifying that the correct income tax is assessed on a U.S. person’s worldwide income.
[xviii] International penalties can be found in the IRS Penalty Handbook in IRM 20.1.9.
[xix] The FBAR is an annual report, FinCEN Form 114, which is filed electronically and is now due April 15 following the calendar year reported; there is an automatic extension to October 15. The FBAR is not filed with the reporting taxpayer’s annual income tax return.
[xx] After the death of Taxpayer’s father in 2009, the money continued to be managed by bankers based upon his father’s instructions; Taxpayer never directed how the money should be invested or disagreed with any recommendations made by the bankers. The district court found that Taxpayer maintained these accounts because they were in places outside of the U.S. where he resided, not with the intention of evading U.S. tax reporting requirements.
[xxi] Which is adjusted for inflation.
[xxii] 31 U.S.C. § 5321(a)(5)(C), (D)(ii).
[xxiii] 31 C.F.R. § 1010.306(c). As stated above, the FBAR is now due April 15 following the calendar year reported; there is an automatic extension to October 15.
Although the June 30 balance is used to calculate the penalty, 31 U.S.C. § 5321(a)(1)(5)(D)(ii), the duty to report the account is triggered not by the June 30 balance, but by the maximum amount in the account during the prior tax year. 31 C.F.R. § 1010.306(c).
[xxiv] Interest and failure-to-pay penalties were also imposed.
[xxv] U.S. v. Schwarzbaum,, case number 22-14058 (11th Cir.).
[xxvi] U.S. Const. Amend. VIII reads as follows: “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.”
I wonder how the Founders would have characterized a framework of federal, state, and local taxes that takes more than 50% of a taxpayer’s earnings every year, and which may tax the value of the taxpayer’s estate after their death. So much for “the pursuit of happiness.” And to think there are those in government who would further increase the tax burden so as to further increase the size of government and government spending, which may lead to inflation, which Milton Friedman once characterized as “taxation without representation.”
[xxvii] 31 U.S.C. § 5321(a)(5)(C)(i), (D)(ii).
[xxviii] 31 U.S.C. § 5321(a)(5)(B)(i).
[xxix] 31 U.S.C. § 5321(a)(5)(C)(i).
[xxx] 31 U.S.C. § 5322(a)–(b).
[xxxi] The account would not be wiped out after two years, of course, if the IRS imposed a separate fifty percent penalty at the end of each applicable year, because then the account would only be halved, then halved again the next year, and still again in each year thereafter. But when the IRS imposes multiple penalties at one time after a series of years — as happened in this case — the statute does not command the IRS to penalize the first year, reduce the account accordingly, and then penalize again. Instead, the statute requires the IRS to calculate a fifty percent maximum penalty based on the June 30 balance for each year. See 31 U.S.C. § 5321(a)(5)(C), (D)(ii); 31 C.F.R. § 1010.306(c). So, if the account balance was $100,000 on June 30 of year one, and $100,000 again on June 30 of year two, then in year three the IRS could impose a $50,000 penalty for both year one and year two, for an aggregate penalty of $100,000, thus wiping out the account entirely.
[xxxii] The Court observed it was not the first to find the FBAR penalty severe: “the Taxpayer Advocate Service, an independent organization within the IRS itself, recently stated that ‘[t]he maximum FBAR penalty is among the harshest civil penalties the government may impose.’”
[xxxiii] “Increase compliance” vs “deter violations”? Is there a meaningful difference in this context?
[xxxiv] Having decided that the FBAR penalty had to be examined in light of the Excessive Fines Clause, the Court considered and dismissed the decision of one its “sister Circuits” which concluded that FBAR penalties were not subject to the Excessive Fines Clause.
[xxxv] The Court observed that Taxpayer was not making “any facial challenge on the FBAR penalty scheme as a whole.”
[xxxvi] Taxpayer suggested that the Court’s excessive fines analysis should focus on the total aggregated fine. The Court disagreed, pointing out that this approach could not be reconciled with the FBAR reporting regime. “Rather we must proceed carefully on an account-by-account basis precisely because the statutory regime characterizes each failure to report a bank account as a violation in and of itself.” Section 5321 of Title 31 of the United States Code specifically authorizes penalties “in the case of a violation involving a failure to report the existence of an account” — not a single aggregated violation for the failure to submit an FBAR form reporting any number of accounts in a given year.
[xxxvii] Section 5321 of Title 31 of the United States Code.
[xxxviii] The Court explained that “the Supreme Court has instructed us that, when conducting a proportionality analysis for the Excessive Fines Clause, it is the gravity of the offense itself to which the fine must be proportional.”
That said, it appears that, in Taxpayer’s case, the account balance as of the reporting date – generally, the date of the violation – was not used in determining the penalty; instead, the focus was on the maximum value of the account during the relevant period.
[xxxix] https://www.irs.gov/newsroom/irs-announces-sweeping-effort-to-restore-fairness-to-tax-system-with-inflation-reduction-act-funding-new-compliance-efforts.
