The Tax Times

United States v. Schwarzbaum, No. 9:18‑cv‑81147 (S.D. Fla.), has become one of the most influential FBAR cases in the Eleventh Circuit, especially for willful penalties on foreign accounts. Across multiple appeals, it clarifies the civil willfulness standard, how courts review FBAR penalty computations, and how the Eighth Amendment’s Excessive Fines Clause limits willful FBAR penalties.

Background and Willfulness

Isac Schwarzbaum, a dual U.S.–German citizen with long‑standing Swiss accounts, failed to file complete and accurate FBARs for several years; the IRS initially assessed roughly $13.7 million in willful FBAR penalties using a 50%‑of‑highest‑balance methodology for 2006–2009. After a bench trial, the Southern District of Florida found willful (reckless) FBAR violations for 2007–2009, not 2006, and entered judgment of about $12.56 million plus interest and additions.

On appeal, the Eleventh Circuit confirmed that recklessness is enough to establish civil FBAR willfulness, aligning with other circuits and its prior Rum decision. The court highlighted factors like the taxpayer’s sophistication, the history and size of the foreign accounts, prior professional advice, and the implausibility of claimed ignorance—illustrating that a pattern of disregard can satisfy willfulness even without direct evidence of intent.

APA Review of Penalty Computations

A central contribution of Schwarzbaum is procedural: FBAR penalty assessments are agency action subject to the Administrative Procedure Act. The district court believed the IRS mis‑computed the penalties and tried to correct them by plugging in its own numbers, but the Eleventh Circuit held that the proper remedy is to vacate and remand to the IRS, not for the court to recalculate the penalties itself.

On remand, the Service recomputed the penalties (still in the multi‑million‑dollar range), and the government sought judgment consistent with the original approximate $12.56 million cap plus statutory additions. For practitioners, this means FBAR litigation typically has two distinct fronts: (1) contesting willfulness and (2) attacking the IRS’s methodology as arbitrary or contrary to statute, with any recalculation occurring at the agency level.

The Excessive Fines Clause and FBAR Penalties

More recently, the Eleventh Circuit held that willful FBAR penalties are “fines” for Eighth Amendment purposes because they are at least partly punitive. Applying the Supreme Court’s Bajakajian “gross disproportionality” test, the court evaluated the penalties on an account‑by‑account basis and focused on one small Swiss account with modest balances that nonetheless generated flat $100,000 willful penalties per year.

The panel concluded that roughly $300,000 of those penalties was constitutionally excessive and ordered that amount reduced while leaving the bulk of the more than $12 million in penalties intact. The Department of Justice has indicated it will not seek Supreme Court review of this Excessive Fines holding, solidifying its precedential force within the Eleventh Circuit for now.

Enforcement and Practical Takeaways

Even after the constitutional reduction, Schwarzbaum faces a substantial judgment that, with interest and additions, has approached the high teens in millions of dollars. The government has actively pursued enforcement, including orders compelling repatriation of foreign assets to satisfy the judgment, underscoring that collection can reach offshore funds once a willful FBAR judgment is in place.

For taxpayers and advisors, Schwarzbaum offers several key lessons:

· Willfulness is broad. Recklessness and willful blindness can support willful FBAR penalties, particularly for sophisticated taxpayers with long‑standing foreign accounts or prior compliance warnings.

· Penalty math is litigable. Courts can vacate arbitrary FBAR computations under the APA and send them back to the IRS, even though judges cannot simply substitute their own calculations.

· Eighth Amendment arguments are viable in the Eleventh Circuit. Disproportionate penalties—especially where statutory minimums greatly exceed small account balances—may be reduced as excessive on an account‑by‑account basis.

· Early remediation still matters. The case illustrates both the magnitude of risk in willful FBAR matters and the limited nature of relief even when an Excessive Fines claim succeeds, reinforcing the value of timely voluntary disclosure or other remedial strategies.

For high‑net‑worth individuals with foreign accounts, Schwarzbaum is a cautionary tale: large willful FBAR penalties are real, enforceable, and now subject to constitutional scrutiny, but only at the margins.