English historian Thomas Fuller once wrote, “Travel makes a wise man better but a fool worse.” In the context of U.S. FBAR penalties, Mr. Fuller’s words are particularly applicable to a U.S. taxpayer who foolishly fails to report applicable foreign financial accounts. Unfortunately, even after death, a decedent’s foolishness can saddle his/her personal representative with substantial tax liabilities.
Many U.S. citizens open foreign financial accounts in countries they visit frequently or where they have investments. The U.S. government requires U.S. citizens to file an informational return (FinCEN Form 114 or FBAR) if the total combined aggregate highest balance or value of all reportable foreign accounts exceeds $10,000 at any time during the calendar year. If eligible foreign financial accounts go unreported, the IRS imposes particularly steep penalties.
The U.S. Supreme Court recently issued a decision with bad news for personal representatives and estates whose decedents were not FBAR-compliant in life. In United States v. Schoenfeld, Schoenfeld, a U.S. citizen, opened a Swiss bank account in 1993 to hold the proceeds from the sale of property. In 2010, the bank closed Schoenfeld’s account, and the funds were wired to a U.S. account. In 2014, the Internal Revenue Service (IRS) assessed a penalty of $614,300 against Schoenfeld for failing to file an FBAR in 2008. In 2015, Schoenfeld died. The IRS then filed a complaint against the estate for the penalty amount.
The Court held the following:
- The estate was not a proper party to the suit, but the IRS could pursue the personal representative of Schoenfeld’s estate for the amount due.
- The government’s claim was not abated by the death of Schoenfeld, and that, as in prior cases, a tax penalty survives death.
Schoenfeld is not only a bleak reminder to U.S. citizens to file complete and timely FBARs, but it also serves as a strong warning to personal representatives. It reminds personal representatives that if the estate of a decedent with outstanding FBAR penalties is not correctly administered, the personal representative could be held liable for those liabilities.
The poet once wrote, “We travel not to escape life, but for life not to escape us.” If you agree to be the personal representative of an estate, be very careful to completely uncover and address all foreign financial account reporting issues at the beginning of the estate administration. If not, it’s unlikely you will escape personal responsibility for FBAR penalties attributable to the decedent.
If you or an estate you are administering have FBAR questions or outstanding issues, call John Ure or one of our experienced international tax or estate tax advisors today at 301.231.6200.