District Court: Willful FBAR Penalties Are Excessive As To Surviving Spouse

(Parker Tax Publishing March 2025)

A district court held that $2 million in penalties assessed against a taxpayer for willfully failing to file Reports of Foreign Bank Accounts (FBARs) survived the taxpayer's death and were not unconstitutional excessive fines with respect to the deceased taxpayer. However, the court further held that the penalties were excessive with respect to the deceased taxpayer's surviving spouse and therefore, government was entitled to recover them only from the deceased taxpayer's estate. U.S. v. Leeds, 2025 PTC 84 (D. Idaho 2025).

Background

Richard Leeds was a United States citizen who died in November 2021. Patricia Leeds is his widow and an octogenarian. Richard served in the United States Navy from about 1950 until 1954; married Patricia in 1955; and served in the United States Air Force from about 1955 until 1957. Thereafter, Richard worked for Bendix Corporation where he set up satellite communications for "NASA and the military around the world."

In 1976, Richard began working for Frank E. Basil, Inc. (Basil), an architectural engineering firm providing services under government contracts. At Basil, Richard assisted in securing government contracts to construct military installations in the Middle East. In November 1984, Richard was traveling by plane to Saudi Arabia on Basil's behalf, when Yemenite terrorists hijacked the plane, which was forced to land in Tehran, Iran. Richard was held on the plane for many hours, and then, Iranian authorities questioned him extensively. Although Richard was eventually released, the government did not assist in obtaining his release. According to Patricia, this traumatic experience prompted Richard to maintain "a foreign account" to ensure "readily available cash" if he ever needed to pay a ransom in the future.

In fact, Richard maintained two foreign bank accounts with EFG Bank (EFG) in Switzerland for more than three decades. In April 1980, more than four years before the hijacking, an EFG account was opened for Richard's benefit. That account is identified by a number ending in 2312 (Account One). Patricia did not dispute that Richard controlled and had authority over Account One. In January 1997, another account was opened at EFG for the Asian Group for International Studies (AGIST). This account is identified by a number ending in 0106 (Account Two). Richard was AGIST's director and beneficial owner, who interacted with EFG on AGIST's behalf. Account One was closed in April 2009. At that time, Richard had more than $2 million transferred from Account One to Account Two. Then, Account Two was closed in June 2012. Richard did not timely disclose either of the Accounts to the IRS, including during 2006 through 2012, the tax years at issue. Patricia denied any personal knowledge of the Accounts until the IRS began investigating Richard in about 2014.

For many years, including the tax years at issue, EFG aided U.S. clients in opening and maintaining undeclared accounts in Switzerland to conceal their assets and income from the government. To avoid prosecution, EFG entered into a non-prosecution agreement with Justice Department in 2015. In that agreement, EFG identified numerous practices it offered its U.S. clients to allow them to avoid tax obligations in the U.S. For example, EFG acknowledged that: (1) it processed significant cash withdrawals even though EFG knew, or had reason to know, that some of the accounts contained undeclared assets; (2) it withheld statements and other mail to eliminate a paper trail of the undeclared accounts' existence; (3) it opened and maintained at least 190 undeclared accounts in the names of sham structures that were beneficially owned by U.S. taxpayers, while knowing or having reason to know that these structures were used by U.S. clients to help conceal their identities from the IRS; and (4) it offered code name services allowing the account holder to replace his or her identity with a code name or number on bank statements and other documentation sent to the client to assist the U.S. taxpayers in evading their U.S. tax obligations.

Richard utilized these EFG's practices in connection with the Accounts. For example, Richard used pseudonyms "WashingtonOne" and "WashingtonTwo" to manage Accounts One and Two, respectively. These pseudonyms allowed Richard to manage the Accounts by signing WashingtonOne or WashingtonTwo rather than his own name. In addition, both accounts had hold mail instructions, meaning Richard would not receive any documentation about the Accounts other than in person. Richard also disregarded AGIST's corporate statute for purposes of Account Two. Richard admitted AGIST as his alter ego and that he used AGIST for the purpose of holding foreign accounts without disclosing his beneficial ownership.

By October 2011, EFG anticipated complying with the Foreign Account Tax Compliance Act (FATCA) and told Richard that U.S. clients were no longer welcome. In February 2012, Richard used over $1.4 million of Account Two funds to purchase precious metals. A week later, Richard visited EFG, was advised of the FATCA requirements, and withdrew cash and sold foreign currency from Account Two. In June 2012, Richard directed EFG to close Account Two.

During the years at issue, Joan Leanos, a CPA, prepared Richard's income tax returns. Each year Leanos provided a "tax organizer" to Richard. Richard would complete the organizer, provide supporting documents, and meet with Leanos, who would then prepare the returns. The tax organizers contained questions about foreign income and foreign bank accounts for purposes of determining whether a Report of Foreign Bank Accounts (FBAR) was required. Richard consistently answered "no" in response to these questions. On one occasion, Richard told Leanos that a third party who was "located overseas" owed him money and asked whether he would have to report that money if he brought it back to the United States. Leanos said she believed he would and recommended that Richard speak with a tax attorney who dealt with foreign issues. Based on Richard's representations that he did not have foreign income, Leanos prepared Richard's returns for every year at issue stating Richard had no foreign income.

After Richard died in 2021, the government filed an action in a district court against Patricia, seeking over $2 million in willful FBAR penalties, late-payment penalties, and interest. In its complaint, the government named Patricia in her capacity as a potential successor-in-interest to Richard's estate, as a personal representative of the estate, and a potential "distributee" of the estate. The government filed a motion for summary judgment, asserting that Richard willfully failed to file FBARs for the tax years 2006 through 2012 and that it was entitled to the maximum penalties under 31 U.S.C. Section 5321(a)(5)(C). Patricia responded that the assessed FBAR penalties extinguished when Richard died; whether Richard's conduct was willful presented a triable factual issue; and the penalties violated the Eighth Amendment's Excessive Fines Clause because they were grossly disproportional to both Richard's and Patricia's culpability.

Analysis

The district court held that the FBAR penalties survived Richard's death and that he willfully failed to file FBARs. The court further held that, assuming the Eighth Amendment Excessive Finds Clause applies to FBAR penalties, those penalties were grossly disproportional as to Patricia, who had no access to or knowledge of the Accounts - but not as to Richard. Accordingly, the court granted summary judgment against Richard's estate but specified that the government could not recover the assessed penalties against Patricia individually.

Applying the objective recklessness standard applicable to willful FBAR penalties, the court found that Richard should have known about the FBAR requirement, there was a grave risk that he was not meting the requirement, and he was positioned to easily discover the requirement but apparently declined to do so. The court noted that Richard concealed his foreign accounts by completing tax organizers in which he expressly denying having foreign income or interest or signature authority over foreign bank accounts. Additionally, Richard used the banking practices that EFG offered to conceal the Accounts, such as the hold mail instruction, the account pseudonyms, and the use of AGIST to conceal his identify from being associated with the Accounts.

Next, the court considered Patricia's argument that the fines were excessive under the Eighth Amendment. The court was persuaded by the Eleventh Circuit's reasoning in U.S. v. Schwarzbaum, 2025 PTC 33 (11th Cir. 2025). In that case, the Eleventh Circuit held that FBAR penalties are in substantial measure punitive in nature and thus subject to review under the Eighth Amendment's Excessive Fines Clause. In assessing whether the penalties were excessive as to Patricia, the court looked at her individualized culpability and observed that she had no knowledge of the Accounts, did not have any interest or signatory rights in them, and was not even aware of their existence until the IRS began its investigation into Richard after he had closed the Accounts. However, the court did not fine the penalties grossly disproportional as to Richard, given his willful conduct as noted above.

Finally, the court concluded that the FBAR penalties survived Richard's death because the penalties are remedial, rather than punitive, for purposes of survival. In a footnote, the court explained that this conclusion was not inconsistent with the conclusion that the Excessive Fines Clause applied because the test in the Excessive Fines context is whether the purpose of the penalty is solely compensatory. The court cited the Eleventh Circuit's finding in Schwarzbaum that the FBAR penalty is primarily remedial with incidental penal effects.

For a discussion of FBAR reporting, see Parker Tax 203,170.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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