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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, July 14, 2013

WSJ: Do 200% Tax Penalties Violate the 8th Amendment?

8 AmendmentWall Street Journal:  When Are Tax Penalties Excessive? Does a $3.5 Million Fine on a Secret $1.7 Million Swiss Account Violate the Eighth Amendment's Prohibition of Excessive Fines?, by Laura Saunders:

U.S. officials are getting even tougher in their crackdown on offshore accounts.

In a civil lawsuit that has attracted notice among tax experts, the government wants to collect nearly $3.5 million in penalties from a taxpayer who had a secret Swiss account, although the account balance was never higher than $1.7 million. The lawsuit, U.S. v. Carl R. Zwerner, was filed in federal court in Miami last month.

"This is the most aggressive step taken by the U.S. government to seek offshore-account penalties larger than the account balance," says Jeffrey Neiman, a former federal prosecutor now in private practice in Fort Lauderdale, Fla., who specializes in criminal tax cases.

Spokesmen for the Justice Department and IRS declined to comment on the case. A decision isn't expected until at least 2014....

Since 2009, the Justice Department has filed more than 75 criminal cases against U.S. taxpayers involving the alleged failure to declare offshore financial accounts. In many of them, prosecutors have sought a single penalty of 50% of the account's maximum balance as punishment for willful failure to file a foreign-account report.

"As far as I know, the government has never asked for more than one 50% penalty in offshore-account cases," says Jack Townsend, a lawyer at Townsend & Jones in Houston who tracks federal tax-crime data.

Still, U.S. law allows the government to assert multiple 50% penalties. Mr. Zwerner is being pursued for four such penalties -- or about twice the highest balance in his account -- although the suit doesn't say why.

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I am surprised at the way both the article and the headline choose to "quantify" the magnitude of the penalty. I assume that simply dividing penalty by balance is easy to remember and explain. However, this metric bears little economic significance.

In most cases, the entire balance on an account would not be (or have been) taxable, per se. Only the returns on balances would. When earnings to balance ratios in bank accounts range between 2% to 50% (if held over very long periods of time), exacting a fine of double a current balance is akin to a fine of 4x to 100x the taxable balance evaded, and even more as a function of tax evaded.

Posted by: MG | Jul 14, 2013 12:59:39 PM

The penalty is for failing to report, not failing to report gains or income with respect to the account. The fine is potentially 50% of the balance for each year an FBAR wasn't filed. Presumably he didn't file for four years.

Posted by: Anonymous | Jul 14, 2013 4:20:57 PM

Some of these accounts have been funded with business profits that should have been taxed in the U.S., so it is possible that the entire balance in the account is really taxable income. Also, even though the highest balance in the account was $1.7 million we do not know the history of the deposits and withdrawals. If business profits were being pumped in and then transferred out, it is possible that more than the $1.7 million was received in benefits by the account owner over a number of years. I think many more facts about the case need to be known before deciding if the penalty is excessive.

Posted by: DJ | Jul 15, 2013 7:31:54 AM

I understand that the penalty is for failing to report balances not gains, but shouldn't it be calibrated as to whether the intent was simply to avoid taxes (which must have a non-taxable basis) or to hide in its entirety, ill-gotten gains (which could be seen as having a "basis" of zero). These penalties essentially confiscate the balance and then more.

Posted by: MG | Jul 15, 2013 8:09:31 AM

I believe it's considered a "crime." He could be put in prison, but unlike "blue collar" crime he escapes that, so why complain?

Posted by: TedL | Jul 15, 2013 10:26:28 AM

We have to remember that the FBAR rules are not an income tax, merely a disclosure of what's where and how much. They were established to catch tax evaders, money launderers (we should all have just dirty money), drug & arms dealers and that ilk. Treasury has put much effort into enforcing these rules along with diplomatic pressure to break down bank secrecy laws in various nations. Interestingly the Swiss secret bank account laws were heralded as humanitarian back when the Nazis were trying to confiscate the wealth of Jews and political opponents. My how times have changed!

Posted by: J.C. Osburn` | Jul 15, 2013 7:03:08 PM

I've got a crazy idea - fix the tax situation in THIS country, and maybe people wouldn't find offshore accounts so attractive.

Posted by: alanstorm | Jul 16, 2013 7:12:08 AM

Clearly the off shore depositor didn't make sufficient contributions to the Obama campaign

Posted by: DANEgerus | Jul 16, 2013 8:24:58 AM


I had to laugh at your comment. I used to practice law and know that self righteous guys like you squeal the loudest when you or one of your family get caught breaking any one of a trillion laws. The squealing rises to ear-splitting levels when the government does something more than usually vicious.

Of course there was a crime, apparently evasion of taxes on $1.7M. The question is whether a fine of $3.5M is reasonable for that offense. It's not, it's a complete outrage and time to throw a few people as well as tea into the harbor, or get some rope over the lamp-posts.

And you'll agree with me the day after your son has his new truck (the one you paid for) seized by the state as involved in criminal activity when your son or one of his friends gets caught in it with barely enough marijuana that it counts as trafficking or dealing. Especially after some fat-faced bureaucrat with the grease of roasted taxpayer dripping down his jowls explains to you that ''s considered a "crime." He could be put in prison, but unlike "blue collar" crime he escapes that, so why complain?'

Posted by: Fred Z | Jul 16, 2013 8:59:31 AM

This is the latest government tactic in breaking us all, especially small business. I was a week late with my $150 corporate filing to the State this year. The penalty? $100. This is becoming consistent whenever I miss a payment deadline. Clark County in Nevada even has a new angle. If you get a business license there you have to write them a letter stating you are out of business or they automatically extend your license and send it to collections if you don't pay. Should anyone be surprised that after 40 years in business I hung it up a couple weeks ago? Because of this crap.

Posted by: Boyd | Jul 16, 2013 9:22:31 AM

"Mr. Zwerner is being pursued for four such penalties -- or about twice the highest balance in his account -- although the suit doesn't say why."

Maybe he was a Romney supporter. Audits and confiscation. That's why.

Posted by: Concerned Citizen | Jul 16, 2013 10:13:24 AM

It is not a 200% penalty. No no no. This is completely unlike any other penalty. Yes, it is 200% of account value, but even that it the wrong measurement relative to other IRS penalties.

In fact, in this case, the penalty rate can not be calculated. It is undefined.


Because at no point does the coomplaint even hint as to any tax evaded. In fact, it seems like the taxpayer actually paid all his taxes (albeit late) before the FBAR penalties were assessed.

Other cases we have seen where there has been tax avoided, the penalties have been,relative to injury to the US government, in excess of 2000%.

Glad to see insty link to this. And if there was ever an issue the tea party should adopt, it is fighting the unprincipled FBAR penalty scheme. There would be a lot of dual citizens and recent immigrants who would soon find the Gadsden flag a pretty thing.

Posted by: FBAR Tax Attorney | Jul 16, 2013 10:21:38 AM

I do have an FBAR penalty webinar our OVDP department head, Amy Holbrook, Esq. and I did. that is now on replay that goes over the entire sorry state of affairs. Sign up at link:

FBAR is title 31. So while it is administered by IRS, it is not title 26 assessment that you can even bring to tax court. We are just about finishing white paper on this and the lack of meaningful administrative procedures.

Posted by: Anthony E. Parent, Esq. | Jul 16, 2013 10:28:17 AM


The crime charged is not, apparently or otherwise, tax evasion, as you could have easily discerned by reading the complaint linked to in the article.

The crime charged is willful violation of the Bank Secrecy Act. The penalty, by statute, is the greater of 50% of the account balance required to be reported or $100,000 per violation. The defendant is charged with four violations, hence the penalty that is (approximately) 200% of the account balance.

Posted by: Anonymous | Jul 16, 2013 10:52:34 AM

'I believe it's considered a "crime."'

Ah, you're very clever. Since it's a crime, there must be a victim. Who would that be?

Posted by: Ben | Jul 16, 2013 10:02:44 PM

"...willful violation of the Bank Secrecy Act."
Anonymous (1:52:34 PM)

So much for the Right To Privacy the Obammunist Left makes so much of, eh?

P.S. If a female can keep her abortions confidential, why not her bank accounts too? Just askin'.

Posted by: Micha Elyi | Jul 17, 2013 5:11:02 AM

And thus this otherwise interesting blog sinks into irrelevance, dragged down by commenters who would be an embarrassment even if they posted at Fox Nation.

Posted by: Anonymous | Jul 17, 2013 4:54:09 PM