Do You Have to File FBARs for Inherited Foreign Bank Accounts?
There can be a lot of confusion around who has a duty to report inherited assets. If you inherited foreign bank accounts from your parents, relatives, or loved ones, you need to know about the IRS reporting requirements, or you could end up paying hundreds of thousands in willful FBAR penalties.
Taxpayer Claimed Inherited Foreign Bank Account Wasn’t His Decades Later
The Goldsmith family has owned a Swiss bank account for decades. Robert Goldsmith’s father opened a bank account at Basler Kantonalbank sometime prior to his death in 1982. At that time, Mr. Goldsmith’s mother inherited the account. She added Mr. Goldsmith as a signatory. Then, in 1989, Mr. Goldsmith’s mother died. Goldsmith inherited his mother’s estate, including several commercial properties and the foreign bank account containing hundreds of thousands of dollars.
Goldsmith went to Switzerland to take over management of the account that same year. He moved the funds from a named account to a numbered account, added his wife and son as signatories, held annual meetings with an account advisor, and withdrew funds for personal expenses, including European vacations for himself and his son. But when the IRS investigated whether he had willfully failed to file Reports of Foreign Bank Accounts (FBARs) on the inherited foreign bank account, Goldsmith’s attorneys argued it was not clear whether he owned the account, and whether it was “account” or a “fund” (though this would not affect the reporting requirements).
Who Has to File FBAR Forms?
These kinds of family bank accounts can sometimes create unusual questions about ownership and reporting requirements. While Mr. Goldsmith appears to have inherited his family’s foreign bank account directly, in other cases the account may be held jointly with siblings or other relatives, or it may be owned and managed by a trust for the benefit of several family members. In these cases, it may not be clear who has the responsibility to file FBARs on the inherited foreign bank account.
The Bank Secrecy Act requires taxpayers to disclose foreign financial accounts with a balance of at least $10,000 in US dollars at any point during the preceding tax year. This applies to any U.S. taxpayer who has “a financial interest in, or signature authority over” a “bank securities, or other financial account in a foreign country.”
That means you may be required to report your family bank account long before you officially inherit it. Aging parents often make their children signatories on their accounts to assist with account management and ease the inheritance process. However, once a family member is a signatory, it triggers the FBAR reporting requirement. If you are a trust beneficiary, you could still be required to file an FBAR on the trust’s foreign bank accounts if your beneficial ownership of the trust assets exceeds 50%.
Managing the Family Accounts Can Create Unknowing Willful FBAR Violations
However, not every failure to file FBARs carries the same penalty. Mr. Goldsmith was assessed a $273,846.00 willful FBAR penalty covering 2008 through 2010. Other taxpayers may face far less severe consequences based on the balance of the accounts, and whether they willfully or recklessly failed to file the required forms.
In Mr. Goldsmith’s case, his hands-on approach to managing the family account led the IRS and the U.S. District Court for the Southern District of California to believe his failure to file was willful. The Court established that Goldsmith had “constructive knowledge” of his FBAR reporting requirement based on the fact that he:
- Transferred the account from a named to a numbered account
- Managed the account, traveling to Switzerland to meet with the account advisor every year
- Paid for a mail hold allowing the bank to destroy his statements
- Signed several Qualified Intermediary forms warning him of potential tax implications
- Withdrew funds during his travels to Europe
- Omitted the inherited foreign bank account from the annual questionnaire he submitted to his CPA
- Failed to pay income tax on the interest generated by the account
- Repatriated over $200,000 when the account closed in 2012
The Court reaffirmed the fact that the IRS need not prove a taxpayer knowingly violated the FBAR reporting requirement, saying:
“If courts required the Government to prove a knowing violation in order to recover civil penalties, such penalties would rarely be recovered because taxpayers rarely admit . . . to knowingly violating the law.”
What This Means for Beneficiaries
Cases like US v Goldsmith serve as a warning for heirs and beneficiaries who inherit foreign bank accounts. Sorting out estate taxes and other tax implications as a trust beneficiary or heir under a person’s will can be difficult, but it is important not to ignore the IRS’s additional reporting requirements for inherited foreign financial accounts. If your family owns accounts overseas, even if you are only an alternate signatory, you should talk to a tax attorney with international tax reporting experience to see whether you should be filing FBARs. Otherwise, you could end up paying a substantial part of your inheritance to the IRS.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions about your obligation to report inherited foreign bank accounts, contact Joe Viola to schedule a free consultation.