The Supreme Court has declined to review a Ninth Circuit decision, affirming a district court, which found that a taxpayer willfully failed to file a Report of Foreign Bank and Foreign Accounts (FBAR) with regard to her foreign account. The Ninth Circuit rejected a variety of the taxpayer's arguments, including that the imposition of the penalty violated the U.S. Constitution's excessive fines clause and that it was barred by the relevant treaty provisions.
FBAR and Potential Penalties
Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing an FBAR with the Department of the Treasury.
The civil and criminal penalties for noncompliance with the FBAR filing requirements are significant. Civil penalties for a non-willful violation can range up to $10,000 per violation, and civil penalties for a willful violation can range up to the greater of $100,000 or 50% of the amount in the account at the time of the violation (these amounts are adjusted for inflation—for penalties assessed after Jan. 15, 2017, the amounts are $12,921 and $129,210, respectively). A "reasonable cause" exception exists for non-willful violations, but not for willful ones.
In U.S. v. Bajakajian, (S Ct 1998) 524 U.S. 321, the Supreme Court held that a punitive forfeiture violates the Excessive Fines Clause of the Eight Amendment if it is grossly disproportional to the gravity of a defendant's offense. Although the Court did not set a rigid set of factors to consider in conducting the proportionality inquiry, it did consider:
- The nature and extent of the crime,
- Whether the violation was related to other illegal activities,
- The other penalties that may be imposed for the violation, and
- The extent of the harm caused.
Facts of Million Dollar FBAR Penalty Case
In 2002, Letantia Bussell was found guilty of :
- Violation of 18 U.S.C. §371 (dealing with conspiracy to commit an offense or to defraud the U.S.);
- False statements, false oaths and concealed assets in bankruptcy, and aiding and abetting and causing an act to be done, in violation of 18 U.S.C. §152(1); and
- Attempt to evade or defeat tax, and aiding and abetting and causing an act to be done, in violation of Code Sec. 7201.
The court imposed a $2,393,527 criminal judgment for restitution owing to multiple businesses. The criminal judgment was amended in 2005 and 2009, and ultimately Bussell was ordered to pay a special assessment of $300, a fine of $50,000, costs of prosecution of $55,626, and restitution to non-federal victims totaling $1,200,871.
In June 2013, IRS assessed a penalty of approximately $1.2 million penalty against Bussell for failing to disclose her financial interests in an overseas account on her 2006 tax return, which she was required to report in 2007. Bussell did not pay the penalty, and IRS filed suit.
District court decision. The district court found that Bussell had willfully failed to file a FBAR, granting partial summary judgment to IRS, but reducing the fine. (U.S. v. Bussell, (DC CA 12/8/2015) 117 AFTR 2d 2016-439) The court rejected all the various arguments offered by the taxpayer, including that the fine was excessive and violated treaty provisions.
The district court was not persuaded by the taxpayer's argument that the fine was excessive under the Eight Amendment because the offense was solely a reporting offense, not a serious crime. The court reasoned that while the taxpayer's offense, tax evasion, was not as serious as some crimes that ultimately trigger civil forfeiture actions, it clearly fit into the class of persons targeted by the Bank Secrecy Act, namely those evading taxes through the use of offshore bank accounts. Further, the district court found that the taxpayer had not carried her burden to show that the money at issue was derived from a lawful source, which would trigger stronger Eight Amendment protections.
After weighing the factors relevant to the an excessive fines inquiry, the district court concluded that IRS's assessment raised some Eighth Amendment concerns because the assessment exceeded the maximum penalty set out in the applicable criminal and civil statutes. The maximum authorized penalty for a willful criminal FBAR violation was a five year sentence and a $250,000 fine. (31 U.S.C § 5322(a)) The taxpayer's FBAR penalty was $1,221,806, which was almost five times the maximum amount allowed in the criminal statute. The district court decreased the penalty imposed from $1,221,806 to $1,120,513, which represented the maximum amount permitted under the applicable civil statute.
The district court also rejected the taxpayer's vague assertion that IRS illegitimately obtained information concerning her Swiss Account from the Swiss government. She contended that, pursuant to the treaty between the U.S. and Switzerland, the U.S. could only receive information from the Swiss government pertaining to tax violations. However, the district court concluded that the instant case was clearly a tax collection case, and it was unclear how IRS's conduct ran afoul of the treaty.
Bussell appealed the district court's decision.
Appellate court decision. The Ninth Circuit affirmed the district court, rejecting all the arguments offered by the taxpayer.
While she admitted that she willfully failed to disclose her financial interests in her overseas account on her 2006 tax return, she raised several arguments on appeal, see "Taxpayer was liable for million dollar FBAR penalty".
Among those arguments, the taxpayer contended that:
- IRS's penalty against her violates the Excessive Fines Clause of the Constitution. The Ninth Circuit rejected Bussell's contention reasoning that generally, a punitive forfeiture violates the Excessive Fines Clause if it is grossly disproportional to the gravity of a defendant's offense. (U.S. v. Bajakajian, (S Ct 1998) 524 U.S. 321) The Ninth Circuit found that the assessment against Bussell was not grossly disproportionate to the harm she caused because she defrauded the government and reduced public revenues. (U.S. v. Mackby, (CA 9 2003) 339 F.3d 1013)
- Introduction of banking evidence at the district court violated an international treaty between the U.S. and Switzerland. The Ninth Circuit concluded that Bussell was not entitled to relief under this theory because she had not shown that the treaty she relied on created an enforceable right. (U.S. v. Mann, (CA 9 1987) 829 F.2d 849)
Supreme Court review. Bussell petitioned the Supreme Court to review the Ninth Circuit's decision. She argued
- That the Eighth Amendment prohibition against excessive fines did not allow a forfeiture of half of an account's value (in this case, more than $1 million) merely because of a failure to report the account; and
- That the treaty between the U.S. and Switzerland on dual taxation, which was restricted to disclosure of tax information, couldn't be used to obtain information for non-tax uses, such as the existence of a foreign account held in violation of FBAR.
On Apr. 30, 2018, the Supreme court refused to review the Ninth Circuit's decision. Accordingly, that decision is now final.