Are Estates On The Hook for Decedent’s FBAR Violation (2024)

Are Estates On The Hook for a Decedent’s FBAR Violation?

Are Estates On The Hook for a Decedent’s FBAR Violation?

Unfortunately, when a U.S. Taxpayer passes away, it does not automatically cancel or prevent already accrued foreign account reporting violations from becoming assessed penalties. In other words, if a decedent had accrued fines and penalties (while they were alive) for failing to report the FBAR, the IRS could still assess those penalties after the Taxpayer passed away — as long as they were within the statutory period. Additionally, the Internal Revenue Service may still have the ability to pursue those fines and penalties against the decedent’s estate. In the recent case of Benishai, the Taxpayer filed late FBARs to report his foreign bank and financial accounts and had agreed to extend the statute of limitations for the IRS to assess penalties. The IRS assessed the penalties and the estate challenged whether they were valid, and if they were valid if they could be enforced against the estate. Some of the key issues presented to the court included:

• • • What are the statutory of limitations for FBAR?

    • Is an FBAR extension is valid?

    • Is it constitutional for the IRS to assess and collect penalties against the estate, and

    • Were the fines ‘excessive’ under the Eighth Amendment?

Let’s take a brief look at how the court reached its rulings.

How Does Death Impact FBAR Penalties?

In this case, the penalties were assessed against the Taxpayer after the Taxpayer had passed away but before the statute of limitations expired. The court concluded that since the fines accrued before the Taxpayer passed away — because they accrue each year that the Taxpayer does not file timely FBARs — the IRS could assess penalties after he passed away, as long as the assessments were timely.

Were the FBAR Penalty Assessments Timely?

The court held that the FBAR assessments were timely due to the decedent having agreed to multiple statutory extensions with the IRS. To challenge this position, the estate argues that as a matter of law FBAR extensions are invalid and that even if they were valid, the FBAR penalties in this case exceeded the statute of limitations. In response, the court explains that the defendants did not provide any specific authority that prohibits the IRS from extending the statute of limitations, and several other courts have concluded that the FBAR statute of limitation extensions are valid. 

Can the IRS Go After the Estate?

The next issue becomes whether the IRS can go after the estate for payment. Here, the court defers to the Second Circuit and concludes that the IRS can go after the estate for payment.

As provided by the Court (referring to the Second Circuit):

• • • “It seems impermissible for the estate of a deceased taxpayer, who during his lifetime established a pattern of conduct by which he fraudulently avoided taxes, to avoid a liability that the taxpayer himself could not have avoided if his conduct had been uncovered while he was alive. If [the taxpayer] were still living he would be liable for the civil fraud addition. Also, if the tax fraud were committed and a fraudulent return filed before the taxpayer’s death but the fraud was not discovered until after his death, liability for a civil fraud addition imposed as a result of the taxpayer’s tax evasion activities during his lifetime would survive his death and be borne by his estate.”

    • see, e.g., Park, 389 F. Supp. 3d at 575 (“[T]he estate of a person who willfully fails to file an FBAR form during his lifetime cannot avoid the penalty that the person could not have avoided if he had lived.”); United States v. Schoenfeld, 344 F. Supp. 3d 1354, 1375-76 (M.D. Fla. 2018) (holding that a claim for FBAR assessments survives the taxpayer’s death, quoting Kahr). The Court agrees with these decisions and finds that the FBAR penalties are primarily remedial, and thus survive Benishai’s death. See United States v. Green, 457 F. Supp. 3d 1262, 1272 (S.D. Fla. 2020) (“[T]he FBAR penalty is primarily remedial with incidental penal effects. Accordingly, the FBAR penalties pursuant to §5321(a)(5)(C) survive Marie’s death.”).

Note: Willful vs Non-Willful

It is important to note that the FBAR penalties Benishai were non-willful. Thus, the reference by the Court to the fact that there would be a presumption that the Taxpayer acted fraudulently and that the civil fraud addition would apply (which would extend the enforcement period) may not be valid since non-willful FBAR violations do not presume the Taxpayer committed tax fraud.

Constitutional Arguments

The Taxpayers also argue that the FBAR Penalties were unconstitutional – first, because a deceased person would not receive due process, and second that FBAR penalties in this case would violate the excessive fines clause (Eighth Amendment). Not surprisingly, the court rejects these arguments as well. The court concludes that the estate has been afforded due process and a full and fair opportunity to contest the FBAR penalties — and as to the Eighth Amendment, the court relies on the argument that they are primarily remedial (and thus do not violate the Eighth Amendment).

Eighth Amendment Argument and Schwarzbaum

In another recent case (Schwarzbaum), the Court found that FBAR penalties may violate the excessive fines clause of the Eighth Amendment. In that case, the Court referred specifically to FBAR willfulness penalties and the issue of whether a $100,000 minimum penalty was excessive because some of the accounts had less than $20,000 in them — it did not refer to non-willfulness penalties as was the case in Benishai.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.