When someone has an undisclosed foreign bank account that the government has not yet assessed penalties for and they die, can the government still pursue the penalties?
The answer hinges on a fundamental legal classification that courts are actively debating—are FBAR penalties primarily punitive fines or remedial damages? If FBAR penalties are primarily punitive, they might extinguish upon death like other penal sanctions. If they’re primarily remedial, they survive as claims against the estate.
With potential penalties reaching millions of dollars, this distinction could determine whether beneficiaries receive their intended inheritance or whether an estate is largely consumed by government penalties. A recent case United States v. Leeds, No. 22-cv-01234 (D. Idaho March 7, 2025), addresses this issue.
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Facts & Procedural History
The taxpayer here was a U.S. citizen. He died in November of 2021. Prior to his death, he had maintained two Swiss bank accounts for more than three decades.
The first account was opened in his name at EFG Bank in 1980. The second account was opened at the same bank in 1997 under the name of an entity that the taxpayer controlled as director and beneficial owner.
Throughout his life, the taxpayer took extraordinary measures to conceal these accounts from the IRS. He used pseudonyms to manage the accounts. He implemented “hold mail” instructions to prevent receiving documentation at his residence. He even consistently denied having foreign accounts when directly asked by his accountant and on his tax returns.
During the tax years at issue (2006-2012), the taxpayer maintained more than half his total income in these accounts. For example, while his original tax return for 2006 reported income of $67,178, his later amended return disclosed his actual income was $184,766, with the difference largely attributable to undisclosed foreign income.
In 2014, with FATCA implementation looming and Swiss banks preparing to share account information with the U.S., the IRS began investigating the taxpayer. He initially applied for the Offshore Voluntary Disclosure Program (“OVDP”) but later opted out. After examination, the IRS determined his FBAR violations were willful and in September 2020 assessed penalties totaling approximately $1.5 million.
After the taxpayer’s death, the government filed an action in federal district court against his widow, in her capacity as personal representative of his estate, seeking over $2 million in willful FBAR penalties, late-payment penalties, and interest. The widow was appointed as personal representative solely for defending against this tax litigation, as no formal probate proceedings had been initiated. Following discovery, the government moved for summary judgment against the estate, which resulted in the court’s opinion in this case.
FBAR Requirements and Penalties
The Bank Secrecy Act requires U.S. persons (including estates) to file an FBAR reporting foreign financial accounts exceeding $10,000 in aggregate value during the calendar year. These reports must be filed electronically by April 15 of the following year, with an automatic extension to October 15.
The penalties for non-compliance vary significantly based on whether the violation is deemed willful or non-willful. Non-willful violations carry a maximum penalty of $10,000 per violation. Willful violations, however, result in much harsher penalties: the greater of $100,000 or 50% of the account balance at the time of the violation. We have addressed various aspects of these rules in several other articles on this website, such as there being no collection remedies for FBAR penalties and there being no minimum limit on willful penalties.
In this case, the willful FBAR penalties assessed against the taxpayer were approximately $1.5 million, with late-payment penalties and interest bringing the total to over $2 million by the time of the government’s action against his estate.
Penal vs. Remedial Sanction?
The taxpayer’s widow argued that the FBAR penalties were “extinguished” when the taxpayer died. This argument is based on the long-standing legal principle that purely penal sanctions abate upon death, while remedial ones survive.
The distinction makes intuitive sense—punishment serves no purpose when the wrongdoer is deceased, but compensation for damages remains valid regardless of the wrongdoer’s status.
To determine whether a penalty is penal or remedial, court in this case applied factors from Hudson v. United States, 522 U.S. 93, 99-100 (1997), examining whether the sanction:
- Involves an affirmative disability or restraint
- Has historically been regarded as punishment
- Comes into play only on a finding of scienter (knowledge of wrongdoing)
- Promotes retribution and deterrence
- Applies to behavior that is already a crime
- Has an alternative purpose
- Appears excessive in relation to the alternative purpose
In applying these factors, the court concluded that FBAR penalties are “primarily remedial with incidental penal effects” for purposes of survival. Under this classification, the penalties survived Richard’s death and remained enforceable against his estate.
Remedial for Survival, Punitive for the 8th Amendment
The court also addressed whether these same FBAR penalties constitute “fines” subject to the Eighth Amendment’s Excessive Fines Clause. This raises the question as to how can a penalty be remedial enough to survive death but punitive enough to qualify as a “fine” under the Constitution?
This precise issue has created a circuit split. The First Circuit in United States v. Toth, 33 F.4th 1 (1st Cir. 2022) held that FBAR penalties are not “fines” under the Eighth Amendment because they merely represent “liquidated damages” that compensate the government for investigation costs. The Supreme Court denied certiorari in Toth, though Justice Gorsuch dissented, criticizing the government for making no effort to prove the remedial nature of the penalties.
In direct conflict, the Eleventh Circuit in United States v. Schwarzbaum, No. 22-14058 (11th Cir. Jan. 23, 2025) held that FBAR penalties are “fines” subject to Eighth Amendment review because they are calculated “irrespective of the magnitude of financial injury to the United States.” In Schwarzbaum, the court found a $300,000 penalty for failing to report a $16,000 account was “grossly disproportional” and violated the Constitution.
In the present case, the court found the Eleventh Circuit’s reasoning more persuasive, concluding that while FBAR penalties have remedial aspects sufficient to survive death, they also have significant punitive characteristics that trigger Eighth Amendment scrutiny. The court acknowledged this apparent contradiction in a footnote, stating that the conclusion “is not inconsistent” because “the test in the Excessive Fines context remains whether the purpose of the penalty is solely compensatory.”
Why This Matters for Executors
This contradiction creates both uncertainty and opportunity for executors. If the Supreme Court eventually resolves the circuit split by deciding that FBAR penalties are primarily punitive, it could undermine the rationale for their survival after death. This would fundamentally change how executors handle estates with unreported foreign accounts.
Until such resolution occurs, executors should approach estates with potential FBAR issues with caution, understanding that:
- Currently, courts uniformly hold that FBAR penalties survive death and remain enforceable against estates.
- The constitutional question about whether these penalties are “fines” subject to Eighth Amendment protection remains unresolved, with a clear circuit split.
- Even in jurisdictions following Schwarzbaum and Leeds, where FBAR penalties are considered “fines,” the excessive fines analysis only provides protection against grossly disproportional penalties—not against all penalties.
- The Leeds case created an important distinction between estate liability and personal liability, finding that penalties that were not excessive against the taxpayer’s estate would be excessive if imposed against the surviving spouse personally due to her lack of knowledge about the accounts.
The Takeaway
For executors, this case explains that FBAR penalties survive death and remain enforceable against the estate regardless of how they’re classified for constitutional purposes. However, the seemingly conflicting legal analysis—remedial enough to survive death but potentially punitive enough for Eighth Amendment protection—suggests this area of law may continue to evolve. The constitutional classification of FBAR penalties as “fines” offers a potential defense against grossly disproportional penalties, but doesn’t currently change the fundamental rule that these obligations survive the death of the account holder and must be addressed during estate administration.
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