Do FBAR Penalties Survive Death

Do FBAR Penalties Survive Death

Do FBAR Penalties Survive Death?

Yes, FBAR violations (Foreign Account Penalties) can survive death when the penalties were assessed beforehand – at least in Texas District Court and in the case of US v. Gill — which serves as a good example to illustrate the concept. In this case, the personal representative of the estate sought to dismiss the matter involving the foreign account non-compliance penalties, because the owner of the foreign accounts had passed away and thus, penalties should not survive since they were “penal” in nature and not remedial. Unfortunately, the court rejected the motion and determined that these types of foreign bank and financial account penalties do survive death. A few key facts to consider is that the penalties were first assessed against the decedent for nearly $750,000 before he passed away — and the personal representative were family members. Here are some thoughts on why this court found that FBAR penalties survive death.

Assessed FBAR Penalties Before Death

Before Mr. Gill passed away, he had been assessed FBAR penalties. Mr. Gill was a US Citizen who was previously a Lawful Permanent Resident. Between 2005 in 2010, Mr. Gill failed to report foreign income on his US tax returns. In addition, he also failed to report ownership or signature authority of various foreign bank and financial accounts (Schedule B; FBAR). Therefore, the Internal Revenue Service assessed nearly $741,000 in penalties against Mr. Gill personally for non-willful failure to file. Mr. Gill never paid these penalties, and the government filed a lawsuit. It is important to note, that the penalties were based on the defendant being non-willful, so it is not that the government has alleged there were any nefarious activities at issue (nor even that the Taxpayer had acted with reckless disregard); it was a non-willful penalty determination by the IRS.

Motion to Appoint Substitute Personal Representative

Once the government learned that Mr. Gill had passed away, a personal representative of the Gill estate was appointed to take care of the estate and to represent the estate as a defendant in this matter; the personal representative filed a motion to dismiss.

Motion to Dismiss FBAR Penalties as Not Surviving Death

The motion to dismiss was based on the fact that the defendant takes the position that the FBAR penalties should not survive death because the code section relied on by the government refers to procedural matters and not the actual merits of the claim. The key code section at issue is 28 USC 2404.

28 USC 2404 (Death of Defendant in Damage Action)

      • A civil action for damages commenced by or on behalf of the United States or in which it is interested shall not abate on the death of a defendant but shall survive and be enforceable against his estate as well as against surviving defendants.

Wood Test

The Court applied the factors as set forth in US v Wood — 643 F.2d 188 (5th Cir. 1980).

      • whether the purpose of the statute was to redress individual wrongs or more general wrongs to the public;

      • whether recovery under the statute runs to the harmed individual or to the public; and

      • whether the recovery authorized by the statute is wholly disproportionate to the harm suffered.’” In re Wood, 643 F.2d at 191(quoting Murphy v. Household Fin. Corp., 560 F.2d 206, 209 (6th Cir. 1977))

The Court Rules in Favor of the US Government

In this particular case, the Court found that the FBAR penalties can survive death. The Court took the position that in general, the FBAR penalty should be considered remedial and not penal. In applying the Wood test, the Court went on to explain that the injured party is the United States, and the costs and fees expended by the US Government to investigate the particular Taxpayer about the undisclosed accounts would be sufficient under the first factor. The Court further explained, the FBAR penalty would be remedial under the second factor because the government is the harmed party and that it must conduct further investigations involving the undisclosed accounts. Finally, the Court concluded that the third factor is met as the penalties were not disproportionate based in part on the number of undisclosed accounts Taxpayers had and how FBAR penalties can be issued (per violation, per year).

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