You can cross another challenge to penalties related to Reports of Foreign Bank and Financial Accounts (FBARs) off the list. On June 5, 2023, the U.S. Supreme Court denied a petition for a rehearing in Toth v. United States. A petition for certiorari had previously been filed with the Court in August 2022, which was rejected in January 2023.

The petitioner was seeking review of a decision by the U.S. Court of Appeals for the First Circuit that affirmed a $2.17 million civil penalty imposed on her by the IRS for willfully failing to file multiple FBARs. The question before the high court would have been whether penalties for willful failure to file an FBAR are limited by the excessive fines clause of the Eighth Amendment to the U.S. Constitution.

Case Background

Throughout the case, which was initially heard by the U.S. District Court in the District of Massachusetts, the petitioner had maintained she didn’t purposefully avoid reporting a foreign bank account left to her by her father to the IRS. He emigrated with his family from Germany to Argentina at the onset of World War II, with the petitioner eventually moving from Argentina to the United States. Citing this geographically diverse history, she claimed to be unaware of the reporting rules.

Under the Bank Secrecy Act, U.S. citizens with certain foreign accounts must file an FBAR. The filing requirement kicks in when a U.S. person has a financial interest in, or other authority over, one or more foreign bank accounts with an aggregate balance that exceeded $10,000 during the previous calendar year.

The filing requirement is enforced through civil and criminal penalties. For individuals whose failure to file an FBAR is willful, the maximum civil penalty is the greater of $100,000 or half the balance in the unreported account.

In this case, the nondisclosed account had a balance of about $4.2 million. Because the IRS deemed the failure to disclose as willful, Toth was assessed penalties equal to half of the balance, plus interest and late fees. By contrast, the maximum penalty for non-willful failures to disclose is $10,000.

A Dissenting Opinion

Interestingly, though the Supreme Court twice denied the petitioner, Associate Justice Neil Gorsuch made it known that he would have granted her request.

While dissenting with the denial of the initial petition for certiorari in January, he wrote the “government did not calculate [the petitioner’s] penalty with reference to any losses or expenses it had incurred. Instead, the IRS imposed its penalty to punish her and, in that way, deter others. Even supposing, however, that [the petitioner’s] penalty bore both punitive and compensatory purposes, it would still merit constitutional review.”

He closed in saying the case would have been well worth the Court’s time and he hopes the lower courts don’t repeat their mistakes.

Another Case Remains

Although it’s apparently case closed for Toth, another FBAR-related case remains before the Supreme Court: Bedrosian v. United States.

Here, a wealthy business executive with a high-value Swiss bank account is hoping the Court will establish a standard in determining when FBAR disclosure failures are willful. The petitioner is leaning on the Court’s ruling in Bittner v. United States, a case in which the high court ruled FBAR penalties accrue on a per-form rather than a per-account basis.

However, as the government argued in a May 2023 filing, Bittner vs. United States concerns a non-willful violation, not a willful one. As of this writing, Bedrosian vs. United States represents the last FBAR case on the table for the Supreme Court.

An Issue Still in Play

Had it decided to hear Toth vs. United States, the Court would have likely issued the definitive statement on whether the excessive fines clause of the Eighth Amendment applies to FBAR penalties. Now, as alluded to by Justice Gorsuch, lower courts will have to revisit the issue should it arise again.

If the failure to file the form did not also involve a failure to report income from the account(s), there are procedures a taxpayer can consider that might not involve such heavy penalties. If you have questions about the proper reporting of foreign financial accounts on the FBAR form, please contact a Moore Doeren Mayhew advisor today.