Benjamin Franklin once famously wrote in a 1789 letter, “In this world nothing can be said to be certain, except death and taxes.” Many recognize the truth in Mr. Franklin’s statement. Some may also believe that certain death is an escape from certain taxes. Unfortunately, that is not necessarily the case. While death may offer personal freedom from taxation (and associated penalties and interest and reporting requirements), such taxes, penalties, interest, and reporting requirements may be left to haunt an individual’s estate (and by extension the individual’s beneficiaries). In a recent federal case, an individual’s failure to file Foreign Bank Account Reports (“FBARs”) resulted in a hefty judgment against his estate.
FBARs & Penalties, Generally
Generally, individuals with interests or accounts in foreign jurisdictions have various filing or reporting obligations. First, individuals must report their interests in foreign financial accounts by completing Schedule B, Part III, Line 7 of Form 1040:
7a At any time during 2020, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country?
If “Yes,” are you required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), to report that financial interest or signature authority?
7b If you are required to file FinCEN Form 114, enter the name of the foreign country where the financial account is located.
Second, and in accordance with Schedule B, Part III, Line 7, individuals may also have an FBAR filing obligation. Section 1010.350 states, in part:
(a) In general. Each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists and shall provide such information as shall be specified in a reporting form prescribed under 31 U.S.C. 5314 to be filed by such persons. The form prescribed under section 5314 is the Report of Foreign Bank and Financial Accounts (TD-F 90-22.1), or any successor form. See paragraphs (g)(1) and (g)(2) of this section for a special rule for persons with a financial interest in 25 or more accounts, or signature or other authority over 25 or more accounts.[1]
Further, such reports are required if the individual’s foreign financial accounts exceed certain threshold amounts:
(c) Reports required to be filed by § 1010.350 shall be filed with FinCEN on or before June 30 of each calendar year with respect to foreign financial accounts exceeding $10,000 maintained during the previous calendar year.[2]
Moreover, the Internal Revenue Service (“IRS”) may assess and collect penalties against individuals for failing to report their interests or accounts in foreign jurisdictions:
(g) The authority to enforce the provisions of 31 U.S.C. 5314 and §§ 1010.350 and 1010.420 of this chapter has been redelegated from FinCEN to the Commissioner of Internal Revenue by means of a Memorandum of Agreement between FinCEN and IRS. Such authority includes, with respect to 31 U.S.C. 5314 and 1010.350 and 1010.420 of this chapter, the authority to: assess and collect civil penalties under 31 U.S.C. 5321 and 31 CFR 1010.820; investigate possible civil violations of these provisions (in addition to the authority already provided at paragraph (c)(2)) of this section); employ the summons power of subpart I of this part 1010; issue administrative rulings under subpart G of this part 1010; and take any other action reasonably necessary for the enforcement of these and related provisions, including pursuit of injunctions.[3]
If such reporting failures are considered “willful,” individuals may be subject to steep penalties:
(C) Willful violations.—In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—
(i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—
(I) $100,000, or
(II) 50 percent of the amount determined under subparagraph (D), and
(ii) subparagraph (B)(ii) shall not apply.
(D) Amount.—The amount determined under this subparagraph is—
(i) in the case of a violation involving a transaction, the amount of the transaction, or
(ii) in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.[4]
U.S. v. Estate of Danielsen
In October of this year, the U.S. District Court for the Middle District of Florida issued a judgment against the estate of Mr. Dean Danielsen.[5] The government moved for default judgment against Mr. Danielsen’s estate, seeking the outstanding balance of federal penalties assessed against Mr. Danielsen for failing to file an FBAR regarding his interest in two foreign bank accounts pursuant to 31 U.S.C. § 5321(a)(5).[6]
Mr. Danielsen began selling Swiss annuities in 1993. In 1999, Mr. Danielsen formed Sugar Creek Stiftung (“Sugar Creek”) and funded it with $200,000. He then opened two foreign accounts in Sugar Creek’s name: one in Canada and one in Lichtenstein. Between 2003 and 2006, Mr. Danielsen transferred $646,294 into the two accounts. Further, between 2003 and 2008, Mr. Danielsen withdrew $13,639,253 from Sugar Creek’s two foreign accounts. The balances in the two foreign accounts exceeded $10,000 from 2006 to 2010.[7]
Mr. Danielsen failed to timely file FBARs to report his interest in the two foreign bank accounts. Additionally, he affirmatively answered “no” to the question of whether he had a foreign bank account on his 2006, 2007, and 2009 income tax returns. Consequently, the Secretary of Treasury assessed penalties in the amount of $5,466,892 for the years 2006 through 2009.[8] Mr. Danielsen later died, and his estate failed to pay the civil penalties.
The Court found in favor of the government, largely based on certain alleged facts:
Here, the Government alleged several facts suggesting Danielsen acted willfully. Notably, Danielsen filed FBARs in 1994 and 1995 for foreign financial accounts proving Danielsen knew of his obligation to file an FBAR in subsequent years. Moreover, Danielsen, under penalty of perjury and with knowledge of his bank accounts in Lichtenstein and Canadian, checked “no” when asked if he had a foreign bank account. These actions suggest Danielsen acted willfully in failing to report his ownership and interests in his foreign bank accounts.[9]
As a result, the Court granted the government’s motion for default judgment and entered a judgment of $6,418,880.09 (inclusive of interest) against the estate of Mr. Danielsen.[10]
Conclusion
This case is notable for a few reasons. First, a taxpayer’s failure to properly report his or her foreign interests or accounts while living could lead to his or her estate bearing substantial penalties and interest. If a taxpayer intends to leave his or her assets/estate to certain beneficiaries, bear in mind that such assets may never reach them if foreign interests were not properly reported.
Second, willfulness does not require actual knowledge. Willfulness simply requires reckless or careless disregard of one’s statutory duty.[11] The fact that Mr. Danielsen previously filed FBARs in earlier years suggested he knew his obligation to file FBARs in later years.
Finally, taxpayers are considered to have constructive knowledge of the contents of their tax returns. That means each question and line item in tax returns matter. Even more, reviewing the tax returns and other filing obligations matters. Failure to correctly report one’s foreign interests and accounts could be very costly.
International and Offshore Tax Compliance Attorneys
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[1] 31 C.F.R. § 1010.350(a).
[2] 31 C.F.R. § 1010.306(c).
[3] 31 C.F.R. § 1010.810(g).
[4] 31 U.S.C. § 5321(a)(5)(C)-(D).
[5] U.S. v. Estate of Danielsen, No. 2:19-cv-496-FtM-38NPM, 2020 WL 6163101 (M.D. Fla. Oct. 6, 2020).
[6] Id. at *1.
[7] Id.
[8] Id.
[9] Id. at *3.
[10] It should also be noted that Mr. Danielsen’s estate never filed a response to the government’s motion for default judgment, which is certainly a factor in this case.
[11] See generally Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007).
