In the recent case of United States v. Leeds (D. Idaho 2025), the court addressed whether Foreign Bank Account Report (FBAR) penalties can be enforced against estates of deceased taxpayers when surviving spouses are not personally culpable. This ruling clarifies that FBAR penalties survive a taxpayer's death and can be enforced against the estate, even when survivors had no knowledge of the unreported accounts. This development has significant implications for estate planning and tax compliance in cases involving foreign assets.
The Bank Secrecy Act requires U.S. persons with foreign financial accounts exceeding $10,000 in aggregate value to file annual FBARs (FinCEN Form 114). Penalties for non-compliance vary based on culpability: non-willful violations may result in penalties up to $10,000 per violation, while willful violations can trigger penalties of the greater of $100,000 or 50% of the unreported account balance. These penalties are assessed under Title 31, distinguishing them from traditional tax penalties under the Internal Revenue Code.
The Leeds case reinforced the principle that FBAR penalties survive death and are enforceable against estates because they are primarily classified as remedial rather than purely punitive. Richard Leeds' estate faced over $2 million in willful FBAR penalties for unreported Swiss accounts from 2006 to 2012. The court determined that these penalties accrued on the due date of the unfiled FBARs and did not extinguish upon Leeds' death in 2021, leaving his estate liable for the substantial assessment.
A Critical Distinction In The Leeds Ruling Was
The Court’s Treatment Of The Widow’s
Personal Liability Versus The Estate’s Obligations.
Patricia Leeds argued that the penalties should not apply to her personally as she had no knowledge of the accounts. The court agreed that she was not personally liable due to her lack of culpability but clarified that the estate remained responsible for the FBAR penalties assessed against her deceased husband. This important differentiation protects innocent survivors from personal liability while still holding the estate accountable.
Courts increasingly scrutinize FBAR penalties under the Eighth Amendment's Excessive Fines Clause, which prohibits fines that are "grossly disproportional" to the offense. In Leeds, the court acknowledged that while FBAR penalties are remedial enough to survive death, they may still trigger Eighth Amendment review if excessive. However, the court declined to rule definitively on the proportionality of the $2 million penalty in this specific case, leaving this question open for future litigation.
A significant circuit split has emerged regarding FBAR penalties and constitutional protections: the First Circuit in Toth has ruled that FBAR penalties are not "fines" under the Eighth Amendment, while the Eleventh Circuit in Schwarzbaum held that they are subject to excessive fines review. This division creates uncertainty for executors and beneficiaries, as the applicable standard depends on jurisdiction. In the Schwarzbaum case, a $300,000 penalty for a $16,000 unreported account was deemed grossly disproportionate, suggesting potential defenses for estates facing similarly disproportionate assessments.
For executors managing estates with FBAR issues, the Leeds ruling underscores several critical considerations. First, they must recognize that FBAR penalties attach to the estate regardless of survivors' knowledge. Second, in appropriate jurisdictions, they may challenge penalties as excessive fines, particularly if penalties greatly exceed account balances. Third, they should identify FBAR compliance issues early to potentially mitigate penalties through voluntary disclosure programs like the Streamlined Procedures.
The court's reasoning in Leeds emphasized the dual nature of FBAR penalties as both remedial and potentially punitive. The court applied the Hudson factors, concluding that FBAR penalties primarily compensate the government for investigative costs, which justified their survival after death. However, it also recognized that these penalties could be punitive enough to warrant constitutional scrutiny, creating a nuanced framework that balances governmental interests against potential excessiveness.
The Leeds case reinforces that FBAR penalties survive death while offering potential Eighth Amendment protections against grossly disproportionate assessments. This evolving legal landscape highlights the tension between the government's legitimate interest in foreign account compliance and constitutional protections against excessive penalties. As courts continue to navigate this complex intersection of tax enforcement and constitutional rights, the need for Supreme Court clarification grows to resolve the circuit split and provide consistent guidance for taxpayers, executors, and innocent survivors across jurisdictions.
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Read more at: Tax Times blog
