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Federal Tax

Supreme Court Will Not Rehear FBAR Penalty Case

Tim Shaw  

· 5 minute read

Tim Shaw  

· 5 minute read

The Supreme Court declined again to take up a grandmother’s challenge of a $2 million penalty assessed by the IRS for a willful failure to not report a Swiss bank account on the grounds of excessive fines under the Eighth Amendment, despite pushback from one dissenting justice.

On June 5, the Supreme Court denied the petition for rehearing (2023 WL 3806428) filed by Monica Toth, an 82-year-old taxpayer who had previously asked the Court to overturn the rulings of the First Circuit and the U.S. District Court for the District of Massachusetts. Both courts held that civil penalties applied under 31 U.S.C. § 5321(a)(5)(C)-(D) are not covered by the excessive-fine clause. Toth filed her initial cert petition in August 2022, which the Court rejected in January.

Toth had maintained that she did not purposefully avoid reporting to the IRS a foreign bank account left to her by her father, who took his family from Germany at the onset of World War II to Argentina. Monica eventually settled down in the United States but claimed she was unaware of the reporting rules under the Bank Secrecy Act.

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.

Supreme Court Justice Neil Gorsuch made it known in the Court’s denial of Toth’s petition for rehearing that he would have granted her request. He wrote in January in dissenting from the first denial that the “government did not calculate Ms. Toth’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,” wrote Gorsuch. “Even supposing, however, that Ms. Toth’s penalty bore both punitive and compensatory purposes, it would still merit constitutional review.” He closed in saying that the case “would have been well worth” the Court’s time and that he hopes the lower courts do not repeat their “mistakes.”

Also before the Court currently is 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 disclosure failures are willful. Bedrosian is leaning on the Court’s ruling in another FBAR-related decision, where the Court ruled that FBAR penalties accrue on a per-FBAR basis, not on a per-account basis (Bittner, (S Ct 2/28/2023) 131 AFTR 2d ¶2023-437) In Bittner, though, concerns a non-willful violation, as the government argued in a May filing.

Bedrosian, now the last FBAR case on the table this Supreme Court session, was set to be distributed for conference June 15.

For more information about FBAR penalties, see Checkpoint’s Federal Tax Coordinator ¶ V-1813.4.


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