United States v. Schwarzbaum

• Decision Date: 25 January 2022
• Docket Number: No. 20-12061,20-12061
• Citation: 24 F.4th 1355
• Parties: UNITED STATES of America, Defendant-Appellee, v. Isac SCHWARZBAUM, Plaintiff-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

24 F.4th 1355

UNITED STATES of America, Defendant-Appellee,

v.Isac SCHWARZBAUM, Plaintiff-Appellant.

No. 20-12061

United States Court of Appeals, Eleventh Circuit.

January 25, 2022

Stacy Delayne Blank, Andrea Darling de Cortes, William Morris Sharp, Chad M. Vanderhoef, Holland & Knight, LLP, Tampa, FL, Jose Angel Casal, Daniel Ira Small, Holland & Knight, LLP, Miami, FL, James P. Dawson, Holland & Knight, LLP, West Palm Beach, FL, Nicole M. Elliott, Holland & Knight, LLP, Washington, DC, for Plaintiff-Appellant.

Clint A. Carpenter, Francesca Ugolini, U.S. Department of Justice, Appellate Section Tax Division, Washington, DC, John Paul Nasta, Michael N. Wilcove, U.S. Department of Justice, Tax Division, Washington, DC, Jeffrey N. Nunez, Mary Elizabeth Smith, U.S. Department of Justice, Washington, DC, Emily M. Smachetti, U.S. Attorney's Office, Miami, FL, U.S. Attorney Service - Southern District of Florida, U.S. Attorney Service - SFL, Miami, FL, for Defendant-Appellee.

Before Branch, Grant, and Brasher, Circuit Judges.

Branch, Circuit Judge:

Every year, U.S. citizens with over $10,000 in foreign bank accounts must disclose information about those accounts to the IRS on a Report of Foreign Bank and Financial Accounts or "FBAR" form. For several years in the early 2000s, Isac Schwarzbaum did not. After the IRS discovered Schwarzbaum's omissions, and determined that he had acted willfully, it imposed several million dollars in civil penalties, and the government sued to collect.

In response, Schwarzbaum conceded that he failed to report his foreign bank accounts to the IRS, but contested the IRS's determination that his violations were willful and argued for vacatur of his civil penalties. After a bench trial, the district court held that Schwarzbaum's violations were reckless, and therefore willful, in most of the tax years at issue. But the district court also held that the IRS had miscalculated Schwarzbaum's civil penalties and set them aside under the Administrative Procedure Act (APA), Pub. L. No. 79–404, 60 Stat. 237, 5 U.S.C. § 551 et seq. The district court then sua sponte calculated and imposed a fresh set of penalties. On appeal, Schwarzbaum argues that the district court applied the wrong legal standard in evaluating whether he willfully violated the FBAR reporting requirements, and that the new penalties the district court imposed were unlawful under the APA.¹

Starting with Schwarzbaum's first argument, we conclude that the district court applied the correct legal standard in analyzing whether Schwarzbaum willfully violated the FBAR reporting requirements. Willful conduct in the FBAR context includes knowing and reckless conduct. Reckless conduct is action that objectively entails a high risk of harm, which is the standard the district court applied.

However, turning to Schwarzbaum's second argument, we nevertheless conclude that the civil penalties assessed by the IRS were unlawful under the APA and must be recalculated. As the district court found, the IRS erred by using the wrong foreign bank account balances to calculate Schwarzbaum's penalties, contravening the relevant statute and regulations. At trial, the district court further erred by calculating and imposing new penalties instead of remanding to the agency, as required by the APA. Even though the district court ultimately arrived at the same total penalty amount the IRS did originally, the IRS's original errors were not harmless, and, therefore, a remand for recalculation is necessary.

After careful review and with the benefit of oral argument, we vacate the district court's decision and remand with instructions to remand Schwarzbaum's case to the IRS.

I. Background

A. The FBAR's Statutory and Regulatory Framework

In the Bank Secrecy Act of 1970, Pub. L. No. 91–508, 84 Stat. 1114, Congress directed the Secretary of the Treasury to promulgate regulations requiring U.S. citizens and others to report their "transaction[s]" and "relationship[s]" with "foreign financial agenc[ies]" to the IRS. Bank Secrecy Act §§ 241–42, 84 Stat. at 1124 (codified as amended at 31 U.S.C. § 5314 ). In response, the Secretary of the Treasury created the Report of Foreign Bank and Financial Accounts form, known as the FBAR. See 31 C.F.R. § 1010.350(a). Treasury regulations provide that each U.S. citizen with interests in or authority over foreign bank accounts with balances exceeding $10,000 must file an annual FBAR identifying and describing those accounts. See id. §§ 1010.306(c), 1010.350(a).

The IRS may impose civil penalties on persons who fail to report their foreign bank accounts as provided by the FBAR statute and its implementing regulations. See 31 U.S.C. § 5321(a)(5)(A) (providing that "[t]he Secretary of the Treasury may impose a civil money penalty on any person who violates ... any provision of section 5314"); 31 C.F.R. § 1010.810(g) (delegating to the Commissioner of Internal Revenue "the authority to: assess and collect civil penalties under 31 U.S.C. [§] 5321"). The IRS "may assess a civil [FBAR] penalty ... at any time before the end of the 6-year period beginning on the date of the transaction with respect to which the penalty is assessed." 31 U.S.C. § 5321(b)(1). The maximum civil penalty for a non-willful violation of the FBAR reporting requirements is $10,000. Id. § 5321(a)(5)(B)(i). The maximum civil penalty for a willful violation is

the greater of ... $100,000, or ... in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, [50% of] the balance in the account at the time of the violation.

Id. § 5321(a)(5)(C)(i), (D)(ii).² For each tax year, covered individuals must file their FBAR forms by June 30 of the following year. See 31 C.F.R. § 1010.306(c).

B. Facts and Procedural History

Isac Schwarzbaum is a wealthy, naturalized U.S. citizen who was born in Germany and has lived intermittently in the United States since the 1990s. Beginning in the early 2000s, Schwarzbaum held interests in foreign bank accounts in Switzerland and Costa Rica. Between 2006 and 2009, Schwarzbaum held interests in eleven Swiss accounts and two Costa Rican accounts. As a U.S. citizen, Schwarzbaum was, and is, subject to the FBAR reporting requirements for foreign bank accounts. See 31 U.S.C. § 5314(a).

Schwarzbaum uses certified public accountants (CPAs) to prepare his U.S. tax returns. In the past, some of Schwarzbaum's CPAs advised him that he did not need to report his foreign assets to the IRS unless those assets had a "U.S. connection." This was bad advice. The FBAR regulations require U.S. citizens to report their foreign accounts with balances exceeding $10,000 to the IRS every year, whether or not the accounts have any connection to the United States. See 31 C.F.R. §§ 1010.306(c), 1010.350. Nonetheless, in 2006, Schwarzbaum's CPA prepared and filed an FBAR on his behalf listing only a single Costa Rican bank account.

In 2007, Schwarzbaum self-prepared and filed his own FBAR, which again listed only a single Costa Rican bank account. When self-preparing his 2007 FBAR, Schwarzbaum reviewed the instructions that accompany the FBAR form, which stated:

Each United States person, who has a financial interest in or signature authority, or other authority over any financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing [an FBAR] with the Department of the Treasury on or before June 30, of the succeeding year.

In 2008, Schwarzbaum did not file an FBAR, and in 2009, he again self-prepared and filed his own FBAR, listing only one of his Swiss accounts and his two Costa Rican accounts.

Some time after, Schwarzbaum consulted with U.S. tax counsel, who advised him that he had violated the FBAR reporting requirements in previous tax years by failing to report many of his foreign accounts. In 2011, Schwarzbaum then voluntarily disclosed to the IRS the existence and balances of the foreign accounts he had previously failed to report. In 2013 and 2014, the IRS investigated and proposed civil penalties totaling $13,729,591 against Schwarzbaum for willful violations of the FBAR reporting requirements for the 2006–2009 tax years.

In calculating Schwarzbaum's FBAR penalties, the IRS started with the highest annual balances for the foreign accounts Schwarzbaum had failed to report to the IRS during the relevant tax years.³ For accounts with balances exceeding $1 million, the IRS then divided the balances in half, arriving at the statutory maximum penalties. See 31 U.S.C. § 5321(a)(5)(C)(i), (D)(ii) (providing that the maximum penalty for willful FBAR violations is the greater of $100,000 or 50% of "the balance in the account at the time of the violation"). For accounts with balances of $1 million or less, the IRS calculated a mitigated set of penalties using a computational formula set out in the IRS's internal guidelines, the Internal Revenue Manual (IRM). The IRS then added up the statutory maximum penalties for the $1 million-plus accounts and the mitigated penalties for the $1 million-or-less accounts, for a total potential penalty of $35,416,667. Deciding that a $35 million-plus penalty would be excessive, the IRS then further mitigated Schwarzbaum's penalties by dropping his 2006, 2007, and 2009 penalties to $0 and dividing his 2008 penalties—which totaled $13,729,591—across all four tax years, assigning $1,173,778 to tax year 2006 and $4,185,271 each to tax years 2007, 2008, and 2009. Schwarzbaum appealed the IRS's proposed penalties to the IRS Appeals Office, which sustained the penalties in September 2016.⁴

Schwarzbaum did not pay his FBAR penalties, and in August 2018, the government filed suit to collect them. In March 2020, after conducting a five-day bench trial,...