Income Tax Follows Actual Ownership of Foreign Account

by Sanford Millar

I have seen the following scenarios quite often in working with clients to determine whether a voluntary disclosure (OVDI) is appropriate and how they should report foreign account.

First, a parent or grandparent entrusts a younger generation family member with management of family assets. Often these assets are set aside by persons who are foreign nationals who are living outside the U.S. and not subject to U.S. taxation. The funds are often not reported to or in many cases are hidden from their native government. The persons engaging in this conduct are often oppressed minorities or expect to be political or religious refugees and the funds are flight capital.

Second, the account is often opened in the sole name of a member of the younger generation charged with fund management on the condition that he or she use the funds only as directed by the family elder. In cases that I see, the account holder is now a U.S. taxpayer.

The second circumstance I often see is where the elder family members deposit funds into an account and have members of the younger generation sign on as powers of attorney or beneficiaries. Often the funds are intended as either current or future gifts. The younger generation beneficiaries are U.S. taxpayers while the elder may not be or was not at the time the account was opened.

The reporting obligations follow the beneficial use of the funds in both cases. The U.S. taxes income and estates and gifts on a worldwide basis. So, if a U.S. person has actual dominion or control over the use and enjoyment of funds in foreign accounts, then the accounts are reporting laws and income from the accounts is includable in the U.S. persons tax returns. If the funds were acquired by gift or bequest a Report of Foreign Gift or Bequest(Form 3520) may also need to be filed.

Whether the U.S person has dominion or control over the account is determined by subjective and objective factors. Objective factors include (1) whether there is a written agreement between the parties and its terms, and (2) how the funds were actually used. Subjective factors are cultural backgrounds of the parties (what is the custom and practice for the specific community). In some cultures the parents open accounts in the names of their children and do not tell their children about the existence of the accounts for years.

I am often asked whether a voluntary disclosure (OVDI) should be filed by U.S persons who are in one of these scenarios. The answer is often, it depends. It depends on the facts. Most foreign financial institutions are or soon will begin to require proof of compliance with U.S. income tax laws in order to keep accounts in good standing if the account is in the name of a U.S. person. If a U.S. person has the ability to make independent decisions and use the funds and not previously filed FBAR’s or reported the income an OVDI filing may be warranted. In all cases where there is a purported claim of a gift of foreign account funds or an inheritance of such funds, an explanation must be provided to establish “reasonable cause” for not filing the proper information returns (Report of Foreign Gift or Bequest) on a timely basis to avoid severe penalties.

As the IRS focuses more and more resources on international tax evasion techniques and tax evasion careful reporting is a must to avoid penalties, including penalties for tax evasion, tax fraud and FBAR penalties.



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Sanford Millar, Law Offices of Sanford I. Millar | Attorney Advertising

Written by:

Sanford Millar

Law Offices of Sanford I. Millar on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.