This article is relevant for U.S. tax resident individuals who may hold either an interest in, or signature authority over a non-U.S. financial account.
Abstract: One might think that an account holder’s death would mark the end of any consequences for failing to file a Foreign Bank Account Report (FBAR). Not so, according to a U.S. District Court in the recent case of Estate of Danielsen. This article describes the case. A sidebar looks at a slightly earlier court case with a similar result.
Estate of Danielsen, No. 2:19-cv-496-FtM-38NPM, October 6, 2020 (U.S. Dist. Court, Middle Dist. of Florida)
U.S. v. Wolin, No. 17-CV-2927, September 28, 2020 (U.S. Dist. Court, Eastern Dist. of New York)
Estate of Kahr, No. 32737, August 1, 1969 ( U. S. Court of Appeals, Second Circuit)
In the courts: Estate Liable for Decedent’s FBAR Failure
One might think that an account holder’s death would mark the end of any consequences for failing to file a Foreign Bank Account Report (FBAR). Not so, found a U.S. District Court in the recent case of Estate of Danielsen.
U.S. citizens must report their interests in foreign financial accounts by completing Schedule B (Form 1040), Part III (“Foreign Accounts and Trusts”) and filing an FBAR if the aggregate balance in any accounts exceeds $10,000 during the preceding year.
The IRS may assess and collect civil penalties against anyone who fails to file an FBAR disclosing his or her interest in a foreign account. If the individual’s failure to file is willful, the IRS may assess a penalty of up to $100,000 or 50% of the balance in the foreign account at the time of the violation, whichever is greater.
Willfulness doesn’t require actual knowledge of the duty to report an interest in a foreign financial account, but merely involves reckless or careless disregard of that duty. A taxpayer’s false representation that they don’t have a foreign bank account, by answering “no” to the question on Line 7a of Schedule B, Part III of Form 1040, in and of itself supports a finding of reckless disregard of the duty to report foreign accounts on an FBAR.
Facts of the Case
The plaintiff in Danielsen was a U.S. citizen who began selling Swiss annuities in 1993. Shortly thereafter, he formed a corporation and opened two foreign accounts, in its name: one in Lichtenstein and one in Canada.
From 2006 through 2009, the plaintiff was the beneficial owner of, and had a financial interest in, the two foreign accounts as the corporation’s sole owner. The aggregate monthly balance in the foreign accounts always exceeded $10,000. However, despite previously filing FBARs for different foreign accounts, he didn’t file FBARs for his foreign accounts in Lichtenstein and Canada between 2006 and 2009.
Also, for each year, the plaintiff answered “no” to the question on Line 7a of Schedule B (Form 1040): “Did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country?”
The IRS assessed FBAR penalties for the years 2006 through 2009, which the plaintiff failed to pay. After his death, the plaintiff’s estate also failed to pay the assessed FBAR penalties.
When the case went to court, the magistrate judge noted that the plaintiff had filed FBARs for different foreign accounts in 1994 and 1995. This was evidence that he knew he was required to file FBARs for his foreign accounts.
Moreover, the plaintiff, under penalty of perjury and with knowledge of his foreign bank accounts in Lichtenstein and Canada, had checked “no” on Line 7a of Schedule B (Form 1040) for each year from 2006 through 2009. The magistrate judge determined this was evidence that he recklessly disregarded his duty to report foreign accounts.
Based on these facts, the plaintiff’s failure to file FBARs for 2006 through 2009 was willful, and the IRS was granted judgment on the penalties. The judge further determined that the plaintiff’s estate was liable for those penalties.
The lesson of this case is clear: Failing to regularly and properly file FBARs can lead to penalties that will endure even after the account holder’s death. If you have foreign accounts, be sure to work closely with your CPA to keep up with your filings so neither you nor your estate will suffer a costly penalty.
Sidebar: Remedial Penalties Don’t Go Away
The court’s finding in Danielsen (see main article) echoes a similar decision handed down by a different district court about a week earlier. In that case, U.S. v. Wolin, the plaintiff didn’t disclose a foreign account to the IRS on his 2008 return or at any other time. He also failed to file an FBAR for 2008.
Upon his death in 2014, the IRS assessed a $1.4 million penalty against his estate. In legal proceedings, the district court determined that the FBAR penalty indeed survived the plaintiff’s death.
The court noted that, under Estate of Kahr, liability for a tax penalty survives an individual’s death and is borne by his or her estate if the purpose of the penalty is remedial. The failure to file an FBAR is a “remedial penalty with incidental penal effects,” said the court, because it’s imposed to protect tax revenue and reimburse the government for the public funds expended in investigating and uncovering the individual’s tax malfeasance.
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