Personal Representative Inherits Deceased's FBAR Penalty

Personal Representative Inherits Deceased’s FBAR Penalty

FBAR Penalty for Deceased Extends to Personal Representative 

Personal Representative Inherits Deceased’s FBAR Penalty: In the case of U.S. vs. Sitt, the  Government is in pursuit of FBAR penalties against the decedent’s estate — more specifically, the personal representatives of the estate. The U.S. Government filed a compliant against the personal representatives of the estate, alleging they owe close to $2M in FBAR Penalties that were timely assessed against decedent. 

The U.S. Government continues to aggressively enforce penalties for FBAR violations.

In the current case, the assessed FBAR penalties date back to 2011 unfiled FBAR. In 2018, the IRS assessed FBAR penalties against Ralph Tawil.

Thereafter, the taxpayer passed away and his daughters were named the personal representative of the estate. Now, it looks as if the personal representatives have inherited more than just Mr. Tawil’s money — they have also inherited his IRS headache.

The IRS seeks willful FBAR penalties, which can be assessed at 50% maximum value of the unreported accounts.

U.S v. Sitt (Case 1:20-cv-21672-XXXX)

As provided in the complaint:

“The United States brings this suit to obtain a judgment for civil penalties assessed against the Decedent, Ralph Tawil, for his willful failure to report his interest in foreign financial accounts pursuant to 31 U.S.C. § 5314 and its implementing regulations, as well as interest and late payment penalties that have accrued on those penalties.”

What is Section 5314?

Section 5314 refers to foreign bank account reporting.

As provided by the statute:

(a) Considering the need to avoid impeding or controlling the export or import of monetary instruments and the need to avoid burdening unreasonably a person making a transaction with a foreign financial agency, the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency.

The records and reports shall contain the following information in the way and to the extent the Secretary prescribes:

 (1) the identity and address of participants in a transaction or relationship.

(2) the legal capacity in which a participant is acting.

(3) the identity of real parties in interest.

(4) a description of the transaction.

(b) The Secretary may prescribe—

(1) a reasonable classification of persons subject to or exempt from a requirement under this section or a regulation under this section;

(2) a foreign country to which a requirement or a regulation under this section applies if the Secretary decides applying the requirement or regulation to all foreign countries is unnecessary or undesirable;

(3) the magnitude of transactions subject to a requirement or a regulation under this section;

(4) the kind of transaction subject to or exempt from a requirement or a regulation under this section; and

(5) other matters the Secretary considers necessary to carry out this section or a regulation under this section.

(c) person shall be required to disclose a record required to be kept under this section or under a regulation under this section only as required by law.

Obligation to Report Interest in Foreign Accounts

U.S. persons have certain requirements for reporting foreign accounts.

As provided by the compliant:

“Federal law requires every resident or citizen of the United States who has “a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country” to report that relationship to the Department of the Treasury annually. 31 C.F.R. § 1010.350(a); 31 U.S.C. § 5314(a).

To fulfill this requirement, a person must file a Form TD F 90-22.1, “Report of Foreign Bank and Financial Accounts,” commonly known as an “FBAR.” 31 C.F.R. § 1010.350(a). At the time of the violations alleged in this complaint, an FBAR was due by June 30 “of each calendar year with respect to foreign financial accounts exceeding $10,000 maintained during the previous calendar year.” 31 C.F.R. § 1010.306(c).

Any person who fails to report his or her interest in a foreign account may be subject to a civil penalty assessed by the Department of the Treasury. For violations involving the willful failure to report the existence of a foreign account, the maximum civil penalty that may be assessed is the greater of $100,000 or 50 percent of the balance in the foreign account at the time of the violation. 31 U.S.C. § 5321(a)(5).”

U.S. Alleges Willful FBAR Violations

When a person has not timely reported the FBAR by the due date, they may be subject to extensive fines and penalties, depending on extent of the non-compliance, and willful vs- non-willful.

Here, the U.S. alleges the Taxpayer was willful.

The decedent, Tawil, was a citizen of the United States.

He had various entities overseas.  It appeared that at times, he filed FBARs and other times, he didn’t file the requisite forms.

In addition, there was a significant amount of money in the accounts (upwards of $6-$7 million dollars).

Moreover, Tawil seemingly created entities for the sole purpose of hiding his identity — while still receiving withdrawals from the account.

He was what is referred to as the “Beneficial Owner” of the businesses.

Personal Representative vs. Estate

Marily Sitt and Sharon Sutton are the named defendants.

They are named as the Personal Representatives and not the Estate, because the U.S. Government may proceed against the Personal Representative, but not the estate.

Why?

In the case of U.S. v. Schoenfeld (FBAR case against Decedent’s Estate and Personal Representative), the court ruled that the U.S. Government can proceed against the personal representative and not the estate.

Estate FBAR Liability

As provided in U.S. v. Schoenfeld:

“Additionally, the Court is not persuaded that the Government can proceed based on equitable principles.

Although courts have broad “discretion in refusing to aid the unclean litigant,” the Government fails to provide any authority suggesting that this maxim may be used to allow a claim to proceed in the absence of a legal basis and against a defendant which lacks the legal capacity to be sued. 

Thus, despite the Court’s interest in “prevent[ing] a wrongdoer from enjoying the fruits of his transgression [and] avert[ing] an injury to the public,” Precision Instrument Mfg. Co. v. Auto. Maint. Mach. Co.324 U.S. 806, 815, 65 S.Ct. 993, 89 L.Ed. 1381 (1945), the fact remains that Section 2404 does not authorize commencement of this action against the Estate and the Estate is not a proper party to this suit. Accordingly, to the extent that the Estate seeks dismissal from this action, the Motion is due to be granted.”

Personal Representative FBAR Liability

As further provided in U.S. v. Schoenfeld:

“However, the Government may pursue its claim against Robert Schoenfeld (Personal Representative_

The Government alleges in the Amended Complaint that Robert Schoenfeld is a distributee of Steven Schoenfeld’s estate. See Amended Complaint ¶ 8.

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.” See Response at 22.

The issue of whether a distributee is a proper party to a lawsuit has come up most frequently in the context of determining who is a proper party for substitution under Rule 25. Rule 25 provides that “[i]f a party dies and the claim is not extinguished, the court may order substitution of the proper party.

This Court, applying Rule 25, has recognized that “substitution may be by an appointed executor or administrator of the deceased party’s estate, or by a distributee of a decedent’s estate, as a ‘successor.’ ” Valle v. Singer, No. 3:11-cv-700-J-34TEM, 2011 WL 13186681, at *8 (M.D. Fla. Dec. 7, 2011) (citations omitted) (emphasis added). Courts in other jurisdictions have reached the same conclusion. See In re Baycol Prods. Litig., 616 F.3d 778, 784-85 (8th Cir. 2010) (internal citations omitted); Sinito v. U.S. Dep’t of Justice, 176 F.3d 512, 516 (D.C. Cir. 1999) ; McSurely v. McClellan, 753 F.2d 88, 99 (D.C. Cir. 1985) ; Rende v. Kay, 415 F.2d 983, 985 (D.C. Cir. 1969) ; Petre, 2015 WL 6667770, at *2 ; Sequoia Prop., 2002 WL 32388132, at *3 (applying Section 2404 and extending the time for substitution until the appointment of a personal representative or distribution of the estate to identify the proper party for substitution); Hardy v. Kaszycki & Sons Contractors, Inc., 842 F.Supp. 713, 716 (S.D.N.Y. 1993) ; Gronowicz v. Leonard, 109 F.R.D. 624, 626 (S.D.N.Y. 1986) ; Ashley v. Ill. Cent. Gulf Railroad Co., 98 F.R.D. 722, 724 (S.D. Miss. 1983).

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.”

Why are FBAR Penalties against the Personal Representative Proper?

In the current case, as in Schoenfeld, the personal representative(s) are the children of the decedent and the beneficiary of the estate.

They will receive the money, which was the subject of penalty.

In other words, from the U.S. Government’s perspective, the penalty is attached to the money that formed the violation

Just because the money has changed hands, does not mean the penalty is absolved.

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