Your FBAR Penalty Will Outlive You: Revisiting Schoenfeld & Gill

Your FBAR Penalty Will Outlive You: Revisiting Schoenfeld & Gill

FBAR Penalties

In recent years, the Internal Revenue Service has been aggressively enforcing all aspects of FBAR reporting and compliance. And unfortunately, it does not stop when people pass away. If a person has been assessed penalties for noncompliance with FBAR reporting, even after they die, the IRS can come after their loved ones. We have received many questions about this topic in the past few years and wanted to revisit two important cases to help you understand why the US government believes it has the right to go after the distributees/estate and why they can be subject to the penalties issued against someone who has passed away. Let’s look at a few cases and the court rulings associated with them.

Steven Schoenfeld: 3:16-CV-01248 (2018, Florida)

In this case, the decedent had opened a foreign account at UBS in Switzerland. Noting, that while simply opening an account at an institution like UBS does not mean that a person was willful, UBS holds the distinction for being one of the first ‘bad banks’ identified by the IRS which led to the Switzerland Deferred Prosecution Agreements and ultimately the Swiss Bank Program. On September 30, 2014, the IRS assessed a penalty against Schoenfeld in the amount of $600,000 — which represented 50% of the value of the account. The decedent passed away on August 21, 2015.

The Penalty was Already Assessed Against the Decedent

An important fact to keep in mind is that the penalty was already assessed against the decedent. In other words, the IRS did not issue the penalty after he passed away, rather the IRS issued the penalty and then he passed away.  Even though the decedent passed away, the IRS still came after the estate for payment of the penalty which led to litigation. It should be noted that pursuant to Florida Law the lawsuit is against the distributee of the estate.

Estate vs Distributee

An important distinction is that the government is not going after the estate specifically, but rather is going after the distributee in accordance with section 2404.

      • An estate’s capacity to be sued is determined “by the law of the state where the court is located.” See Rule 17(b)(3); see also Glickstein v. Sun Bank/Miami, N.A., 922 F.2d 666, 671 (11th Cir. 1991), abrogated on other groundsSaxton, 254 F.3d at 963.

      • Under Florida law, “it is well-settled that ‘an ‘Estate’ is not an entity that can be a party to litigation. It is the personal representative of the estate, in a representative capacity, that is the proper party.’” Spradley v. Spradley, 213 So.3d 1042, 1045 (Fla. 2d DCA 2017) (citation omitted); see also Stat. § 733.612(20). Despite this, the Government contends that Section 2404 provides a vehicle through which it can sue the Estate. See Response at 18-20. Specifically, Section 2404 provides:

Court Ruling in Schoenfeld

The court ruled in favor of the government and provided the following rationale for its ruling:

Interchanging Parties is Valid

      • “The weight of authority supports the conclusion that a complaint filed against a deceased individual is capable of amendment to cure that defendant’s lack of capacity. As such, the Court declines to find the original Complaint in this action to be a legal nullity that was void ab initio. Nevertheless, because the statute of limitations on the Government’s claim expired before the Government filed the Amended Complaint, this action is subject to dismissal unless the filing of the Amended Complaint relates back to the date of the filing of the original Complaint.”

Statute of Limitations

      • “[T]he Court concludes that the Amended Complaint relates back to the date of the filing of the original Complaint because the claims relate to those set forth in the original Complaint, Defendants received notice of the action within the Rule 4(m) period, the Government was mistaken as to the parties’ legal statuses, and Defendants knew, or at the very least, should have known, that but for this mistake, they would have been named as defendants. Accordingly, the Amended Complaint is not barred by the statute of limitations.”

Government Pursue the Distributee/Personal Representative

      • “Here, there is no genuine dispute that Robert Schoenfeld is the sole distributee of the Estate, as Robert Schoenfeld testified that he received 100% of his father’s assets. See Schoenfeld Dep. at 27-29. Thus, the Court finds that as a distributee of the estate, Robert Schoenfeld has the capacity to be sued under Rule 17. Accordingly, as to Robert Schoenfeld, the Motion is due to be denied, as the Government may pursue its claim against him.”

Remedial vs. Penal

The final key issue in the case was to determine whether the claim can survive based on whether it is considered remedial or penal. Remedial claims can survive while penal claims would not survive. Here the court found the penalty to be remedial, and therefore survived the motion.

United States v. Gill 546 F. Supp. 3d 538 (S.D. Tex. 2021) 

In this case, following the lead of Schoenfeld, the court also agreed that the penalty survived death and focused on the fact that it was remedial and not punitive.

Let’s take a look at how the Court reached its conclusion:

      • The Government asserts that all courts that have considered this issue have concluded that FBAR Penalties survive death because they are more remedial than punitive. Dkt. 32 (citing Estate of Schoenfeld , 344 F. Supp. 3d at 1370 ; Green , 457 F. Supp. 3d at 1272 ; United States v. Park , 389 F. Supp. 3d 561, 575 (N.D. Ill. 2019) ; Wolin , 489 F.Supp.3d 21 ). Additionally, others have found that the United States may pursue FBAR assessments against the heirs of non-reporting account holders, though these cases did not address the remedial versus punitive paradigm.  (citing United States v. Garrity , 304 F. Supp. 3d 267 (D. Conn. 2018) ; United States v. Kelley-Hunter281 F. Supp. 3d 121, 124 (D.D.C. 2017) ).

      • The court is more persuaded by the multiple cases that have found FBAR Penalties to be primarily remedial. While most of these cases relied on Hudsonand the Kennedy factors, the court finds that even if one were to apply the In re Wood test espoused by the Estate, modified to take into consideration that the Government is the wronged party here, the penalties would survive death.

      • Because this is a close call and ambiguities in the law must be resolved in favor of the plaintiff, the court finds that the purpose of the statute is primarily remedial and the claim therefore survives Mr. Gill’s death. The Estate’s motion to dismiss (Dkt. 31) is DENIED.

Current Year vs Prior Year Non-Compliance

Once a taxpayer has 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 that 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

Golding & Golding: About Our International Tax Law Firm

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