Under the Bank Secrecy Act, taxpayers are required to disclose to the Treasury Department all ownership interests in overseas bank accounts.  In the process of a failed 2009 Offshore Voluntary Disclosure Initiative submission, Carl Zwerner disclosed that he had a Swiss bank account with $1.5 million in it from 2004-07, held in the name of foundations in which Zwerner was the beneficial owner.

In 2013 the Treasury Department filed suit against Zwerner to collect $2.5 million in statutory penalties and interest.  Last week a federal jury in Miami determined that Zwerner had willfully failed to disclose the account in 2004-06, leaving the court to calculate the civil penalty in the coming weeks.

It is anticipated that Zwerner’s counsel will argue that the proposed civil penalty violates that Excessive Fines Clause of the Eighth Amendment, and it is easy to see why:  Zwerner’s $2.5 million fine exceeds the tax liability on the unreported interest by a 27-to-1 ratio.

At JD Supra, Jed Silversmith explores the Eleventh Circuit standard of review in Eight Amendment excessive fines cases.  The three-prong test, articulated in United States v. Browne, 505 F.3d 1229 (11th Cir. 2007), contains the following elements:

  • Whether the defendant falls into the class of persons at whom the statute was principally directed.  Mr. Silversmith finds that Zwerner, as a taxpayer who has been found to have willfully failed to disclose foreign holdings in an effort to evade taxes, is precisely the class of person at whom the Bank Secrecy Act was aimed.
  • Other penalties authorized by the Legislature (or the Sentencing Commission).  This prong seeks to determine whether the fine is commensurate with the will of Congress.  Mr. Silversmith determines that this prong tends to be very deferential towards the government where Congress is acting directly, and points out that the three-year penalty is only half of the six-year maximum period over which the penalty might apply.
  • The harm caused by the defendant.  Mr. Silversmith finds this to be Zwerner’s strongest argument because of the extreme disproportionality between the amount of the unpaid taxes and the size of the civil penalty.

 

For more detailed analysis, see Jed Silversmith, “Will the Zwerner FBAR Fine Pass Constitutional Muster?” JD Supra Business Advisor (June 6, 2014).

Posted by Conan Yuzna, Associate Editor, Wealth Strategies Journal.