updated 2:28 PM CEST, May 24, 2023

U.S. Supreme Court declines to hear FBAR plea of Boston-area gran, 82

 Monica Toth, whose appeal to the Supreme Court to have her case heard was denied Institute for Justice Monica Toth, whose appeal to the Supreme Court to have her case heard was denied

Experts say refusal to hear case raises questions as to
whether civil penalties might ever be deemed
to violate Eighth Amendment...

Advocates of a fairer treatment by the U.S. of "ordinary" American taxpayers who find themselves accused of financial transgressions they weren't aware of have been expressing disappointment – as well as concern – over a U.S. Supreme Court decision not to hear a case involving an 82-year-old American grandmother's challenge of a US$2.17 million fine she received for having failed to file FBARs (Foreign Bank Account Reports).

The plaintiff in the case, Monica Toth, pictured above, has always maintained that she had been unaware of her FBAR obligations prior to 2010, at which point she sought to come into compliance as required. Until this point, according to the Institute for Justice, an Arlington, Virginia-based public interest law firm that's been represented Toth in her legal battle, she'd been filing her taxes regularly, by hand, herself, using forms obtained at her local library.

Unluckily for her, however, the IRS immediately (2011) launched an audit of her tax affairs, found errors, and assessed her penalties of US$40,000 – which she paid, thinking that would be the end of it.  As reported here last September, the IRS then came after her for her failure to file FBARs for funds she held in a Swiss bank that had been gifted to her in 1999, shortly before his death, by her father, who had become a successful businessman in Argentina after fleeing Nazi Germany in the 1930s. (Monica Toth had been born in Argentina in 1940.)

The charge was that she had "willfully" violated the FBAR reporting requirements, and assessed a civil penalty of US$2.1 million – half the balance of the Swiss account in question – plus another US$1million in late fees and interest.  

After lower courts ruled against her, Toth had sought the SCOTUS's intervention, on the grounds that the IRS's efforts to seize that US$2 million-plus sum from her represent a violation of her constitutional rights, in that the amount represented an "excessive fine" (as defined under the Eighth Amendment's Excessive Fines Clause) rather than a mere "civil penalty". 

 As of June last year, things appeared as though they could begin to be moving the right way at last for Toth and others who'd been hit with FBAR penalties, as the Supreme Court announced that it would agree to hear an FBAR case: Specifically, a so-called "non-willful FBAR penalty" matter, which was expected to result in clarification as to how the penalties in such non-willful FBAR cases should be determined.

At that point, there was some cautious optimism among certain U.S. expats, expat rights campaigners, non-profit organizations and other Foreign Bank Account Report-watchers, who had long wondered openly when the justices would at last agree to hear an FBAR case, such was the widespread sense that the way their inconsistent and often Draconian penalties were being determined and enforced needed fixing.

That sense of an urgent need for the U.S. courts to address the FBAR penalties issue seemed to re-emerge more powerfully than ever, it seemed, on Monday, in the wake of the Supreme Court's announcement with respect to the Toth case, at least to judge by the tsunami of social media postings on the matter by lawyers, tax experts, expat advocates and others, and interviews with many of them. 

"The failure of the Supreme Court to hear the Toth case and in the process, to decide, once and for all, whether FBAR penalties – as they're now being imposed – violate the 'Excessive Fines Clause' of the Eighth Amendment is significant,"  said Toronto-based lawyer and American expat campaigner John Richardson.

"It sends a strong signal that the U.S. Supreme Court is, at least for now, unwilling to rein in the inappropriate use of wildly-excessive FBAR penalties. 

"Even law-abiding, tax-filing American expats will be deeply disappointed by this news."

Frank Agostino, the founder and president of the New Jersey-based law firm Agostino & Associates, which regularly represents taxpayers in civil litigation matters, agreed that the American expat community was "[already] generally livid about FBAR enforcement" even before Monday's news, notwithstanding the fact that few expats have ever actually been caught up in a headline-making FBAR legal case, such as Toth's (so far, anyway). 

"The perception is that [the way the  impinges on the right to travel, and violates the Taxpayer Bill of Rights, which includes the Right to be Informed and the Right to a Fair and Just Tax System.

"Some legal scholars agree with the position taken by Justice Gorsuch, that the [FBAR] penalty, as enforced [here], violates the Eighth Amendment.

"However, this is not an issue for most Americans, and indeed, too few taxpayers – ie., voters – know as much as they ought to about FBARs, let alone their notoriously persecutory penalties, to insist that their elected representatives address the issue.

Even though it needs them to, urgently." 

(The FBAR case the Supreme Court agreed to hear last year was that of Alexandru Bittner, a dual Romanian-U.S. citizen, which went ahead as scheduled in November.  The justices have yet to rule on that matter.) 

Bank Secrecy Act of 1970

As growing numbers of U.S. expats and other American taxpayers with non-U.S. bank accounts have come to know, FBARs trace their origins to the U.S. Bank Secrecy Act of 1970, which obliges any U.S. taxpayer who holds US$10,000 or more at any point during the tax year in one or more non-U.S. banks or financial institutions to report this information to the U.S. Treasury (via the Financial Crimes Enforcement Network, or FinCEN), or else face potentially significant penalties.

It was some years after 1970, however, before multi-million-dollar FBAR cases began making headlines in U.S. district courts around the country.

One trend that has been consistent, though, has been a growing unwillingness on the part of U.S. courts to make allowances for a taxpayer's claims of having been ignorant of the FBAR regulations in their assessing penalties against them – as Matthew L. Roberts, of Dallas-based Freeman Law, explained recently, in an article analyzing the "evolution of the willfulness standard" on his firm's website.

Strongly-argued dissent

In the SCOTUS's announcement on Monday that it didn't think Toth's case was worth hearing after all, meanwhile, one of the Court's nine justices strongly dissented, as many observers are pointing out: Justice Neil Gorsuch.

In a strongly-worded, three page response to "the denial of certiorari," Justice Gorsuch explained why he believed that taking on the case would in fact have been "well worth [the Supreme Court's] time," citing the difficulty of reconciling the lower court's decision in the Toth matter with such precedents as the fact that "the Excessive Fines Clause traces its venerable lineage to [the] Magna Carta and the English Bill of Rights," as well as the fact that "we have held that '[p]rotection against excessive punitive economic sanctions' is ‘fundamental’ and ‘deeply rooted in this Nation’s history and tradition'."

Gorsuch's observations were echoed by others, including Institute for Justice senior attorney Sam Gedge.  

"Monica's experience shows that civil penalties can have devastating consequences for real people," Gedge said, in a statement.

"Naturally, we're disappointed that the court declined to take up this case.

"The Excessive Fines Clause should serve as a key check on economic sanctions, and we hope the First Circuit will heed Justice Gorsuch's dissent, and correct its misreading of the Excessive Fines Clause in future cases."

Added fellow IJ attorney Brian Morris: "Justice Gorsuch understood what's at stake [here].

"Under the First Circuit's decision, governments are incentivized to impose massive civil fines to raise revenue. And individuals, like Monica, are left helpless to the whims of the government – no matter the size of the penalty that it picks." 

AARO: 'Still hopeful, meantime...
file those FBARs'

The Paris-based Association of Americans Resident Overseas said that while the Supreme Court's decision not to hear the Toth case didn't come as a huge surprise, it remained hopeful that the Court "will, in the future, hear a case on the constitutionality of such fines under the Eighth Amendment's Excessive Fines Clause, as a favorable decision would likely affect the application of [all types of] excessive fines imposed on Americans abroad," not just those having to do with FBARs.

"In the meantime, we urge all U.S. expats who have any non-U.S. bank and financial accounts to ensure that they're filing all the FBARs and FACTA forms they're required to, while we all advocate for change."

The American Citizens Abroad, the U.S. expat advocacy organization based in Washington, DC, said the Supreme Court's decision not to hear the Toth case was "unfortunate," and added that even though Monica Toth isn't a U.S. citizen living overseas, her situation nevertheless did "raise concerns for U.S. citizens living and working overseas who, often, out of misunderstanding and the complexity of the current tax laws, run afoul of FBAR filings.

"This is why ACA's work to educate Congress and the Administration, in particular with its recent research study on the community of U.S. citizens living abroad, is so important." 

FBARs long in the crosshairs of
U.S. National Taxpayer Advocates

 A little more than a week before Monday's SCOTUS announcement that it wouldn't be hearing the Toth case, the National Taxpayer Advocate, Erin Collins, issued the latest in an ongoing series of annual NTA annual reports to call attention to major problems with the U.S. FBAR regime. 

On page 159 of the 293-page Annual Report To Congress, Collins wrote that  "While there is a uniform reporting threshold for FBAR, the definition of foreign financial accounts is complex and could include assets that are not obviously financial accounts, such as foreign pensions.

"Individuals subject to FBAR must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts, separately from their tax return by submitting it electronically through the Financial Crimes Enforcement Network’s (FinCEN’s) Bank Secrecy Act E-Filing System," she continued.

"While the rules for determining who is subject to these reporting regimes and what assets are subject to reporting are complex, the stakes are very high from the perspective of penalties. In FATCA, civil penalties begin at US$10,000 for taxpayers who fail to file a complete Form 8938, and max out at US$50,000.

"Non-willful FBAR violations of reporting requirements [on the other hand] are subject to penalties of up to US$10,000 (adjusted yearly for inflation); willful violations are subject to penalties of up to the greater of 50% of the account balance or US$100,000 (adjusted for inflation), whichever is higher.

"[Meanwhile] both FATCA and FBAR violations might also give rise to criminal penalties. While the purpose of these regimes may be to prevent tax avoidance by
requiring reporting of 'offshore' holdings, they can be a substantial financial trap for the unwary, particularly for 'accidental Americans' who were born and [continue to] reside overseas."

One point Collins didn't make was that some courts have assigned penalties on a per-account rather than "per-FBAR" basis, with the result that the FBAR penalties some U.S. taxpayers with multiple overseas accounts have been hit with have been multiples of what they would have been if the money had been kept in a single account. 

In the Alexandru Bittner FBAR case (mentioned above) that the Supreme Court is currently considering, following hearings last November, for example, a "per-form/year" ruling would mean a penalty for his failure to report over five years of just US$50,000 – less than a fiftieth of the US$2.72 million that he'd owe if he were held to be liable on the basis of all of the dozens of accounts he had failed to report in each of the five years in question.

However the court rules in the Bittner case, experts say, it isn't likely to resolve the issues at the heart of the Toth case, which isn't about how the number of un-reported overseas bank  accounts are accounted for in determining FBAR penalties, but which is, instead, about whether her US$2 million-plus penalty is unconstitutional, under the Eighth Amendment's Excessive Fines clause.

To read and download the U.S. Supreme Court's Order List for Monday, which contains the denial of the writ of certiorari, and Justice Gorsuch's remarks of dissent, click here. 

Related stories on the subject of FBARs and the issue of their excessive fines:

  *   U.S. Supreme Court (at last) agrees to decide on penalty for non-willful FBAR filing failures

 *   U.S. Supreme Court to begin hearing Alexandru Bittner FBAR case arguments tomorrow (Nov.2nd)

   *   Boston-area gran, 82, turns to Supreme Court, as IRS pursues her for FBAR errors over gifted Swiss account money

  *  U.S. Supreme Court declines to hear FBAR case 

  *  Are the FBAR regs fit for purpose – FinCEN wants to know by next Friday