September 1, 2020
Individuals who have foreign financial accounts that aggregate more than $10,000 during the calendar year must report those accounts to the IRS (generally known as FBAR). The purpose of the reporting is to make certain that foreign accounts are not being used to avoid U.S. income taxes. The penalty for willful failure to make the report is not merely all of the account’s income, it is 50% of the account’s value! Isac had several foreign accounts that he failed to report for several years, and the IRS came after him. The failure to report in 2006 was determined to be not willful, so there was no penalty. The 50% penalty did apply to 2007, 2008, and 2009, and it came to nearly $13 million. Isac argued that a penalty so large violated the Eighth Amendment’s ban on excessive fines. The District Court answered that a tax is not a fine within the meaning of the Amendment. Rather, the amount of the penalty ensures that the government “is made whole” when people willfully try to hide their investments off shore.