There may have been a time when inheriting an unreported offshore financial account was not problematic; but not today. The executor/trustee of the estate of the decedent has fiduciary responsibility to IRS and faces personal liability if the fiduciary does any of the following:
(1) The executor distributed assets of the estate.
(2) The distribution rendered the estate insolvent.
(3) The distribution took place after the executor had notice of the government’s claim
What if the decedent had an unreported offshore financial, what should the fiduciary do? The first thing to do is locate the bank accounts and obtain the bank records. The best place to start is with the records of the decedent. All U.S. taxpayers with offshore accounts must maintain records of those accounts for the last five consecutive years under the Bank Secrecy Act. However, many offshore account holders had “mail hold” orders at their financial institutions so records in the possession of the decedent at the time of death may not be adequate, therefore it may be necessary to reach out to the financial institutions themselves. This could be an intense process as bank secrecy laws and financial institution policies vary. The efforts of the fiduciary should be carefully documented. Beneficiaries should be made aware of the process and potential for delay in distributions.
Second, the fiduciary should determine if account distributions were made to estate beneficiaries or others based upon “payable on death” instructions on the financial account. This is important for purposes of potential disclosures in a voluntary disclosure filing. The payment of account proceeds to an account beneficiary will not relieve the fiduciary of reporting any unreported income for prior years. The income tax liability will be an obligation of the estate.
Third, where necessary the fiduciary should hire experience counsel and to determine if an offshore and/or domestic voluntary disclosure is appropriate. Counsel should hire an independent forensic account to assist in evaluating the potential for unreported income and the need to amend returns.
Fourth, if assets are located in a Sanctions Country (such as Iran or Cuba) then the executor should ask counsel whether a license is needed from the U.S. Dept. of Treasury, Office of Foreign Asset Control (OFAC) to hire local counsel and/or make distributions.
Fifth, the fiduciary should determine why foreign bank account reports (FBAR) were not timely filed. A reason may be that the account balance never reached $10,000 annually and therefore an FBAR was not necessary. The fiduciary must then carefully evaluate its risks and decide whether it should enter the Offshore Voluntary Disclosure Program (OVDP). The wrong guess here could subject the fiduciary to personal liability for an inappropriate distribution in violation of the Internal Revenue Code and for FBAR and other penalties. The FBAR penalties range up to $100,000 or 50% of the high annual account balance, per account per year for “willful” violations. If beneficiaries insist on distributions after being advised of the risk of distribution, then all parties could be jointly liable.
The potential for fiduciaries being penalized for failing to come forward upon discovery of an offshore account whether they make distributions or not cannot be overstated. The IRS and Department of Justice will view the fiduciary as a participant in the plot to avoid reporting and the result will be harsh.