June 30, 2020 11:11 pm

FBAR Penalties Are Constitutional

If you have certain foreign financial accounts, you must report them annually to the U.S. Treasury. This is done electronically through BSA E-Filing System (https://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html). If you fail to do so and the violation is willful, substantially penalties may ensue. Each willful violation can result in a penalty of $100,000 or 50% of the amount in the foreign account on the date of the violation (which is the deadline for filing the FBAR report).

One taxpayer who was assessed $12.9 million in penalties for his willful failure to make such reports for 2007 through 2009 challenged the constitutionality of the penalties. He argued that they violated the 8th Amendment against “cruel and unusual punishment,” which includes excessive fines. A district court rejected his argument (Isac Schwarzbaum, DC-FL, 5/18/20 at https://www.govinfo.gov/content/pkg/USCOURTS-flsd-9_18-cv-81147/pdf/USCOURTS-flsd-9_18-cv-81147-3.pdf). As the U.S. Supreme Court explained more than 80 years ago, tax penalties are meant for remedial purposes and are not for punitive purposes covered by the 8th Amendment. Tax penalties are for the protection of revenue and to reimburse the government for the heavy expense of investigation resulting from a taxpayer’s fraud.

The IRS has an FBRA Reference Guide (https://www.irs.gov/pub/irs-utl/irsfbarreferenceguide.pdf) detailing who must file annual reports.

Tax Glossary

Unrecaptured Section 1250 gain

Long-term gain realized on the sale of depreciable realty attributed to depreciation deductions and subject to a 25% capital gain rate.

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