The Supreme Court's denial of certiorari to reconsider the First Circuit's United States v. Toth decision poses significant implications for U.S. residents engaged in foreign banking.
Swiss bank accounts are famously known for their privacy, security, and safety.[2] However, with the Supreme Court recently denying both certiorari and rehearing on a case about excessive fines on a foreign bank account, the power of the Internal Revenue Service (IRS) over such accounts has broadened tremendously.[3]
Background
Monica Toth was born and raised in Buenos Aires, Argentina, in the 1940s.[4] Her father escaped from Nazi Germany in the 1930s.[5] Once in Argentina, Toth’s father found success in his career, married, and started his family.[6] He kept money in a Swiss bank account in the event that his family would have to flee persecution, as he had decades prior.[7]Monica Toth left Argentina in the 1960s and moved to the United States.[8] Before his death in 1999, Toth’s father gifted her the Swiss bank account, with a multi-million-dollar balance.[9]
Under the Report of Foreign Bank and Financial Accounts (FBAR), foreign bank accounts with a balance over $10,000 must be reported to the IRS.[10] Toth failed to file the FBAR until 2010, as she was unaware of this requirement and “completed her tax returns by hand . . . at [her] local library.”[11] The IRS audited Toth in 2011 and found that she owed a balance of $40,000.[12] However, the IRS did not stop there.[13] After finding that Toth had “willfully” violated the FBAR, the IRS imposed a $2,173,703.00 penalty.[14]
Procedural History
The United States, on behalf of the IRS, brought suit in the United States District Court for the District of Massachusetts.[15] For two years, Toth represented herself pro se, committing several mistakes during the litigation process.[16] The District Court granted the United States’ motion for summary judgment, finding no genuine dispute of material fact and ordering Toth to pay a combined $3,138,097.48 consisting of the penalty, late fees, and interest.[17] The First Circuit Court of Appeals affirmed, finding the penalty was not considered a “fine” and therefore did not violate the Excessive Fines Clause of the Eighth Amendment.[18]
On June 5, 2023, the Supreme Court of the United States denied Toth’s Petition for Rehearing, leaving her with the tremendous penalty.[19] Justice Gorsuch was the only dissenting opinion to the denial of the Petition for Writ of Certiorari.[20] According to Justice Gorsuch, the First Circuit’s holding “that the Constitution’s protection against excessive fines did not apply to Ms. Toth’s case because the IRS’s assessment against her was ‘not tied to any criminal sanction’ and served a ‘remedial purpose’ . . . [was] difficult to reconcile with [Supreme Court] precedents.”[21] If the case had reached the Supreme Court, one possible outcome was ruling that this fine violated the Eighth Amendment.[22]
International Implications
The Toth decision has both legal and practical implications and may lead to future litigation regarding the definition and extent of gifts.[23] Toth’s bank account arguably was not a typical bank account – rather, it was a gift from her father.[24]It will be interesting to see if framing accounts as gifts changes the outcome of such cases.[25] Further, the title to the bank account was transferred to Toth after she became a United States citizen.[26] The IRS currently advises new immigrants on the FBAR as well as other reporting requirements, which may avoid a situation such as Toth’s from happening again.[27]
Another implication of the First Circuit’s decision is the possible deterrence of tax evasion resulting from the use of foreign bank accounts.[28] While opening a bank account in a country with strong secrecy laws was previously viable, the IRS's reporting crackdown and broad power to fine may dissuade people from opening those accounts.[29] However, the First Circuit’s decision arguably will not deter those who open these accounts to purposefully evade taxes.[30] Similarly, as Toth’s case appears to be a genuine accident, restrictions on intentionally avoiding taxes would not have caused her to act differently.[31]
The last consequence, and arguably most important for international relations, is that Switzerland would lose a significant amount of tax revenue if the penalty were to be removed from the bank account directly.[32] Although Switzerland generally has lower tax rates than the rest of the world, a significant amount of revenue is at risk.[33] As of July 2016, the marginal effective tax rate on the deposits of a high-rate taxpayer was over 40 percent.[34] Although there are exceptions, loopholes, tax credits, and many other factors that alter the total taxation amount, this is still a large sum of money.[35]
Overall, this was not the ideal case to set circuit court precedent about “willful” violations of the FBAR. The external factors, including Ms. Toth’s unawareness of the FBAR filing requirement, set this case apart from a “typical” tax evasion case. It would have been interesting to see if the Supreme Court would have recognized this distinction, along with an analysis of the proportionality and deterring effects of the penalty, had the Writ of Certiorari been granted.
[1] Photograph of notebook reading “Report of Foreign Bank and Financial Accounts (FBAR),” in Matthew Roberts, Sixth Circuit Finds That FBAR Willfulness Includes Recklessness, Forbes (Mar. 5, 2024, 7:04 PM), https://www.forbes.com/sites/matthewroberts/2024/03/05/sixth-circuit-finds-that-fbar-willfulness-includes-recklessness/?sh=6b0a9d3a1de5.
[2] See Gideon Alper, Swiss Bank Accounts, Alper L. (Mar. 4, 2024), https://www.alperlaw.com/offshore/swiss-bank-accounts/#:~:text=Alongside%20privacy%2C%20Swiss%20bank%20accounts,for%20depositing%20and%20managing%20funds.
[3] Toth v. United States, 143 S.Ct. 552 (2023), reh'g denied, United States v. Toth, 143 S.Ct. 2604 (2023).
[4] See Jacob Sullum, IRS Harshly Punishes Taxpayers Who Accidentally Break the Rules, Chi. Sun Times (Jan. 25, 2023, 12:25 PM), https://chicago.suntimes.com/columnists/2023/1/25/23571245/irs-policy-penalties-senior-citizen-monica-toth-supreme-court-jacob-sullum-column.
[5] See Nick Sibilla, Supreme Court Lets The IRS Evade The Eighth Amendment, Only Gorsuch Dissents, Forbes (Jan. 23, 2023, 4:05 PM), https://www.forbes.com/sites/nicksibilla/2023/01/23/supreme-court-lets-the-irs-evade-the-eighth-amendment-only-gorsuch-dissents/?sh=51cba341350b; see also Ariel Zilber, IRS Wants $2.1 Million from 82-Year-Old Grandmother Whose Family Fled the Nazis, N.Y. Post (Sept. 1, 2022, 11:12 AM), https://nypost.com/2022/09/01/why-irs-is-after-82-year-old-grandmother-whose-family-fled-nazis/.
[6] Institute for Justice, Monica Toth, Inst. Justice (Aug. 29, 2022), https://ij.org/client/monica-toth/; see also Toth, 143 S.Ct. at 553 (Gorsuch, J., dissenting).
[7] See Toth, 143 S.Ct. at 522 (Gorsuch, J., dissenting) (stating that “perhaps owing to his early formative experiences, Ms. Toth’s father always kept a reserve of funds in a Swiss bank account.”); see also Institute for Justice, supra note 6.
[8] See Sullum, supra note 4.
[9] See Nate Raymond, U.S. Supreme Court’s Gorsuch in Dissent Calls $2.17 Mln Tax penalty Excessive, Reuters (Jan. 23, 2023, 4:33 PM), https://www.reuters.com/legal/government/us-supreme-courts-gorsuch-dissent-calls-217-mln-tax-penalty-excessive-2023-01-23/#:~:text=According%20to%20her%20lawyers%2C%20Toth%27s,in%20a%20Swiss%20bank%20account.
[10] See Report of Foreign Bank and Financial Accounts (FBAR), I.R.S., https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar (last visited Apr. 21, 2023).
[11] See Sullum, supra note 4.
[12] See id.
[13] See id.
[14] See id.
[15] Memorandum and Order Denying Motion to Dismiss, United States v. Toth, 2017 WL 1703936 (D. Mass. May 2, 2017), aff'd, United States v. Toth, 33 F.4th 1 (1st Cir. 2022).
[16] See Toth, 143 S.Ct. at 552 (Gorsuch, J., dissenting) (stating that “[i]nitially, Ms. Toth sought to represent herself in proceedings challenging the IRS’s assessment, but that did not go well”).
[17] Memorandum and Order on Motion for Summary Judgment, United States v. Toth, 2020 WL 5549111, at *9 (D. Mass. Sept. 16, 2020), aff'd, Toth, 33 F.4th 1.
[18] Toth, 33 F.4th at 19, cert. denied, Toth, 143 S.Ct., reh'g denied, Toth v. United States, 143 S.Ct. 2604 (2023).
[19] Toth, 143 S.Ct. 2604 (Mem); see also Toth, 33 F.4th 1, cert. denied, Toth, 143 S.Ct. 552 (2023), reh’g denied, Toth v. United States, 143 S.Ct. 2604 (2023).
[20] Toth, 143 S.Ct., (Mem)-553, reh’g denied, Toth, 143 S.Ct. 2604.
[21] See id.
[22] See Toth, 33 F.4th at 15 (“Toth first contends that the more than $2 million penalty that she faces for willfully failing to file an FBAR for the 2007 calendar year violates the Excessive Fines Clause of the Eighth Amendment to the U.S. Constitution.”); see also U.S. Const. amend. VIII.
[23] For further discussion on legal implications, see infra notes 24–27 and accompanying text. For further discussion on practical implications, see infra notes 28–35 and accompanying text.
[24] See Raymond, supra note 9.
[25] See Frequently Asked Questions on Gift Taxes, I.R.S., https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes (last updated Nov. 22, 2023) (defining a gift as “[a]ny transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return”).
[26] See Zilber, supra note 5.
[27] See generally Tax Information and Responsibilities for New Immigrants to the United States, I.R.S., https://www.irs.gov/individuals/international-taxpayers/tax-information-and-responsibilities-for-new-immigrants-to-the-united-states (last updated Jan. 10, 2024).
[28] See id.
[29] See, e.g., Niel Johannesen, Daniel Reck, Max Risch, Joel Slemrod, John Guyton & Patrick Langetieg, The Offshore World According to FACTA: New Evidence on the Foreign Wealth of U.S. Households, I.R.S. 1, 2 (Mar. 9, 2023), https://www.irs.gov/pub/irs-soi/23rpfatcaevidenceforeignwealth.pdf (stating that “[m]any taxpayers have long been able to evade capital income taxes, wealth taxes, and inheritance taxes by holding wealth through banks in countries with a strong commitment not to share information, in the form of bank secrecy laws and other measures”).
[30] See United States v. Toth, 33 F.4th 1, 18 (1st Cir. 2022) (rejecting one of Toth’s arguments that the statutes at issue “reveal[] that a deterrent or retributive purpose underlies the provision,” which would bolster the argument that the fine was a form of punishment); see also Ben Johnson, Do Criminal Laws Deter Crime? Deterrence Theory in Criminal Justice: A Primer, Mn. House Rsch. Dep’t. (Jan. 2019), https://www.house.mn.gov/hrd/pubs/deterrence.pdf (explaining deterrence theory in the context of criminal law).
[31] See generally id.
[32] For further discussion on the loss of tax revenue, see infra notes 33–34 and accompanying text.
[33] See Taxation of Household Savings – Switzerland, Org. Econ. Co-operation Dev., https://www.oecd.org/tax/tax-policy/taxation-household-savings-switzerland.pdf (last visited Apr. 21, 2024).
[34] See id.
[35] See generally Zilber, supra note 5.
ความคิดเห็น