Bloomberg Law
Jan. 24, 2023, 9:45 AM

Supreme Court Punt in Tax Fine Case Leaves Uncertainty in Wake

Lydia Wheeler
Lydia Wheeler
Senior Reporter
Jeffery Leon
Jeffery Leon

The US Supreme Court left lower courts with a mess to sort out in declining to weigh in on whether constitutional protections against excessive fines extend to civil tax penalties.

The court refused on Monday to hear a Massachusetts woman’s challenge to a $2.17 million fine she received for failing to report a foreign bank account. The denial leaves in place an appellate court decision Justice Neil Gorsuch said is difficult to square with the original understanding of the Eighth Amendment. He wanted the court to take up the case.

The April decision by the US Court of Appeals for the First Circuit leaves uncertain whether the Excessive Fines Clause applies to crippling penalties imposed through a civil enforcement process rather than a criminal one, said Sam Gedge, a senior attorney at the Institute for Justice who represented Monica Toth in her appeal.

“The first circuit’s decision casts a lot of doubt on the extent to which even obviously punitive and devastating civil penalties trigger any kind of protection,” he said.

As a result, attorneys and legal scholars say, state and local governments in Maine, Massachusetts, New Hampshire, Puerto Rico, and Rhode Island now have an easy work around to evade limits on excessive fines. Those are covered by the First Circuit.

Civil penalties and economic sanctions are common place at all levels of government, but attorneys say the case opens the door for more claims of excessive fines in future disputes over tax penalties levied for failing to report foreign bank accounts.

Civil Label

Toth for years failed to file a Foreign Bank and Financial Accounts (FBAR), form to report the millions her father left her in a Swiss bank account. She challenged the constitutionality of the IRS penalty, but the First Circuit ruled the Excessive Fines Clause offered her no protection because the fine wasn’t tied to any criminal sanction and served a remedial purpose.

Toth’s fine is not compensatory and it’s not remedial, but the government asserts that it is and outside the scope of the Eighth Amendment, said Clark Neily, senior vice president for legal studies at the Cato Institute. The libertarian think tank filed a brief supporting Toth.

“It’s extraordinarily problematic for courts to not only invite, but encourage government officials to blatantly misrepresent the ends of a statute they are enforcing simply so they can get a court win,” Neily said. “The Supreme court is standing by while the federal government self-evidently does this.”

Dissenting from the decision not to hear the case, Gorsuch said that allowing the government to evade constitutional scrutiny by putting a civil label on fines and declining to pursue any related criminal case makes the court’s prior precedents upholding the protections mean very little.

The court ruled for the first time in 2019’s Timbs v. Indiana that states and cities are bound by the Excessive Fines Clause, but the decision didn’t speak to how it applies to civil versus criminal economic sanctions. In Austin v. United States, the justices held civil forfeitures and penalties trigger scrutiny under the clause if they punish, in part.

In Toth’s case, Gorsuch said the government imposed its penalty to punish her and deter others. “Under our cases a fine that serves even ‘in part to punish’ is subject to analysis under the Excessive Fines Clause,” he said.

Unique Argument

Laura Zwicker, a tax attorney at Greenberg Glusker and chair of the firm’s Private Client Services Group, said that Toth’s argument over excessive fines is unique for FBAR disputes, noting that most focus on determining willful or non-willful violations. Toth’s argument presents a new angle to these disputes.

“It’s a completely different attack than what we’ve seen before,” said Zwicker.

Zwicker added that Gorsuch’s comments suggested that he could find a number of civil tax penalties to be violations of the Eighth Amendment, which could shake up how enforcement is handled. “It would substantially change the way that things leading up to tax fraud are dealt with by the IRS,” said Zwicker.

Review Denied

Andrew Howlett, a member at Miller & Chevalier who focuses on foreign account issues, pushed back on the First Circuit concerns. He said the lower court ruling embraced a more attenuated linkage between a remedial penalty and the actual harm done to the government.

“It’s still the case that a penalty under Supreme Court precedent must be punitive and a deterrent in nature in order to invoke the excessive fines limitation,” said Howlett. “Even if the government is incentivized to penalize the maximum amount possible, they cannot do so, unless the penalties has some plausible nexus to the harms suffered.”

Howlett stated that he expects to see future FBAR cases making similar arguments about excessive fines, stating that Toth’s case along with Gorsuch’s dissent, has presented taxpayers with a new avenue for these kinds of disputes, which could crop up in courts in the future.

“If you’re a lawyer going into court, you’re probably trying to fight that penalty determination, but it doesn’t cost you anything to throw in the constitutional argument,” said Howlett.

The Justice Department, which represented the government in the tax case, didn’t respond to a request for comment.

The Supreme Court agreed earlier this month to hear a case challenging the constitutionality of a Minnesota law that could provide more guidance. The law lets local governments keep the surplus value of a home that’s sold to settle tax debts. Though the case focuses on the Fifth Amendment’s Takings Clause, Gedge said it also asks whether the equity theft violates the Eighth Amendment’s Excessive Fines Clause.

“There’s certainly a real possibility that if the Supreme Court reaches that excessive fines question in Tyler that we will get a bit more clarity on what is or is not a fine in the context of civil payments,” he said.

To contact the reporters on this story: Lydia Wheeler in Washington at; Jeffery Leon in Washington at

To contact the editors responsible for this story: Seth Stern at; John Crawley at

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