A recent district court case* against the estate of a deceased taxpayer has ruled in favor of the IRS granting over $6 million in penalties against the estate for failure to report foreign bank accounts, reinforcing the fact that death does not absolve a taxpayer from his or her FBAR reporting requirements.

Taxpayers, regardless of age or circumstance, are required to report their interests in foreign bank accounts if the aggregate balance on all accounts exceed $10,000 during a given tax year.  If required, the taxpayer will disclose the foreign bank accounts on FinCEN Form 114,  commonly referred to as an FBAR. In addition, the taxpayer must also disclose the foreign accounts on Schedule B of Form 1040. And of course, all income associated with the foreign accounts must be reported on a US income tax return.

In this case, the decedent, answered the Schedule B question regarding foreign account ownership as “No” when in fact the opposite was true. Furthermore, no FBARS were filed by the decedent. Based on the particular facts of the case, the IRS found the decedent’s failure as “willful”, thus giving rise to significant penalties.  Currently, penalties for willful failure to file an FBAR are the greater of $129,210 or 50% of the account balance at the time of the violation.

Of particular relevance was the fact that the penalties were imposed on the decedent’s estate which ultimately impacted the decedent’s beneficiaries.  While the facts are not clear, it appears that that the FBAR violations came to light after the death of the taxpayer.

WG Observation: It is tempting for foreign bank account holders who have not complied with the various tax reporting requirements to avoid the issue altogether and continue to maintain the undisclosed accounts believing that the problems will disappear upon their death.  Not only can this approach create hardship in ensuring that the assets are properly transferred to the identified beneficiary (due to the often opaque account structures) but largely eliminates the ability for the beneficiaries to take advantage of some of the various programs which the IRS offers to allow taxpayers to self-report previous filing omissions such as the IRS Criminal Investigation Voluntary Disclosure Practice or the Streamlined Filing Compliance Procedures. These programs often result in significantly lower penalties than if the IRS discovers the noncompliance first. Furthermore, this approach puts an added burden on the beneficiaries to address the tax reporting issues in addition to the normal estate administration affairs.

This case serves as a cautionary tale for account holders of undisclosed accounts to seek professional guidance and address these issues head-on rather than defer the matter to their beneficiaries.

If you have any questions regarding this or any other international tax topic, please contact your WilkinGuttenplan Advisor.

 * U.S. v. Estate of Danielsen, 126 AFTR 2d 2020-6366