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IRS fine for secret Swiss account won’t go to high court

The case’s snub sparked a dissent from Justice Gorsuch who said the octogenarian taxpayer made a compelling argument for excessive fines.

WASHINGTON (CN) — Justice Neil Gorsuch balked at his Supreme Court colleagues Monday for turning away the case of a taxpayer who was fined $2.17 million, half of the total in a Swiss bank account she inherited, because she failed to report it.

Saying the case would have been “well worth” the high court’s time, Justice Gorsuch called the penalty upheld by the First Circuit a clear violation of the Eighth Amendment’s excessive fines clause.

“One can only hope that other lower courts will not repeat its mistakes,” Gorsuch wrote in a 3-page dissent.

Attorneys for the Boston-area petitioner, octogenarian Monica Toth, also noted their dismay at Monday’s order.

“Monica’s experience shows that civil penalties can have devastating consequences for real people,” Institute for Justice senior attorney Sam Gedge said in a statement. “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.”

“Justice Gorsuch understood what’s at stake,” added Brian Morris, another attorney with the public-interest firm.

Toth inherited the UBS account holding the equivalent of millions of U.S. dollars from her father, who had fled Germany in the mid-1930s when violent anti-Semitism was on the rise, eventually settling in South America where he became a successful businessman. Toth, who was born in 1940, immigrated to the U.S. in her 20s and inherited her father’s account, which he urged her to maintain overseas in case she ever, like him, had to flee government persecution.

Toth has said it was years later when she learned about the federal government’s Foreign Bank and Financial Accounts reporting requirement, which mandates Americans with more than $10,000 in bank accounts overseas file a form with the IRS.

In the government’s respondent brief, however, U.S. Solicitor General Elizabeth Prelogar argues that Toth willfully failed to report the account to the government or pay taxes on it. She says Toth took deliberate measures to keep the account secret from the U.S. after UBS informed her that, due to a change in Swiss law, it would start identifying her as the sender when she transferred funds to her U.S. bank account.

“Petitioner directed UBS to stop making such transfers; instead, she directed the bank to begin transferring funds from her Swiss account — sometimes as much as $95,000 at a time — to accounts held by her relatives in South America, who then made corresponding transfers to her in the United States,” the government wrote.

When she filed a 1040 form with the IRS for the 2007 tax year, she left a question blank that asked about her financial assets in foreign countries. The government only became aware of Toth’s account in 2010, after the IRS requested information from the bank in an investigation around UBS’ role helping U.S. citizens avoid taxes.

Toth noted in her petition to the Supreme Court that, once her tax deficiencies came to light, an IRS examiner made clear that they “may not be significant enough to warrant a fraud referral.”

“The agency did, however, assess civil-fraud penalties for the years 2005 to 2008,” her petition continues. “Toth paid them in early 2012. Combined with her outstanding taxes, her payments totaled slightly under $40,000.”

Three months later, the IRS issued Toth a $2.17 million penalty, half of the balance of the account as of 2008, the maximum penalty for willful failure to file the so-called FBAR form.

The U.S. government justified the penalty in its response brief, saying “that the agency had cause to deem Toth’s violations willful … because she admitted during the examination that she was aware of the foreign-account question on Schedule B of Form 1040 and she deliberately declined to answer that question because ‘she did not want anyone to know about the account,’ based on her father’s advice to keep it secret.”

“The agency also concluded that the ‘only reason’ that petitioner filed an (incomplete) FBAR in 2010 to report the account was the notice from UBS … about turning over account-identifying information to U.S. authorities,” the brief from Prelogar continues.

Toth refused to pay, and the government subsequently sued her for the sum, plus interest and late fees. 

After several years of pro se representation, Toth hired counsel to help her construct a defense around the Eighth Amendment’s Excessive Fines Clause. The IRS prevailed before the district court, however, and the First Circuit affirmed, ruling the clause inapplicable because it said that the multimillion-dollar penalty was “not a fine.”

Gorsuch wrote Monday that Toth’s attorneys made a strong case for the Supreme Court to review of the First Circuit decision.

“They say it clashes with the approach many other courts have taken in similar cases,” he wrote. “They observe that it incentivizes governments to impose exorbitant civil penalties as a means of raising revenue. And they contend that it is difficult to square with the original understanding of the Eighth Amendment.”

Representatives for the Department of Justice did not respond to a request for comment Monday.

Per their custom, the Supreme Court majority did not offer any explanation for turning down the case. Gorsuch called the case ripe for the court’s scrutiny.

“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,” Gorsuch said.

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