The IRS and the Eighth Amendment

Alexandru Bittner,

a Romanian-American dual citizen, nonwillfully failed to file five foreign bank account reports, or FBARs, with the IRS while living in Romania between 2007 and 2011. Taxpayers fill out annual FBAR forms if they have “foreign financial accounts exceeding $10,000.” When Mr. Bittner moved back to the U.S., he discovered this responsibility and had his certified public accountant file these forms to the IRS. The IRS responded by imposing a $2.72 million penalty even though there were no allegations of tax fraud or any additional taxes owed.

In Bittner, the court will have to determine how much in penalties Mr. Bittner must pay. The tax code imposes a $10,000 penalty per nonwillful violation of this statute. Mr. Bittner argues he had five violations—one for each missed FBAR—bringing him to $50,000 in fines. The government wants more, arguing he had 272 violations, one for each unreported account during the five-year period.

The consequence of ruling in favor of the government would be severe. Roughly nine million U.S. citizens live abroad and another 45 million are foreign-born. Any of these Americans could hold foreign bank accounts for a variety of reasons: to send money back to their family, to give themselves easier access to funds when visiting or to hold the inheritance of a deceased family member. The IRS’s standard $10,000 penalty has the potential to ruin these Americans’ financial lives.

But Mr. Bittner’s case has a good chance at changing the standard. The Eighth Amendment prohibits the government from imposing “excessive fines.” A $2.72 million fine for a nonwillful mistake is the definition of excessive. Any vagueness on the penalty standard should be decided in favor of the taxpayer and against the government since the government wrote the law.

Not every foreign bank account is a vehicle for tax evasion, and the IRS shouldn’t be able to impose huge fines for honest mistakes. Instead, the agency should collect the tax, plus interest, and move on. The Supreme Court can bring some sanity to an already-bewildering tax code.

Mr. Nix is a law clerk and Mr. Martinez a senior attorney for the National Taxpayers Union Foundation.