The IRS wants to seize more than $2 million from an elderly woman, whose family fled from Nazi Germany, for failing to report her father's endowment to her. Now, she's petitioning the Supreme Court to consider whether this is an unconstitutionally excessive fine.
The Institute for Justice, representing Monica Toth, an 82-year-old grandmother living in the Boston area, filed a petition with the Supreme Court on Friday asking them to determine whether federal "civil penalties" imposed by the federal government for violating regulations count as "fines." While a reasonable person might assume "penalties" and "fines" are the same thing, the federal government's position is that they are not, and, therefore, the IRS can demand millions in such penalties from people without triggering the Excessive Fines Clause of the Eighth Amendment.
Monica Toth's family fled Germany in the 1930s to escape rising fascism and antisemitism. Her family landed in Argentina, where she was born in 1940. Toth immigrated to the U.S. when she was 22 and established a family. She became a U.S. citizen in the 1980s.
Her father, who had in the meantime become a successful businessman, gifted Toth several million dollars in a Swiss bank account shortly before dying in 1999. The federal Bank Secrecy Act, passed in 1970, requires citizens to report various banking records and information to the government. It also requires any citizen with more than $10,000 in foreign bank accounts to fill out a Report of Foreign Bank and Financial Accounts (FBAR) annually.
Toth had not been filing these FBARs until 2010, which is when she says she discovered the requirement. According to the Institute for Justice, she had previously been filing her taxes by hand using forms from the local library. Once she knew of the requirement, she disclosed the existence of the account to the IRS and told them she hoped her filings would put her back into compliance with the law.
Things didn't go well for her. According to the Institute for Justice's filing, the IRS launched an audit in 2011. The agency determined that she underpaid her taxes in some years and overpaid in others. She paid $40,000 in penalties for her tax mistakes. Everything was settled. Her taxes were up to date.
But then the IRS came for her again because of her failure to file her FBARs. Under federal law, the maximum penalty for failing to file this record is either $100,000 or half the balance of the reported account, whichever is greater. The IRS declared that her failure to file the FBAR documentation was "reckless" and filed for half the money of the account, a civil penalty of more than $2.1 million. It doesn't matter whether Toth's failure to file the form deprived the IRS of taxes it was owed or whether she was actively trying to deceive the government. All that mattered was that she didn't file a proper record of the bank account that the IRS contends she should have known she needed to file.
The fight here is not over whether the federal government and the IRS have the power to penalize people for trying to conceal bank accounts from tax collectors. Rather, it's about whether taking $2.1 million from a citizen for simply not annually completing a one-page form can be considered an excessive fine that violates the Eighth Amendment of the Constitution's Bill of Rights.
The United States argues that it cannot because it does not believe that taking Toth's money should count as a "fine" at all. It is, instead, a "civil penalty" that is immune to scrutiny under the Eighth Amendment. The U.S. Court of Appeals for the First Circuit has agreed with the federal government and refused to even consider whether taking $2.1 million from Toth was "excessive." The Institute for Justice counters that this is clearly a type of fine.
"The Eighth Amendment's Excessive Fines Clause is a key check on the government's power to punish," said Institute for Justice Attorney Sam Gedge in a prepared statement. "That is why the Excessive Fines Clause is part of the Bill of Rights, and that is why the federal courts need to take it seriously."
The Institute for Justice has previously and successfully turned to the Supreme Court to set limits on the government's ability to seize people's assets and property. In Timbs v. Indiana (2019), the Court ruled unanimously that the Eighth Amendment applied to state-level asset forfeitures in a case where the state of Indiana seized an SUV from a man arrested for selling heroin and attempted to keep it. In that ruling, Justice Ruth Bader Ginsburg noted that one of the purposes of the Eighth Amendment is to prevent the government from using fines not as a punishment but "as a source of revenue."
Toth has already made amends and paid fines for her mistakes with her IRS filings. In absence of evidence of deliberate fraud, it's hard not to see this grasping as anything other than an attempt by the IRS and the Department of Treasury to bring in some money. The Institute for Justice notes that Toth is far from alone here. There's been a recent escalation in the use of civil penalties by the federal government over FBAR filings: "Over the past decade, the government has expanded its FBAR enforcement relentlessly. Between 2012 and 2020, it assessed nearly $1.5 billion in FBAR penalties. This Term, it is asking the Court to ratify a still more aggressive regime."
Whenever you read about how the IRS needs more and better enforcers and will only target wealthy people who are deliberately trying to conceal their money, think about Toth's case. The IRS is looking for reasons to take huge sums of money from people without showing that these citizens have been engaging in actual misconduct. Worse still, this agency is also attempting to argue that seizing people's money and assets doesn't count as a fine and, therefore, the Eighth Amendment doesn't protect citizens against it.