The Supreme Court’s rejection of an 80-year-old woman’s challenge to an IRS penalty for failing to report taxes on a foreign account could encourage the tax collection agency and localities to issue civil penalties as a means to increase revenue, the woman’s attorney says, and at least one justice agrees.
Sam Gedge, an attorney for the libertarian nonprofit public interest law firm Institute for Justice, represented Monica Toth, who unintentionally failed to report taxes on a foreign account and was penalized more than half of the money in the account — about $3 million — after she corrected the error in an updated filing.
Mr. Gedge noted that the IRS, which will receive an $80 billion boost under the Inflation Reduction Act, plans to add personnel and resources to close the $600 billion annual deficit between the taxes it collects and the levies owed.
“Unlike virtually any other kind of punishment the government can impose on you, imposing penalties and imposing fines actually makes the government money. So there is this really structural incentive for governments — whether it’s federal, state or local — to take as much as they can get,” Mr. Gedge said. “It’s really a nationwide problem.”
His client, Ms. Toth, was unaware of a federal requirement to report tax filings on a Swiss bank account she inherited from her father. The reporting error continued for about 10 years.
Ms. Toth became a U.S. citizen in the 1980s after immigrating from Argentina, where she was born. Her father fled Germany for Buenos Aires in the 1940s after he was assaulted for being Jewish. He became a successful businessman and used a bank in Switzerland.
When he died in 1999, Ms. Toth inherited the account but didn’t realize until 2010 that she had to report it to the IRS. She had always completed her tax returns by hand at a public library. Once she realized the error, she filed updated forms. The IRS fined her about $3 million for the omission.
Federal attorneys said in court briefs that Ms. Toth did not disclose her foreign account until the Swiss bank notified her that the U.S. government had requested information about her account and several others during its investigation into foreign accounting.
“The agency stated that it had determined that petitioner’s violation was willful based on a number of factors, including 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 government wrote in its court filing.
Lower courts ruled against Ms. Toth, and Mr. Gedge asked the Supreme Court to hear her challenge to the fine. The attorney argued that the penalty ran afoul of the Eighth Amendment, which prohibits excessive fines.
The high court declined to take up Ms. Toth’s case, but Justice Neil M. Gorsuch warned that leaving the precedent intact could, as Ms. Toth and her supporters said, give governments incentives to impose aggressive fines to boost revenue.
“It incentivizes governments to impose exorbitant civil penalties as a means of raising revenue. And … it is difficult to square with the original understanding of the Eighth Amendment,” said Justice Gorsuch, citing briefs in support of Ms. Toth. “For all these reasons, taking up this case would have been well worth our time.”
Mr. Gedge noted that car owners have been fined thousands of dollars for parking the wrong way in their driveways and homeowners have faced huge fines for not mowing their lawns on time.
“These kinds of civil penalties and fines have real consequences for real ordinary people and it is something the courts need to take seriously,” he said.
The Supreme Court didn’t take Ms. Toth’s case but is weighing one with regard to the Bank Secrecy Act, which requires reporting on foreign accounts to the IRS.
In November, the court heard arguments over a Romania-born U.S. citizen’s challenge of a more than $2 million fine for not reporting his foreign accounts in a timely manner.
Alexandru Bittner, who immigrated to the United States in 1982 and eventually became a dual citizen, challenged his roughly $2.7 million fine in court. He lived in Romania from 1990 to 2011 before returning to the U.S.
While overseas, Mr. Bittner earned millions of dollars from real estate, restaurants, manufacturing, hotels, construction and aquaculture, according to court documents. During his time outside the U.S., he filed tax returns for some of the years he was abroad but did not include information about his foreign accounts.
Upon returning to the U.S., Mr. Bittner hired an accountant to correct his tax filings. He stressed that his failure to disclose foreign accounts for years was not willful.
The IRS determined that Mr. Bittner’s updated filings were inaccurate and in 2017 fined him $10,000 for each violation. He was on the hook for a total of $2.72 million, and the federal government took him to court.
Mr. Bittner’s attorneys say he should be fined only $50,000. They reason that federal law requires a fine of $10,000 per failure to file an annual report — not a fine of $10,000 per foreign account that was not initially disclosed.
Mr. Gedge said a win for Mr. Bittner wouldn’t help Ms. Toth’s legal battle but would expose the government’s ability to impose crippling fines.
“It spotlights — like Mr. Bittner’s case — this phenomenon of the federal government for the past 10 years or so really getting very aggressive, taking as much as they can get with these reporting filings,” he said.
A spokesperson for the Justice Department did not immediately respond to a request for comment, and a spokesperson for the IRS said the agency doesn’t comment on pending litigation.
A ruling in Mr. Bittner’s case is expected by June.
• Alex Swoyer can be reached at email@example.com.
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