Foreign Nationals & Expats
Houston Tax Attorney
Court Finds Representative of Estate Liable for Deceased’s FBAR Penalties
The Court in United States v. Schoenfeld (M.D. Fla. 3:16-cv-1248-J-34PDB) finds that a deceased taxpayer’s FBAR civil penalty liabilities are collectible from his estate’s beneficiary.
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 account generated income from interest, dividends, and passive foreign investment company gains.
The IRS asserted that taxpayer did not report any income or his financial interest in the foreign account on his tax returns or FBARs.
In 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. The IRS assessed a penalty against Steven Schoenfeld in the amount of $614,300—50 percent of the account’s $1,228,600 balance.
Steven Schoenfeld died on August 21, 2015. He died testate and appointed Robert Schoenfeld as the personal representative of his estate. However, Robert Schoenfeld did not present the Will for probate.
On September 29, 2016, the Government initiated this action against Steven Schoenfeld to reduce its assessed penalty to judgment to judgment. The Government filed an amended complaint to name the Estate of Steven Schoenfeld as a defendant. The Estate filed a motion to dismiss the Amended Complaint.
The Court finds that the Estate is not a proper party to the suit. However, the Government may pursue its claim against Robert Schoenfeld.
Further, it contends that “[a]s the personal representative named in Steven’s will and the sole beneficiary of his Estate, Robert is a proper party to this suit.”
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…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.
Next the Court determines whether the Government’s claim abated upon Steven Schoenfeld’s death.
An action brought against a deceased party cannot continue “unless the cause of action, on account of which the suit was brought, is one that survives by law.” Ex parte Schreiber, 110 U.S. 76, 80 (1884). “In the absence of an expression of contrary intent, the survival of a federal cause of action is a question of federal common law.” United States v. NEC Corp., 11 F.3d 136, 137 (11th Cir. 1993), as amended, (Jan. 12, 1994) (citation omitted). Here, Congress has not specifically expressed its intention as to whether the Government’s claim survives. Thus, the Court must turn to federal common law for guidance.
“It is well-settled that remedial actions survive the death of [a party], while penal actions do not.” Id. A remedial action “compensates an individual for specific harm suffered,” whereas a penal action “imposes damages upon the defendant for a general wrong to the public.”
Ultimately, the Court is of the view that the Government’s claim survives Steven Schoenfeld’s death. In doing so, this Court joins many others which have found that a tax penalty survives.
Voluntary disclosure options for estates
While this case addresses the Government’s ability to collect a decedent’s FBAR penalties, what about the assessment of such penalties after a taxpayer is deceased? We’ve come across taxpayers who’ve discovered significant unreported foreign accounts in their deceased relative’s estate, but no FBAR penalty had been previously asserted. The question is then what should be done to correct the previous non-compliance.
IRS private guidance issued on 10/22/07 (cited in CCH JOURNAL OF TAX PRACTICE & PROCEDURE, June-July 2008), provides that if a taxpayer is deceased and the Personal Representative of the Estate discovers that an FBAR was never filed by the taxpayer and believes that the taxpayer had foreign financial accounts that may have had an aggregate amount above $10,000, the representative should file an FBAR for the estate, but will not be expected to file FBARs that the decedent should have filed.
Where there is unreported income from the financial accounts, amended returns for the deceased individuals should be filed to prevent the personal representative from being personally responsible for Title 26 taxes and penalties. They can be filed under any of IRS’ voluntary disclosure options, depending on the facts of the case. In addition, despite the IRS’ informal guidance, it might be prudent to also file protective FBARs for the deceased.