Supreme Court Declines Case Challenging Excessive IRS Penalties

Should an elderly grandmother be forced to hand over millions of dollars to the government for failing to file a particular form?


The Supreme Court today rejected to consider a case on whether some Internal Revenue Service (IRS) penalties are actually unconstitutionally excessive fines.

The case revolves around Monica Toth, an 82-year-old Boston-area woman who the IRS wants to seize more than $2 million from because she ran afoul of IRS documentation guidelines.

In the 1930s, Toth's family fled from Nazi Germany to Argentina, where she was born. Toth moved to America at age 22 and later became a U.S. citizen. Toth's father, a successful businessman, gifted Toth millions of dollars in a Swiss bank account before dying in 1999.

The federal Bank Secrecy Act establishes various record and reporting guidelines for citizens, including a mandatory annual form for any American citizen with more than $10,000 in a foreign bank—the Report of Foreign Bank and Financial Accounts (FBAR). Toth was not filing this form with her taxes and claimed she wasn't aware of the requirement. Once she knew of the form's requirement, she contacted the IRS to attempt to come into compliance. The IRS audited her in 2011, finding she overpaid her taxes some years and underpaid others. She ended up paying $40,000 in penalties for her mistakes.

But that's not where the story ends. Under federal law, there's a penalty for failing to file an FBAR, and it's a doozy. The maximum penalty for failing to file the report is either $100,000 or half the value of the account's balance, whichever is greater. The IRS called her failure to file the right form "reckless" and has been attempting to levy a $2.1 million civil penalty, half the money in the account, along with an additional million dollars in late fees and interest.

Toth turned to the Institute for Justice (I.J.) for assistance. The U.S. Court of Appeals for the First Circuit agreed with the IRS, so I.J. requested that the Supreme Court intervene. The fight isn't over whether the IRS has the power to penalize people for failing to file proper forms. The fight is over whether the penalty in this case is excessive given the circumstances and, therefore, a violation of the Eighth Amendment. The United States has been trying to argue that a criminal "fine" for wrongdoing is different from a civil penalty and, therefore, not subject to the Eighth Amendment's restrictions of excessive punishment.

Today, the Supreme Court declined to hear Toth's case. Justice Neil Gorsuch dissented from the rejection and wrote separately to explain that the Supreme Court has previously ruled that the excessive fines clause in the Eighth Amendment can be applied in situations other than those that are most obviously rendered to those who are convicted of crimes. He concludes that clearly the massive penalty against Toth is intended to be a form of punishment meant to deter her and others from violating the law:

The government did not calculate Ms. Toth's penalty with reference to any losses or expenses it had incurred. The government imposed its penalty to punish her and, in that way, deter others. Even supposing, however, that Ms. Toth's penalty bore both punitive and compensatory purposes, it would still merit constitutional review. Under our cases a fine that serves even "in part to punish" is subject to analysis under the Excessive Fines Clause.

Gorsuch would have had the Court take up the case. But he appears to have been alone. No other justices signed onto his dissent.

"Monica's experience shows that civil penalties can have devastating consequences for real people," said Sam Gedge, a senior attorney for I.J., in a statement released after the justices declined to hear the case. "Naturally, we're disappointed that the Court declined to take up this case. The Excessive Fines Clause should serve as a key check on economic sanctions, and we hope the First Circuit will heed Justice Gorsuch's dissent and correct its misreading of the Excessive Fines Clause in future cases."