Can the IRS Collect Tax Debts Like FBAR Penalties After Death?

You may have heard the famous saying that “nothing is certain but death and taxes.” But what happens when death precedes taxation, and how are the decedent’s survivors financially impacted? These are critical questions affecting countless families across the United States – questions upon which one recent court case, United States v. Steven Schoenfeld (2018), may help to shed light. In Schoenfeld, the U.S. District Court for the Middle District of Florida, Jacksonville Division, found that even after the plaintiff’s passing, the government maintained its right to impose and collect FBAR penalties (which our international tax lawyers will explain, alongside the underlying federal laws, later in this article). “Ultimately,” the order concluded, “the Court is of the view that the Government’s claim survives Steven Schoenfeld’s death.” This ruling may have serious financial implications for the adult children and surviving spouses of late taxpayers with unpaid tax liabilities.

FBAR Penalties Not Affected by Taxpayer’s Death, Court Rules

The court order linked above recounts the following series of events:

  1. In 1993, Schoenfeld, a U.S. citizen, opened a Swiss bank account with UBS AG, into which he deposited the proceeds from the sale of property in New York City. According to the order, “The account ‘generated income from interest, dividends, and Passive Foreign Investment Company Gains.’”
  2. More than a decade later, in 2009, UBS AG issued a warning to U.S. clients that their information might be provided to the Internal Revenue Service. (Indeed, it was around this time that the federal government was beginning to ramp up its enforcement efforts against offshore tax evasion – an initiative the IRS and DOJ continue to prioritize today. The same year UBS AG issued these warnings, the IRS launched its now-defunct Offshore Voluntary Disclosure Program, or OVDP. A year later, in 2010, Congress passed the Foreign Account Tax Compliance Act, or FATCA. Three years after that, in 2013, the Department of Justice launched its Swiss Bank Program – now also defunct.)
  3. In 2010, the bank closed Schoenfeld’s account. The funds therein were wired to an American brokerage firm where Schoenfeld had another account. The “sole beneficiary” of this account was Schoenfeld’s son, Robert, whom the order noted “‘assisted in his father’s financial affairs.’”
  4. In 2014, the IRS assessed against Schoenfeld a penalty of $614,300. Why? To answer that question, we need to pause our timeline and discuss FBAR filing requirements – and the penalties for ignoring them.

What is the FBAR Filing Requirement, and Who Does it Apply To?

During the 1970s, Congress passed a law called the Bank Secrecy Act (BSA). While the BSA contains numerous provisions, one of the most important is its FBAR requirement.

The acronym FBAR alternately refers to “Foreign Bank Account Report,” “Foreign Bank Account Reporting,” and “Report of Foreign Bank and Financial Accounts,” depending on the source. All refer to the same document: an electronic tax form titled FinCEN Form 114 (previously known as TD F 90-22.1). The FBAR must be filed using FinCEN’s BSA E-Filing System. (For context, “FinCEN” is the Financial Crimes Enforcement Network, which frequently works with the IRS to detect noncompliance.)

Though exceptions do arise, you must generally file an FBAR if you meet the following criteria:

  1. You are a U.S. person (such as a citizen or resident).
  2. You have signature authority over, or interest in, a foreign bank account (including checking, savings, and business accounts).
  3. The value of the account (or accounts) exceeded $10,000, however briefly, at any time.

Failure to file can result in debilitating penalties. For example, there is a penalty of up to 50% of the account balance if the failure was “willful” (as opposed to negligent). This explains why the IRS assessed a $614,300 fine, as the pertinent account balance was approximately $1,228,600 – almost 123 times greater than the FBAR reporting threshold.

Florida Court Rules in IRS’ Favor in FBAR Penalty Litigation

Now that you understand the necessary background information about FBAR, we will proceed with the timeline of the case.

  1. In 2015, Schoenfeld passed away. Prior to death, he appointed Robert Schoenfeld, his son, to act “as the personal representative of his estate.”
  2. The government then proceeded to file a Complaint and, later, an Amended Complaint, which was served on Robert in 2016.
  3. In 2017, Schoenfeld sought dismissal of the Amended Complaint, initiating a series of hearings, Motions, and Responses (which are legal documents that request various actions or orders from judges). Ultimately, citing a series of precedents and standards, the Court held that the government’s claim was still valid, despite Schoenfeld’s death – and, “In doing so… join[ed] many others which have found that a tax penalty survives.” For example, the Court cited another recent case, United States v. Park (2017), in which the Court “allowed the IRS to pursue FBAR assessments against the non-reporter’s heirs.”

Personal Liability to Estate Executor

The federal and applicable state government are in the position of creditors and must be made whole upon the passing of a decedent for all assessed or assessable income and estate taxes, penalties and interest.  An estate administrator will incur personal liability if assets are passed to heirs without all creditors being made whole including the federal and state governments. Additionally, an executor or personal representative assumes personal liability by law for the payment of estate taxes. And, where no U.S. executor has been appointed, the Internal Revenue Code imposes that liability directly upon the holder of the decedent’s property. What this means is that a deemed executor is held to be responsible for the payment of estate tax up to the full extent of the value of the property in his or her possession and will incur personal liability for U.S. estate taxes if he or she distributes assets out to other U.S. beneficiaries, or takes personal possession of an asset before paying U.S. estate taxes.



Transferee Liability to Recipients of Estate Assets

The federal and state government can also go after recipients of tainted estate assets as creditors directly under a fraudulent conveyance theory.   For example, Florida fraudulent conveyances case law list the following badges of fraud as a basis for Transferee Liability:

  1. The existence or threat of litigation
  2. A familial relationship between the transferor and transferee
  3. Grossly inadequate, or complete lack of consideration
  4. Secrecy and concealment of the transfer
  5. Retention of rights of possession of the property by the transferor
  6. The insolvency or indebtedness of the transferor at the time of the transfer
  7. The transfer of all or substantially all of the debtor’s estate

Alter Ego or Nominee of the Transferor

The federal and state governments can also go after the recipients of a tainted estate assets under an Alter Ego or Nominee of the Transferor theory.

Another scheme (potentially criminal) to attempt to avoid / evade tax collection is where H and or W transfer property to a third party (ordinarily a friend or family) in a non-arm’s-length transaction (often at far less than fair market value with the non-documented understanding that the transaction is in name only and the asset is to be returned at a later date), where a large tax liability is owed or likely to soon be assessed. The IRS where faced with this scenario can claim that the third party is merely an alter ego or nominee of the transferor and issue a lien and begin to levy against the third party.

The relevant factors in making an alter ego or nominee determination include;

  • Whether the acquiring taxpayer used personal funds to acquire the property.
  • The adequacy and source of consideration.
  • The likelihood the property was placed in the nominee’s name in anticipation of a collection action.
  • Whether the acquiring party or rather the transferring party constructively enjoyed the benefits of possession and control over the property.
  • The relationship between the taxpayer and the acquiring party.
  • The formalities, or lack thereof, over the transfer of ownership.
  • Who is paying the maintenance expenses, using the property as collateral, paying state and local taxes on the property.

FBAR Tax Lawyers Can Help You Report Foreign Bank Accounts

The takeaway message, though not necessarily new or groundbreaking from a legal standpoint, is nonetheless significant for the surviving spouses and children of noncompliant taxpayers – whose debts to the IRS, rather than being relieved by death, are passed on to the decedent’s estate.

If you need help determining whether you are liable for the tax debts or IRS penalties incurred by a spouse or relative who has since passed away, the Tax Law Office of David W. Klasing is here to provide assistance. Our tax relief attorneys can evaluate your family’s situation and identify potential strategies for proceeding. Depending on the nature, age, and amount of the debt, your relationship to the decedent, and other factors, it may be possible to obtain innocent spouse relief or make an offer in compromise (OIC). In other cases, it may be necessary to initiate tax litigation, or to look for other ways of resolving the dispute. For a reduced-rate consultation about foreign bank account reporting, tax debt relief, or a related matter, contact us online today, or call the Tax Law Office of David W. Klasing at (800) 681-1295.

Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San BernardinoSanta BarbaraPanorama CityOxnardSan DiegoBakersfieldSan Jose, San FranciscoOakland and Sacramento.

 

Helpful Q and A libraries:

https://klasing-associates.com/topics/ovdi-faq/

https://klasing-associates.com/topics/fbar-compliance-and-disclosure-faq/

https://klasing-associates.com/topics/foreign-audit-faq/

https://klasing-associates.com/topics/international-tax-law-faq/

https://klasing-associates.com/topics/ovdp/