The death or disability of a taxpayer who has failed to timely file a Report of Foreign Bank or Financial Account (FBAR) can present difficult problems for fiduciaries like trustees, estate executors and conservators. The fiduciary has an absolute obligation to gather the assets of the estate of a taxpayer who is mentally or physically disabled or who is deceased and to properly account to estates creditors and beneficiaries. Among the assets to be included in the accountings are foreign held assets, including foreign financial accounts, such as bank accounts and brokerage accounts. Locating these accounts is not always easy and often the taxpayer is not cooperative because of their disease process (such as Alzheimer’s) or disability (stroke or heart attach) or has passed away. However, when the fiduciary finds evidence of offshore accounts it is incumbent upon the fiduciary to make a thorough search to find all records of the taxpayer relating to the account and determine if the taxpayer is in compliance with FBAR reporting and income tax reporting for the offshore account. The fiduciary faces personal liability if he/she finds evidence of an offshore account and does not timely file currently due FBAR and properly report the accounts for income tax purposes. The question is what about delinquent FBAR’s and unreported income from the offshore accounts.
If a fiduciary finds evidence of unreported offshore accounts, then the proper approach is to determine if the taxpayer is otherwise eligible to make a voluntary disclosure under the offshore voluntary disclosure program of 2012 (OVDP). The fiduciary can apply to enter the OVDP on behalf of the taxpayer’s estate, including conservatorship estate, and should do so. The FBAR penalties range from no penalty for Reasonable Cause (which is based upon a reasoned opinion letter from a lawyer) to $10,000 per year per account for non-willful violations to the greater of $100,000 or 50% of the highest account balance per year per account for willful violations (the 50% penalty). A criminal penalty is also possible which may include time in custody and the 50% penalty. The 50% penalty is based upon a finding that the taxpayer had the specific intent to avoid filing an FBAR and otherwise not disclose the offshore account and report it income. The OVDP offers a relief from potential criminal prosecution in exchange for a single integrated 27.5% FBAR penalty. The 27.5% penalty, known as a civil miscellaneous penalty is calculated based upon the highest single year account balance for the 8 years covered (2004-2012) by the OVDP. The civil miscellaneous penalty also includes the penalties for some other unfiled information returns, like the “controlled foreign corporation” return and “Report of Foreign Gift, Deive of Bequest”.
A fiduciary may have difficulties convincing potential beneficiaries of the estate that coming forward is the proper approach. The pressure from beneficiaries should not intimidate a fiduciary who may face personal liability for making a conscious independent decision not to come forward. An alternative approach is to enter the OVDP and clearly disclosure the underlying facts, including when appropriate, evidence of the taxpayer’s mental incapacity at the time the FBAR’s were due. If the estate is large enough mitigating the risk of a finding of specific intent (willfulness) can be a reason to consider “opting out” of the OVDP once a settlement is proposed by the IRS.
A further manner of immunizing a fiduciary from claims of beneficiaries is for the fiduciary to ask for court approval to retain counsel to make the OVDP recommendation and get court approval for key decisions. Being a fiduciary is risky enough, but when offshore accounts are involved the fiduciary is best advised to proceed with caution.