Eleventh Circuit finds some FBAR penalties are excessive

The Eleventh Circuit held that three penalties of 23 assessed against a taxpayer for failure to file Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR), constituted excessive fines under the Eighth Amendment.

Facts: Isac Schwarzbaum, a naturalized U.S. citizen born in Germany, held numerous foreign bank accounts in Switzerland and Costa Rica. Between 2006 and 2009, Schwarzbaum failed to disclose his interests in 11 Swiss and two Costa Rican bank accounts. Although CPAs had aided Schwarzbaum in filing his U.S. tax returns, they incorrectly advised him that these accounts did not need to be reported to the U.S. government.

The Bank Secrecy Act of 1970, 31 U.S.C. Section 5311 et seq., authorizes Treasury to require U.S. citizens and other persons designated in 31 U.S.C. Section 5314 to report any “transaction” or “relation” with a “foreign financial agency.” This includes the FBAR requirement of reporting an interest in or authority over any foreign bank account with a balance exceeding $10,000 at any time during the year (31 C.F.R. §§1010.306(c) and 1010.350(a)). The FBAR is filed with the IRS, which has been delegated authority to impose civil penalties for violations (31 U.S.C. §5321).

Penalties for nonwillful failures to file an FBAR are capped at $10,000 per failure (31 U.S.C. §5321(a)(5)(B)(i)). For willful violations, the IRS may impose a civil penalty of the greater of $100,000 or 50% of the balance in the account at the time of the violation. Schwarzbaum held 13 undisclosed accounts in violation of the Bank Secrecy Act. Although he later prepared the necessary FBARs, he filed incomplete reports that disclosed only a few accounts.

In 2010, Schwarzbaum participated in the IRS Offshore Voluntary Disclosure Initiative (OVDI), a program intended to offer taxpayers with previously unreported offshore accounts a way to come into compliance, address past omissions, and reduce possible penalties associated with those accounts. He disclosed his foreign accounts from 2003 to 2010, but he later opted out of the OVDI, triggering an IRS investigation.

The IRS found willful FBAR violations for tax years 2007 to 2009, stating that Schwarzbaum had acted with recklessness. The Service used the highest aggregate account balances for each year to assess penalties. An initial penalty of $35.4 million was issued, later mitigated to $13.7 million. To collect it, the government sued under 31 U.S.C. Section 5321(b)(2) in the Southern District of Florida. The district court found that Schwarzbaum had acted willfully with respect to his FBAR filing requirements. It also held that the IRS had miscalculated the penalties due to the use of incorrect base balances, but instead of sending it back to the IRS, the court recalculated the penalties and issued a lower, $12.9 million total penalty (Schwarzbaum, No. 18-cv-81147 (S.D. Fla. 5/18/20)).

Schwarzbaum appealed to the Eleventh Circuit, which affirmed the willfulness finding but held that the district court had erred by recalculating the penalties instead of remanding the issue to the IRS (Schwarzbaum, 24 F.4th 1355 (11th Cir. 2022)). The IRS then recalculated a new penalty of $13.5 million, and the government sought judgment for the original $12.6 million amount plus interest and penalties. Schwarzbaum appealed the decision again and raised procedural and constitutional claims based on the U.S. Constitution’s Eighth Amendment’s Excessive Fines Clause.

Issues: The Excessive Fines Clause states, “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.” Schwarzbaum argued that the civil penalties imposed for willful FBAR violations requirements fall within the scope of the Excessive Fines Clause. Although the penalties issued were civil in form, Schwarzbaum argued they were punitive in function and constitutionally excessive. This idea had never been presented to the Eleventh Circuit before, but the First Circuit in Toth, 33 F.4th 1 (1st Cir. 2022), had held that FBAR penalties were not subject to the Excessive Fines Clause because they were remedial, not punitive.

The Eleventh Circuit, however, took a different approach, based on Supreme Court precedent in Austin, 509 U.S. 602 (1993), and Bajakajian, 524 U.S. 321 (1998). As found in Austin, if penalties are meant to punish an individual or deter others from not following the law, they can be punitive in nature. If a penalty acts as punishment, it falls under the Eighth Amendment’s Excessive Fines Clause. In Schwarzbaum’s case, the court examined whether FBAR penalties, though labeled as civil, served punitive purposes in practice and revealed a clear intent to deter and punish misconduct.

The court determined that the Excessive Fines Clause applied to FBAR penalties and then turned to the proportionality of the penalties to Schwarzbaum’s accounts. Applying the Bajakajian test for gross disproportionality, the court evaluated Schwarzbaum’s penalties by account. The court concluded that the minimum penalty of $100,000 per account was excessive when applied to a smaller account that Schwarzbaum failed to report in 2007, 2008, and 2009, with maximum applicable balances of $15,809, $13,487, and $15,758 for each year, respectively. These penalties totaled $300,000, significantly out of proportion to the account’s value. In contrast, the court found that the penalties on the other accounts, each holding hundreds of thousands or millions of dollars, exhibited a more reasonable relationship concerning the account balance and were constitutionally sound.

Holding: The Eleventh Circuit held that willful FBAR penalties can be subject to the Excessive Fines Clause of the Eighth Amendment but that most of Schwarzbaum’s penalties were not excessive by that standard. The court removed the $300,000 in penalties it deemed disproportionate but upheld the rest, totaling $12.25 million plus interest and late penalties.

Schwarzbaum, 127 F.4th 259 (11th Cir. 2025)

— John McKinley, CPA, CGMA, J.D., LL.M., and Thomas Godwin, CPA, CGMA, Ph.D., are both professors of the practice in accounting and taxation, and Matthew Tardif is a student, all in the SC Johnson College of Business at Cornell University in Ithaca, N.Y. To comment on this column, contact Paul Bonner, the JofA‘s tax editor.