Deceased Individuals’ FBAR Penalties
Successor Liability for Decedent’s FBAR Penalties
The United States taxes its citizens and residents on their worldwide income. It does this by means of the Internal Revenue Code. The United States Bank Secrecy Act supports the Internal Revenue Code. Americans had been transferring money overseas and investing it there and not reporting the income on their U.S. income tax return. The Bank Secrecy Act seeks to curb evasion the use of foreign financial accounts to evade U.S. income tax. It does this by requiring U.S. citizens and residents to file an annual Report of Foreign Bank and Financial Accounts (“FBAR”) reporting their foreign financial accounts. U.S. Treasury conveys information reported on FBARs to the Internal Revenue Service, which is charged with enforcing the Internal Revenue Code. The IRS then verifies that income from the FBAR-reported accounts is reported on the reporter’s U.S. income tax return.
Bank Secrecy Act compliance should be taken seriously. BSA violations are subject to severe civil penalties, and, in extreme cases, criminal prosecution. Paul Manifort was convicted on a count of willful failure to file FBARs, and is now serving a prison sentence.
It had been thought that an individual’s Bank Secrecy Act compliance issues died with him or her. Two recent cases, United States v. Estate of Schoenfeld, 344 F.Supp.3d 1354 (M.D. Fla. 2018), and United States v. Park, 389 F.Supp.3d 561 (N.D. Ill. 2019), are changing this. In each case, the Court held the personal representative and distributees of a decedent’s estate liable for monetary penalties for the decedent’s FBAR noncompliance, without any basis in law for doing so. It thus appears there is developing Federal common law holding a decedent’s personal representative and distributees liable for penalties for the decedent’s BSA noncompliance.
What to Do in the Case of a Decedent Who Failed to Comply
When presented with a case in which a decedent failed to comply with U.S. laws concerning foreign financial accounts, counsel should, of course, as soon as possible file FBARs or amended FBARs as needed for the decedent for the last six years. This is so because the ability to make a voluntary disclosure avoiding draconian penalties for failure to timely file FBARs disappears once the U.S. government learns of the delinquency from a source other than the decedent’s estate. The statute of limitations on assessing a penalty for failure to file an FBAR is six years, and it begins to run on the FBAR due date, whether or not the FBAR is filed.
How to FBAR-report the decedent’s foreign financial accounts is a tougher question. The decedent, of course, cannot sign FinCEN Forms 114a, Record of Authorization to Electronically File FBARs. The personal representative (called “executor” or “executrix” in some states) of the decedent’s estate can, however, sign Forms 114a authorizing the filing of FBARs reporting the decedent’s foreign financial accounts. For this purpose a decedent’s estate should be opened in the probate court of the decedent’s domicile. The FBARs should be filed in the personal representative’s name. The personal representative should obtain from the IRS an employer identification number (EIN”) for the estate. Part I, Line 2 of the FBARs should identify the filer as “Fiduciary of Other,” and “Personal Representative of the Estate of [decedent’s name,] deceased.” The estate’s EIN should be entered in Part I, Line 3 of the FBARs. Part I, Line 3a should identify the number as “EIN.”
Once the decedent’s delinquent FBARs have been filed, his personal representative needs to address the decedent’s U.S. income tax compliance. If the decedent filed U.S. income tax returns failing to disclose his foreign financial accounts or income therefrom, amended U.S. income tax returns should be prepared for him for the last five years. If the amended U.S. income tax returns report no additional tax due, but do include Forms 8938, Statement of Foreign Financial Assets, which the decedent failed to file, then the amended tax returns should be filed under the IRS’ Delinquent International Information Return Submission Procedure.
If the amended U.S. income tax returns report additional tax due, and the decedent’s failure to comply with U.S. laws regarding foreign financial accounts was nonwillful, then the personal representative should proceed under the IRS’ Streamlined Offshore Compliance Procedures (“Streamlined Procedures”), for residents or nonresidents of the U.S., as appropriate.
If the decedent’s noncompliance was willful, then the personal representative should proceed under the IRS’ more onerous and punitive Voluntary Disclosure Practice (“VAT”).
Separate posts will address the Delinquent International Information Return Submission Procedures; the Streamlined Procedures, for residents of the United States as well as nonresidents; and the Voluntary Disclosure Practice.