A Half-Million Dollar Fine for a Tax Paperwork Oversight
Too many courts ignore the Eighth Amendment’s ban on excessive fines.
Most of us would consider a half-million dollar fine for overlooking less than $30,000 in federal taxes to be excessive. Our astonishment at the penalty would only increase upon learning that the oversight resulted from a paperwork violation, with no evidence of deliberate evasion. But a federal judge signed off on the fine, saying that she deferred to the IRS in finding the punishment "not excessive." Now, 88-year-old retiree Tuncay Saydam is hoping the Ninth Circuit Court of Appeals will reach a more reasonable conclusion.
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Running Afoul of an 'Obscure and Seemingly Benign Tax Form'
According to the IRS, "per the Bank Secrecy Act, every year you must report certain foreign financial accounts, such as bank accounts, brokerage accounts and mutual funds, to the Treasury Department and keep certain records of those accounts. You report the accounts by filing a Report of Foreign Bank and Financial Accounts (FBAR) on Financial Crimes Enforcement Network (FinCEN) Form 114."
Tuncay Saydam was born in Turkey and has dual U.S. and Turkish citizenship. For years, he maintained bank accounts in Turkey, where he lived until 1980 before coming to this country to become a computer science professor at the University of Delaware. The overseas accounts eventually became substantial, since he deposited into them the proceeds of payments he received for consulting jobs he did for communications companies in Europe. At one point, he had over $875,000 in those accounts.
Legally, Saydam was supposed to file an FBAR form on his foreign accounts since they contained more than $10,000—but like many Americans, he didn't know that. "The FBAR is one of many obscure and seemingly benign tax forms that can trip up otherwise compliant taxpayers," Brown Advisory, an investment management firm, notes on its website. The firm adds that "tax penalties are generally imposed for filing errors or failures regardless of whether those errors were intentional or accidental."
Because Saydam didn't file FBARs, the federal government didn't have an opportunity to tax proceeds generated by the overseas accounts. According to court documents from his Eighth Amendment challenge to the excessiveness of the resulting penalties, "including Saydam's advance payments and tax credits, and not including penalties, the Government's final tax loss is $29,006."
The IRS discovered this "tax loss" in the course of an audit. "When the government audited Tuncay, it determined that he owed around $29,000 in back taxes, for which it assessed an additional $11,000 in late penalties," notes the Institute for Justice (I.J.), which supports Saydam in his battle with the federal government. But the IRS also penalized the retiree for failing to file FBARs.
A $544,933 Fine for Failing To File Paperwork
"The Government calculated the penalties by taking the aggregate balance with the highest amount in this time span, which was Saydam's 2014 foreign accounts ($875,127). This amount was then divided in half ($437,564), and split proportionally among the five years," according to the court. "With interest, the total penalty owed is $544,933."
"No fraud, no evasion, no criminal charges. Merely five-years of paperwork failure punished as if he'd stashed millions in the Caymans and shredded the records," Andrew Leahey, a Drexel University law professor, commented about the case at Forbes. "When did reporting of Foreign Bank and Financial Accounts (FBAR) stop being about transparency and start functioning as a fiscal firing squad?"
Leahey noted that FBAR penalties began as tools for combating "serious financial crimes…like money laundering, tax evasion, and organized fraud schemes" but has become a weapon for penalizing anybody who maintains a financial presence overseas without keeping Uncle Sam in the loop. Falling afoul of the penalties doesn't require criminal intent or fraud. Simply failing to file paperwork can result in a financial death sentence for unlucky taxpayers.
"What the Saydam case illustrates, perhaps better than any FBAR case in recent memory, is how the regime now punishes form failure more harshly than some forms of fraud," he added.
Criminal Penalties Would Have Been Less
In Saydam's case, Judge Donna M. Ryu agreed that the penalty is punitive and vastly exceeds other fines that have been ruled excessive. She also conceded, as did the federal government, that had the retired professor been criminally charged, the penalty would have been less: "Saydam's total FBAR penalty of $437,564 is 3.1 times greater than the maximum fine of $139,000 under the Sentencing Guidelines." But she sniffs that "the fact that the penalty is greater than the Guidelines maximum is not dispositive."
In Ryu's assessment, "it is not the court's role to legislate, or to second-guess the wisdom of the FBAR statutory penalty scheme." She quotes earlier decisions to the effect that "so long as a government provides an unrebutted commonsense explanation or some — even relatively weak — evidence to justify its fine, it will likely prevail against an Excessive Fines Clause challenge." Never mind that the Excessive Fines Clause is in the Eighth Amendment and trumps laws and administrative interpretations.
Well, anybody can come up with a "relatively weak" justification for just about anything, so it's unlikely that a challenge to excessive fines will ever prevail with this judge. That gives government officials free rein, within the very broad parameters established by Congress, to harshly penalize people for failing to successfully navigate byzantine financial paperwork requirements. The judge's comments suggest that for her (and many of her peers), the Eighth Amendment is essentially a dead letter in non-tax cases, too.
Fines, then, are more of a means of hammering the population into submission than of proportionally penalizing people for doing measurable damage.
To this point, Leahey responds, "when civil penalties break free from any connection to actual harm caused, the tax system stops looking like a regulatory framework and starts looking like a collection racket—in this case, targeting immigrants."
A Continuing Fight Against Excessive Fines
With the support of attorneys from the Institute for Justice, Tuncay Saydam is continuing his challenge against the I.R.S.'s draconian penalties.
"The Eighth Amendment's Excessive Fines Clause enshrines a timeless teaching: The fine must fit the crime," comments I.J. Attorney Mike Greenberg. "A runaway civil penalty for a minor reporting violation is just the sort of punishment the Framers designed that provision to check."
The question is whether the Ninth Circuit Court of Appeals takes the Eighth Amendments bar against excessive fines seriously. Too many courts have written it off.
