Seattle International Tax Attorney Blog

FBAR Penalty Does Not Terminate At Death

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In United States of America v. Estate of Steven Schoenfeld, the District Court held that the FBAR penalties do not terminate upon the death of the taxpayer.  

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FBAR Background.

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In 1970, Congress enacted the Currency and Foreign Transactions Reporting Act, commonly referred to as the Bank Secrecy Act ("BSA"), 31 U.S.C. §§ 5311-5314, 5316- 5332. Pursuant to the BSA, United States "persons"2 are required to file an FBAR indicating their financial interests in and/or signatory authority over a foreign account if certain conditions are met. See 31 U.S.C. § 5314(a); 31 C.F.R. §§ 1010.350(a). Failure to file an FBAR can subject the taxpayer to a civil penalty. The civil penalty for a willful violation of a non-filing of an FBAR may not exceed the greater of $100,000 or 50% of the amount of the unreported account. Generally, the IRS must assess a civil penalty within 6 years of the violation. 

 

Background Facts of Case.

 

In 1993, Steven Schoenfeld, a citizen of the United States, established a foreign account with UBS AG in Switzerland with funds he acquired from the sale of a New York apartment. The Government asserts that Steven Schoenfeld did not “report his income from, or financial interest in, his foreign account on his federal tax returns for any year of the account’s existence,” even though he “reported interest and investment income from domestic sources. In 2009, UBS AG notified account holders that it might provide their account information to the IRS. In response, Steven Schoenfeld told his tax representative that he would not authorize UBS AG to release such information. 

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On September 30, 2014, the [IRS] assessed a civil penalty against Steven Schoenfeld pursuant to Section 5321(a)(5) for willfully failing to file an FBAR for calendar year 2008. Between January 1, 2008, and June 30, 2009, the balance of Steven Schoenfeld's account exceeded $10,000. Thus, the IRS assessed a penalty against Steven Schoenfeld in the amount of $614,300—50 percent of the account’s $1,228,600 balance.  Although the IRS notified Steven Schoenfeld of the assessment and demanded payment, Steven Schoenfeld did not pay the amount demanded. As of August 16, 2016, the amount sought by the Government had grown to $690,188.69, consisting of the FBAR penalty and interest and penalties for late payment under 31 U.S.C. § 3717(e)(2).

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Steven Schoenfeld died on August 21, 2015, and named his son as his personal representative. 

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On September 29, 2016, the Government initiated this action against Steven Schoenfeld to reduce its assessed penalty to judgment. The Government sent the Complaint and a request for waiver of service to Steven Schoenfeld's address, where Robert Schoenfeld resides. An attorney representing the Schoenfeld family wrote a letter to the Government advising that Steven Schoenfeld had died. Accordingly, on December 14, 2016, the Government filed the Amended Complaint as of right pursuant to Rule 15(a). In the Amended Complaint, the Government named the Estate of Steven Schoenfeld (the “Estate”) as a defendant pursuant to 28 U.S.C. § 2404 (“Section 2404”), and Robert Schoenfeld as a defendant based on his status as distributee of the Estate.

 

Defendants moved to dismiss the Amended Complaint. Defendants contend that because a deceased individual does not have the capacity to be sued, the original Complaint - filed against the deceased Steven Schoenfeld - was a legal nullity that was “void ab initio".

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In this case, the District Court found in favor of the IRS. The court found that the amendment of the complaint was not a legal nullity, and that the action could move forward against the estate of the decedent. The court allowed the government's case to apply the FBAR penalties against the estate of the decedent. 

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Importance of Case.

 

Penalties related to unreported foreign bank accounts can cause issues for the account holders. This case provides another issue that account holders should be aware of, namely, the potential issues that the unreported foreign bank account may create for their heirs and future generations. Taxpayer's holding unreported accounts consult with an international tax attorney, and should consider the potential methods of fixing the prior FBAR filings. 

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IRS CIRCULAR 230 NOTICE: ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY ATTORNEYS AT HARLOWE & FALK LLP TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.