Part 4: Mr. FBAR’s Civil Penalty – 5321(a)(5): Toth – Excessive Fine, Based On Willfulness Decreed By Sanction And Not Factual Determination

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This Is Post 4 in a series of posts describing the statutory and regulatory history of Mr. FBAR.

These posts are organized on the page “The Little Red FBAR Book“.*

On August 26, 2022 Ms. Toth filed a PETITION FOR A WRIT OF CERTIORARI to the Supreme Court of The United States.

QUESTION PRESENTED

The Bank Secrecy Act and implementing regulations require U.S. persons to file an annual report — called an FBAR — if they have foreign bank accounts containing more than ten thousand dollars. The maximum civil penalty for willfully failing to file the report is either $100,000 or half the balance in the unreported account, whichever sum is greater. 31 U.S.C. § 5321(a)(5)(C)-(D). Using this formula, the government imposed on petitioner a civil penalty of $2,173,703.00.

The question presented is whether civil penalties imposed under 31 U.S.C. § 5321(a)(5)(C)-(D) — penalties that are avowedly deterrent and noncompensatory — are subject to the Eighth Amendment’s Excessive Fines Clause.

The petition describes the facts and procedural history as follows:

B. Facts and procedural history

1. In the mid-1930s, Monica Toth’s father fled his home in Germany after he was assaulted for being Jewish. He ended up in Buenos Aires, where Monica Toth was born in 1940. Appellant’s C.A. App. 969-70. Toth’s mother pulled her out of school after sixth grade, demanding she devote herself to housework instead. Toth Decl., D. Ct. Doc. 13-1, at ¶¶ 5-11. But at the age of twenty-two, Toth left Argentina for the United States. She completed a high-school equivalency program, got married (and later divorced), and had four children. Throughout her life, she has worked mainly as a homemaker for her family. By the early 1970s, she had earned a college degree. In the 1980s, she became a U.S. citizen.

In the meantime, Toth’s father had become a successful businessman. Shortly before his death in 1999, he made Toth a gift of several million dollars. For decades, he had used a bank in Switzerland. When gifting the money to Toth, he facilitated opening an account in her name at the same bank, and the funds were kept there.

Until 2010, Toth did not file any FBARs reporting her foreign account. (During this period, she would fill out her tax returns by hand, using forms from the town library. Appellant’s C.A. App. 1019-20.) In late 2010, however, she filed a partially completed FBAR that disclosed the account. She volunteered that she did not have some of the information that had to be included, and she wrote that she would obtain that information and “file amended tax returns and forms to you.” Ex. 6 to Def.’s Statement of Additional Material Facts, D. Ct. Doc. 168-5, at 3. Later the same month, she mailed out complete FBARs for the five preceding years. Ex. 8 to Def.’s Statement of Additional Material Facts, D. Ct. Doc. 168-7, at 1 (“Although late, I hope these filings will put me in good standing with your office.”). Those forms ultimately were routed, not to the Treasury Department, but to a different agency altogether, the Centers for Medicare & Medicaid Services. Appellant’s C.A. App. 3070-79.

The next summer, in 2011, the IRS launched an audit. Following its review, the agency determined that Toth ultimately underpaid her taxes for some years and overpaid for others. (For 2007, for example, the examiner recorded that Toth’s amended return reflected an overpayment of more than $11,000. Appellant’s C.A. App. 3065.) All told, the examiner noted, “[t]he overall tax deficiencies may not be significant enough to warrant a fraud referral.” Appellant’s C.A. App. 3042. The agency did, however, assess civil-fraud penalties for the years 2005 to 2008. Toth paid them in early 2012. Combined with her outstanding taxes, her payments totaled slightly under $40,000.

Three months later, the IRS assessed Toth a different penalty: for her untimely FBAR for calendar year 2007. The agency determined that her failure to file the FBAR had been “willful” — meaning the maximum potential penalty could run to half the balance of her bank account for that year. Appellant’s C.A. App. 3017. The agency then selected that maximum, equal to 50 percent of the value of Toth’s account as of mid-2008. For failing to file the one-page FBAR, her penalty amounted to $2,173,703.00.

2.a. Toth did not pay the FBAR penalty. So the government sued her for a judgment imposing it, plus interest and late fees. For several years, Toth defended herself pro se. It went poorly. She denied having willfully failed to file her FBAR. She also raised the Eighth Amendment’s Excessive Fines Clause as a defense. But with no legal training (and with lifelong difficulties in communicating), she failed to comply with her discovery obligations.3 Eventually, the district court sanctioned her. For its sanction, the court deemed certain facts established, including that Toth had “willfully failed to file an FBAR regarding the Account with respect to calendar year 2007.” United States v. Toth, No. 15-cv-13367, 2018 WL 4963172, at *6 (D. Mass. Oct. 15, 2018). That sanction, the court acknowledged, would prevent Toth from disputing that she had willfully violated the FBAR’s reporting requirement. It would not, however, “foreclose [her] from arguing her affirmative defense that the fine imposed by the Government violates the Excessive Fines Clause of the Eighth Amendment.” Id. at *5.

b. After two more years of litigation — during which Toth hired counsel — the district court entered summary judgment for the government. The court held that its earlier sanctions order established that Toth had willfully violated the FBAR’s reporting requirement. App. 43a-44a, 49a; see also App. 50a (adding that the record showed Toth to have been “willfully blind or reckless”). Thus, the court said, “[t]he only remaining issue . . . to resolve is whether the penalty assessed is appropriate and consistent with the law.” App. 44a.

On that front, the court rejected Toth’s excessive-fines defense. Foremost, the court held that “the Eighth Amendment does not apply to civil penalties under 31 U.S.C. § 5321(a)(5)(A).” App. 53a. “[S]uch proportionality protections as the Eighth Amendment contains,” the court recited, “have generally been considered inapplicable to civil actions initiated by the United States.” App. 53a (quoting United States v. One Parcel of Real Prop., 960 F.2d 200, 206 (1st Cir. 1992)). That view of the Excessive Fines Clause was repudiated by this Court in 1993; in Austin v. United States, the Court held that the Clause’s application turns not on whether a sanction is “civil or criminal,” but on whether it “serv[es] in part to punish.” 509 U.S. 602, 610. But six months after Austin, the First Circuit declared that “it would not extend the Supreme Court’s holding in Austin ‘to any action other than forfeitures’ brought under the statute at issue in Austin.” App. 53a (quoting McNichols v. Comm’r, 13 F.3d 432, 434 (1993)). Now almost three decades later, the district court viewed itself as “bound” by that circuit precedent and so held that the Excessive Fines Clause does not apply to FBAR penalties. App. 53a.

The district court added that “[e]ven if” the Excessive Fines Clause applied, the penalty imposed on Toth would be valid. App. 54a. At the same time, however, the court declined to hold an evidentiary hearing on the matter given its predicate “finding that the [excessive-fines] factors do not apply to [Toth’s] civil penalty” to begin with. App. 56a-57a n.9.

I have bolded certain parts of the above petition. For the purposes of this post I am listing the bolded portions separately in order to extract facts that I believe provide relevant context as follows:

1. he (her father) facilitated opening an account in her name at the same bank, and the funds were kept there.

JR Commentary: It appears Ms. Toth did NOT open the account herself. In addition the account was funded with money that was never subject to US taxation in the first place.

2. In late 2010, however, she filed a partially completed FBAR that disclosed the account.

JR Commentary: It appears that when she discovered in the FBAR requirement in 201 that she voluntarily filed an FBAR.

3. Later the same month, she mailed out complete FBARs for the five preceding years.

JR Commentary: It appears that she voluntarily filed FBARs for the years going back to at least 2005 which included the 2007 year. Significantly it appears that she filed these FBARS BEFORE her tax returns were audited.

4. For 2007, for example, the examiner recorded that Toth’s amended return reflected an overpayment of more than $11,000. Appellant’s C.A. App. 3065.

JR Commentary: Interestingly she overpaid her taxes for the 2007 year which was also the year she was issued the FBAR penalty. Her FBAR issues appear to have resulted from having the misfortune of being audited.

5. Three months later, the IRS assessed Toth a different penalty: for her untimely FBAR for calendar year 2007. The agency determined that her failure to file the FBAR had been “willful” — meaning the maximum potential penalty could run to half the balance of her bank account for that year. Appellant’s C.A. App. 3017. The agency then selected that maximum, equal to 50 percent of the value of Toth’s account as of mid-2008. For failing to file the one-page FBAR, her penalty amounted to $2,173,703.00.

JR Commentary: Like Mr. Schik Ms. Toth was issued an FBAR penalty for the 2007 year. Interestingly both Mr. Schik and Ms. Toth had accounts at UBS in Switzerland which was the bank tied to the Birkenfeld disclosures. Coincidence? This also shows why the initial factual determination of willfulness (or not) is crucial.

6. Eventually, the district court sanctioned her. For its sanction, the court deemed certain facts established, including that Toth had “willfully failed to file an FBAR regarding the Account with respect to calendar year 2007.” United States v. Toth, No. 15-cv-13367, 2018 WL 4963172, at *6 (D. Mass. Oct. 15, 2018). That sanction, the court acknowledged, would prevent Toth from disputing that she had willfully violated the FBAR’s reporting requirement.

JR Commentary: The lesson from Schik is that willfulness is a question of fact. The district court sanctioned Ms. Toth for not complying with the various rules of procedure. The sanction included a finding of willfulness where there had been no factual determination of willfulness. Although this issue was considered by the Court of Appeal, this is very very troubling.

7. the district court entered summary judgment for the government. The court held that its earlier sanctions order established that Toth had willfully violated the FBAR’s reporting requirement. App. 43a-44a, 49a; see also App. 50a (adding that the record showed Toth to have been “willfully blind or reckless”).

JR Commentary: To be clear the sanction which deemed Ms. Toth to be willful allowed the government to simply proceed on the basis of of willfulness without any factual determination on the issue. In other words: What is clearly a matter of fact was converted to a matter of sanction.

The Court Of Appeal

Toth – Court Of Appeal:

https://casetext.com/case/united-states-v-toth-9

The Court recognized that the willfulness determination was the result of a sanction and not a factual determination and commented that:

The District Court noted “the gravity of the proposed sanctions,” which included a finding of fact necessary for the government to impose the more than $2 million penalty against Toth — namely, that Toth had violated the Act’s reporting requirements willfully in 2007. See 31 U.S.C. § 5321(a)(5)(C).

and

B.
The District Court based the sanction on the finding that Toth’s “persistent violations of the Court’s discovery orders” were “severe, repeated, and deliberate.” Toth II, 2018 WL 4963172 at *4. The District Court acknowledged that Toth was proceeding pro se but explained that it “ha[d] been very accommodating to [Toth], affording her numerous extensions, ample notice, and many opportunities to explain herself.” Id. The District Court emphasized that it had “attempted warnings and lesser sanctions to no avail.” Id. at *5. The District Court then concluded that, in light of Toth’s “pattern of stonewalling this litigation, including not meeting her discovery obligations despite numerous chances to do so,” id. at *4, it saw “no effective option[ ] other than” to “tak[e] as established the four facts identified,” id. at *5.

United States v. Toth, 33 F.4th 1, 8-9 (1st Cir. 2022)

Interestingly the Court Of Appeal was NOT troubled this circumstance commenting that:

A.
Toth focuses in challenging the sanctions order on the District Court’s decision to require that it be taken as an established fact that she “willfully failed to file an FBAR” for the 2007 calendar year. She argues that this requirement was a particularly harsh sanction because, she contends, it “was tantamount to a default judgment,” in that it precluded her from denying that she willfully failed to file an FBAR for the 2007 calendar year. She then argues that the sanction, given that feature of it, was “extreme [and] unwarranted” because her conduct was far less “severe, repeated and deliberate” than the District Court found.

We review the District Court’s “choice of sanction” under Rule 37 “for abuse of discretion.” AngioDynamics, Inc. v. Biolitec AG, 780 F.3d 429, 435 (1st Cir. 2015). We consider both the substantive and the procedural factors that caused the District Court to impose the sanction. Vallejo v. Santini-Padilla, 607 F.3d 1, 8 (1st Cir. 2010). Substantive factors can include “the severity of the violation, the legitimacy of the party’s excuse, repetition of violations, the deliberateness … of the misconduct, mitigating excuses, prejudice to the other side and to the operations of the court, and the adequacy of lesser sanctions.” Robson v. Hallenbeck, 81 F.3d 1, 2 (1st Cir. 1996). Procedural ones can include “whether the offending party was given sufficient notice and opportunity to explain its noncompliance or argue for a lesser penalty.” Malloy v. WM Specialty Mortg., 512 F.3d 23, 26 (1st Cir. 2008) (per curium). We see no abuse of discretion.

United States v. Toth, 33 F.4th 1, 8 (1st Cir. 2022)

That said, the petition to the United States Supreme Court is based on the conflict with the excessive fines clause.

Nevertheless, the Toth case is extremely troubling because:

When considering the operation of 5321(a)(5) penalties (and assuming a person “who violates, or causes any violation of, any provision of section 5314” ), the order of analysis in the civil FBAR penalty context reveals that the initial and most important determination is the issue of willfulness.* Regardless of the reason, it appears that Ms. Toth (although because of her conduct) was denied the opportunity for a judicial determination of whether her failure to file the FBAR in 2007 met the standard of willfulness.

Conclusion

The Toth reveals the importance of addressing the willfulness issue in a professional and focussed manner. It also underscores that a determination of willfulness can happen even when there has been no factual determination of willfulness. Finally, it demonstrates that the IRS is perfectly happy to take more than 2 million dollars from an 82 year old woman without a factual determination of willfulness. To be “FORMwarned is to be FORarmed”. As one tax practitioner reasonably commented:

While the main issue in US v Toth was the constitutionality of the willful FBAR penalty, it also is a good example of what happens when taxpayers try to solve their problems with the IRS by themselves. Toth told the District Court that she had dodged service and hadn’t responded to the IRS’s complaint against her because she “didn’t know what it was” and that the law is “a world that … [she] d[doesn’t know about.” But even after the District Court strongly urged her to hire a lawyer twice, Toth attempted to represent herself. She ended up violating several discovery rules – including failing to file mandatory initial disclosures – before hiring a lawyer to help her. Ultimately, the District Court imposed severe sanctions, penalizing her for her failure to cooperate with the legal process. One of those sanctions legally determined that her conduct was willful, cutting her off from a legal defense that could have saved her over a million dollars in FBAR penalties.

John Richardson – Follow me on Twitter @Expatriationlaw

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*Appendix – A reminder of the legal analysis …

1. Was the failure to file or report willful or non-willful? If willful reasonable cause is not a defence and massive penalties “may” be imposed. (Willfulness is a question of fact and the government bears the burden of proof on a preponderance of the evidence standard.)

(To be clear, if there is a finding of willfulness then a penalty of the greater of $100,000 or 50% of the account balance at the time of the violation “may” be imposed.)

2. If the failure to report was non-willful (maximum penalty of $10,000) can the account holder defeat the imposition of a penalty by proving on a preponderance of the evidence (note the account holder bears the burden of proof):

(A) Reasonable cause for the failure to file; and

(B) that the account was properly reported.

3. If the failure was non-willful but the penalty cannot be defeated through reasonable cause:

(A) how much should the penalty be (up to $10,000 adjusted for inflation); and

(B) can that penalty be imposed on each account or is the penalty restricted to a single FBAR penalty based on a failure to file a single form?

Note that the answer to the “non-willful” vs. “willful” question has a huge bearing on the amount of the penalty that “may” be imposed. The fate of the account holder may be effectively determined at this initial stage of the inquiry. I will explore this more in a subsequent post which discusses Ms. Toth’s meeting with Mr. FBAR.

Toth – Court Of Appeal:

https://casetext.com/case/united-states-v-toth-9

Toth did not oppose the government’s motion, and the District Court ordered Toth to “show cause as to why these sanctions should not be imposed.” The District Court noted “the gravity of the proposed sanctions,” which included a finding of fact necessary for the government to impose the more than $2 million penalty against Toth — namely, that Toth had violated the Act’s reporting requirements willfully in 2007. See 31 U.S.C. § 5321(a)(5)(C).

B.
The District Court based the sanction on the finding that Toth’s “persistent violations of the Court’s discovery orders” were “severe, repeated, and deliberate.” Toth II, 2018 WL 4963172 at *4. The District Court acknowledged that Toth was proceeding pro se but explained that it “ha[d] been very accommodating to [Toth], affording her numerous extensions, ample notice, and many opportunities to explain herself.” Id. The District Court emphasized that it had “attempted warnings and lesser sanctions to no avail.” Id. at *5. The District Court then concluded that, in light of Toth’s “pattern of stonewalling this litigation, including not meeting her discovery obligations despite numerous chances to do so,” id. at *4, it saw “no effective option[ ] other than” to “tak[e] as established the four facts identified,” id. at *5.

United States v. Toth, 33 F.4th 1, 8-9 (1st Cir. 2022)

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