Tax Mishap or Tax Mistake? Failure to File IRS Form May Cost Grandmother Millions

A Tax Mistake that has wound its way to the United States Supreme Court has many observers wondering if a filing requirement in the tax code, which may cost an elderly grandmother millions of dollars, is a flaw in the system or a feature that the government is exploiting the tax mistake. Should failing to file a form have such heavy consequences?

Does The Punishment Fit The Crime?

The case revolves around an 82-year-old grandmother named Monica Toth. Toth had inherited several million dollars from her father, kept in a Swiss bank account. Toth failed to file a Report of Foreign Bank and Financial Accounts form, known as an FBAR, for several years after she inherited her money. Though she tried to correct this filing mistake, the IRS found that her failure to file the FBAR was “willful” and “reckless,” allowing them to assess a penalty of half of her Swiss bank account balance. Toth owed over $2 million in penalties and over a million more in late fees, interest, and attorneys’ fees.

Toth’s attorneys filed a lawsuit and argued that the massive penalty was unconstitutional because it violated the Eighth Amendment’s prohibition against excessive fines. Legally, the Eighth Amendment only applies to criminal punishments, and it does not apply to civil fines. However, Toth believed that the IRS’ actions were more like a criminal punishment than a civil fine.

Supreme Court Declines to Hear Tax Case

Toth’s attorneys argued that the massive penalty was disproportionate to Toth’s “willful” failure to file the FBAR and was instead meant to act as a punishment for Toth and a deterrent for others. The IRS countered that courts have always found its penalties to be civil fines; therefore, the Eighth Amendment does not apply.

The U.S. Court of Appeals for the First Circuit agreed with the IRS and found that the Eighth Amendment did not apply to Toth’s case. On appeal to the U.S. Supreme Court, Justice Gorsuch was the only Justice who thought the case had merit. As a result, the appellate court decision stands, and Ms. Toth will have to pay the penalty to the IRS.

Avoid Unexpected Tax Problems

The Toth case shows that you should never expect the IRS to have sympathy for a filing mistake, even an unintentional one. If you are facing an audit, you need experienced professionals. Contact the Highland Tax Group today to learn more.