IRS FBAR for Deceased Person Enforcement

FBAR for deceased person: The FBAR for deceased person rules are complicated.

When it comes to the IRS, death and taxes, there is a 4th component to the equation that many taxpayers with previously unreported foreign accounts may have to deal with…FBAR Penalties.

In recent years, there has been a surge in the number of cases involving FBAR for deceased person(s) & FBAR penalties.

And, while FBAR penalties can be civil (willful or non-willful) or criminal, the IRS can also come after individuals, after they have passed – and in certain circumstances, even after their heirs and personal representative(s).

One important (and ongoing) case is the case of U.S. vs. Park. It involves Korean related accounts, and since we represent many clients each year from Korea, we wanted to provide a summary of what’s actually going on in this case.

U.S. vs. Park Procedural Importance

U.S. vs. Park has not been decided yet. There have been many motions, and procedural tactics thus far, but the case is still in active litigation.

The purpose of the case is to shed some light on the fact that the IRS can move forward against the estate and personal representative for FBAR penalties that were assessed after the decedent had passed away.

FBAR Penalty for U.S. v. Park 

Mr. Park was a successful businessman. And, like many successful businessmen (and women) he found himself at the receiving end of an occasional lawsuit, or two…or many.

He had been sued by the FTC, and had other issues surrounding himself, business and finances.

Foreign Accounts Outside of the U.S.

Mr. Park had various accounts outside the U.S.. He did not report them for many years. In 2008, he amended his returns to reflect these foreign accounts and file the necessary FBARs.

He did not submit to one of the approved Amnesty Programs. Rather, he submitted a “Quiet Disclosure” since some amended returns/ FBAR were timely, but incomplete, while others were untimely, etc.

He got caught, and the IRS pounced. He passed away, and left a significant estate that was probated in Korea.

Then after he passed away, the IRS assessed FBAR penalties.

“On November 21, 2014, the IRS assessed a penalty against Mr. Park of $3,509,429.50, fifty percent of the value of his foreign bank accounts, for his willful failure to file a timely FBAR form for 2008. The penalty remains unpaid.”

Now the IRS is going after his widow and children.

IRS Post-Death FBAR Assessment

In this situation, yes, unfortunately the court held they can go after the family for the decedent’s FBAR Penalties.

Government’s FBAR Claim

The government’s complaint (which has been amended multiple times) essentially is broken down into 7 counts:

  • Count I, to reduce the 2008 FBAR civil penalties to judgment
  • Count II, liability of the Trust for the 2008 FBAR penalties
  • Count III, for Illinois common-law transferee liability against Mrs. Park and the Park children
  • Count IV, fiduciary liability against Mrs. Park as trustee of the Trust and de factor representative of Mr. Park’s estate
  • Count V, to set aside fraudulent transfers of Trust assets to Mrs. Park and the Park children
  • Count VI, to set aside fraudulent transfers of other assets held by Mr. Park to Mrs. Park and the Park children; and
  • Count VII, for an accounting of transfers of Trust assets and other assets owned by Mr. Park. 

Inter-Family Transfers

Mr. Park involved his children and spouse in many of transfers of unreported money. These would be the same people directly responsible for overseeing the distribution of the estate.

Government’s Basis for Post-Death FBAR Penalty Assessment

The decedent had some facts (okay, may facts) going against him. 

As alleged by the IRS:

“The government claims that Mrs. Park and Charles are liable for the FBAR penalty assessed against Mr. Park as representatives of his estate.

With respect to the FBAR claim, the government alleges the following core facts:

A judge of this district entered a judgment of some $16 million against Mr. Park and his businesses, which they did not fully satisfy;

In the midst of subsequent bankruptcy proceedings, Mr. Park fled the country;

 Mr. Park timely filed a 2007 FBAR form, disclosing three accounts, but did not timely file a 2008 FBAR form by June 30, 2009;

Following reports that Swiss banks were cooperating with the United States government by revealing information about foreign accounts held by United States residents (and after UBS revealed such information about Mr. Park’s accounts), advisors began to counsel taxpayers to file amended tax forms disclosing such accounts for prior years;

On June 10, 2010, Mr. Park filed a delinquent 2008 FBAR form1 disclosing ten foreign bank accounts, some of which he had not previously disclosed, which held more than $7 million; and

The IRS assessed an FBAR penalty for 2008 on November 21, 2014.”

Was Mr. Park Willful?

The court relies on the fact that even if “intentional” willfulness cannot be shown, there are lower standard of FBAR willfulness as well.

As provided by the court:

[Defendant] argues that the allegations are not sufficient to support a reasonable inference that Mr. Park acted willfully, based on United States v. Pomerantz, No. C16-689, 2017 WL 2483213, at *3 (W.D. Wash. Jun. 8, 2017).

See also Bedrosian v. United States, 912 F.3d 144, 152-53 (3d Cir. 2018) (defining “willfulness,” in the context of a claim for an FBAR penalty, as knowing or reckless conduct).

But the government points out that the Pomerantz court later held in a subsequent decision that the government’s amended complaint contained sufficient allegations of a willful FBAR violation because the penalized party had properly filed FBAR forms in prior years, so he clearly knew of the requirement and how to satisfy it:

Court Dismisses Reliance on Garrity

A few courts held Willful penalties were limited to $100,000 annually, based on an outdated regulations. Most courts disagree – as does this court.

Post-Death FBAR Assessment

This is the crucial part of the court’s analysis — why the IRS can still assess penalties, after he died…

[Defendant] argues that no FBAR liability arose until the IRS assessed a penalty against Mr. Park on November 21, 2014, more than two years after his death.

If the claim arose after Park’s death in July 2012 and after the distribution of his Korean “estate” between November 2012 and January 2013, the argument goes, then there is no claim, as Mr. Park could not have paid the FBAR penalty after his death, and neither Charles nor any other representative of Mr. Park’s estate could pay a penalty before it existed.

FBAR Accrued vs. FBAR Assessment

The government responds that, as an initial matter, its claim for FBAR liability accrued not on the date of the assessment but on June 30, 2009, the date Mr. Park’s 2008 FBAR form was due. See 31 C.F.R. § 1010.306(c).

As the Tenth Circuit explained, in a separate but analogous context:

A tax debt is created by the Tax Code, not the assessment process. See United States v. Drachenberg, 623 F.3d 122, 125 (2d Cir. 2010) (“A tax deficiency arises by operation of law on the date a tax return is due but not filed; no formal demand or assessment is required.”).

The IRS “‘assessment’ refers to little more than the calculation or recording of a tax liability.” United States v. Galletti, 541 U.S. 114, 122 (2004).

The Court agrees with the government’s position.

The estate of a taxpayer who fraudulently concealed a portion of his income during his lifetime, but died before he personally filed a fraudulent return, cannot thereby “avoid a liability the taxpayer himself could not have avoided if his conduct had been uncovered while he was alive.” See Kahr v. Comm’r, 414 F.2d 621, 626 (2d Cir. 1969).

By the same logic, the estate of a person who willfully fails to file an FBAR form during his lifetime cannot avoid the penalty that the person could not have avoided if he had lived. Schoenfeld, 344 F. Supp. 3d at 1375-76 (citing, inter alia, Kahr). In Schoenfeld, the court reasoned that “remedial,” rather than punitive, claims typically survive a party’s death, 344 F. Supp. 3d at 1369-70, and courts have frequently held that actions to recover tax penalties are remedial, not punitive, id. at 1371, in part because the purpose of such penalties, among other purposes, is to reimburse the government for the heavy cost of investigating violations of its tax laws, 1372- 73.

Personal Representative FBAR Liability

The court relies on the following statute and analysis to pursue a claim against the Personal Representative:

FIDUCIARY LIABILITY OF CHARLES PARK UNDER 31 U.S.C. § 3713 Section 3713 provides as follows:

(a)(1) A claim of the United States Government shall be paid first when

(A) a person indebted to the Government is insolvent and– (i) the debtor without enough property to pay all debts makes a voluntary assignment of property; (ii) property of the debtor, if absent, is attached; or (iii) an act of bankruptcy is committed; or

(B) the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor.

(2) This subsection does not apply to a case under title 11. (b) A representative of a person or an estate (except a [bankruptcy] trustee) paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government

The government alleges not only that Charles knew of the FTC lawsuit, the bankruptcy, and his father’s flight to South Korea, but also that he knew of efforts Mr. Park had made to put assets such as the family home beyond the reach of creditors and that he held assets in foreign bank accounts and other valuable foreign property. (3d Am. Compl. ¶¶ 56-57, 91-92, 94-95.)

Based on these allegations as well as others (see id. ¶¶ 25, 36- 40, 56-62), it is plausible that Charles’s familiarity with Mr. Park’s business and personal affairs might have put him on notice of facts that would lead a reasonably prudent person to inquire as to a potential tax debt or FBAR penalty arising out of the years following the FTC judgment and prior to the filing of the amended tax forms for those years in 2010.

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