United States v. Isac Schwarzbaum, CA-11 (Aug. 30, 2024)

Isac Schwarzbaum, a US citizen, held foreign bank accounts in Switzerland and Costa Rica. He failed to file accurate FBARs from 2006 through 2009, despite having over $20 million in foreign assets. Schwarzbaum did not timely report these accounts, nor did he include income from the accounts in his tax returns.

Upon audit, the IRS assessed civil penalties against him for willful failure to file FBARs. The penalties imposed by the IRS were substantial, amounting to $13,729,591, and he challenged the assessments arguing that the excessive penalty violated the “excessive fines” clause of the US Constitution’s Eight Amendment.

Tax practitioner planning. Do the math. The Appellate Court noted that “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.”

Court finds that FBAR penalties fall within 8th amendment protections. The Court concluded that the FBAR penalties fall within the scope of the Eighth Amendment, but then determined that the penalties were not excessive as applied to Schwarzbaum himself. “Schwarzbaum did not make any facial challenge on the FBAR penalty scheme as a whole — we therefore have no occasion to question the constitutionality of a fifty percent fine on a theoretical account of any size triggering the FBAR statutory regime. The only question before us today is whether the fines imposed on Schwarzbaum’s accounts are excessive as to Schwarzbaum.”

Small account not subject to $100,000 minimum penalty. The Court reviewed each of Schwarzbaum’s accounts (many with unknown balances). It particularly noted that:

“the penalty levied against the Aargauische account is constitutionally excessive in all three years at issue. Begin with the 2007 Aargauische account. The account never exceeded $16,000, and on June 30 — the day the account was assessed — the balance was only $11,872. However, under the statutory framework, the Government sought to impose a penalty of $100,000 for this undisclosed account. A $100,000 penalty for an account holding comparatively small amounts of currency strikes us as being “grossly disproportional to the gravity of the defendant’s offense,” Bajakajian, 524 U.S. at 337, namely, attempting to conceal from the IRS an account worth approximately $16,000 or less. A fine that is over eight times the amount in the account on the day of the assessment, and over six times the greatest amount ever held in the account, constitutes an excessive penalty.” 

The Court reduced the penalty by $300,000. It did not reduce penalties on accounts where Schwarzbaum had not produced account balances.

Note. In United States v. Toth, 33 F.4th 1 (1st Cir. 2022), the First Circuit heard a similar case and concluded that FBAR penalties are not subject to the Eighth Amendment Excessive Fines Clause. This Court disagreed.