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Can the IRS Collect Non-Willful FBAR Penalties from a Deceased Taxpayer’s Estate?

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There’s an old saying that nothing is inevitable but death and taxes. But in a fight between the two, which one wins? If a person dies before paying off an assessment, can the IRS collect non-willful FBAR penalties from the deceased taxpayer’s estate?

Non-Willful FBAR Collections Case Creates Problems for Naturalized Family

The IRS took Jagmail Gill to court in December 2019. They said that Gill, a naturalized U.S. citizen, had failed to disclose signatory authority and control over numerous foreign financial accounts between 2005 and 2010. He hadn’t meant to. Still, the IRS had assessed non-willful FBAR penalties of $740,848 against Jagmail, and another $55,304.55 against his wife Amajit Gill in a separate FBAR collections case. The Gills objected, and the two cases were consolidated into one.

FBAR Collections Case Goes on After Taxpayer Dies During Pandemic

Then, Jagmail Gill died. He passed away in the United Kingdom on April 2, 2020, -- in the early days of the COVID-19 pandemic. The turmoil caused by the Coronavirus meant that the Gill family was unable to start his probate estate or name a personal representative for several months.

Still, the FBAR collections case went on. In July 2020, the IRS asked the United States District Court in the Southern District of Texas to appoint someone to represent Mr. Gill’s estate. Mr. Gill’s tax attorney objected, saying that the IRS could not collect non-willful FBAR penalties from Mr. Gill’s estate, so no representative was necessary. Citing the need to be flexible during a “very unusual situation,” the Court stayed the case instead, putting the FBAR collections on hold until a representative could be appointed.

On March 15, 2021, nearly a year after Mr. Gill’s death, Mrs. Gill notified the court that she was officially appointed as the personal representative of Jagmail Gill’s estate, and the court reopened the case. She immediately filed a motion to dismiss saying the IRS could not collect non-willful FBAR penalties from the estate because the claim died with Jagmail.

Are Non-Willful FBAR Penalties a Remedy or a Punishment?

Whether an FBAR penalty assessment can survive a taxpayer’s death depends on whether it qualifies as a “civil action for damages” under federal law. If a lawsuit is filed to compensate the government for some injury done, it will survive so the government can collect a remedy for that injury.

However, if there is “no direct injury,” then the government’s claim isn’t for compensation. Instead, it is a penalty similar to a jail sentence in a criminal case. The deciding factor was whether a non-willful FBAR penalty was remedial or penal in nature.

The court applied two sets of factors. In re Wood applied more generally to the question of survivability, and asked:

  1. Whether the purpose of the statute was to redress individual wrongs, or more general wrongs to the public
  2. Whether the recovery runs to the individual harmed or the public
  3. Whether the recovery was wholly disproportionate to the harm suffered

The court also considered the factors from Hudson v United States, which the court found better suited to cases where the government itself was a party:

  1. Whether the sanction involved an affirmative disability or restraint (preventing someone from doing something)
  2. Whether it was a historical form of punishment (monetary fines are not)
  3. Whether the person’s intent or state of mind is considered (called “scienter”)
  4. Whether the law promotes the traditional aims of punishment (retribution and deterrence)
  5. Whether the behavior involved is already a crime
  6. Whether there is an alternative purpose that could be assigned to it
  7. Whether the sanction is excessive compared to that alternative purpose

Court Asks What is the Purpose of Non-Willful FBAR Penalties?

The court looked at the purpose of the Bank Secrecy Act -- the law that requires taxpayers with foreign financial accounts over $10,000 to file FBAR forms. Congress had designed the law to “improve compliance” with reporting requirements to “combat[] terrorism” and prevent “abusive tax schemes and scams.” Laws punishing non-willful violations, like Mr. Gill’s, targeted a broader audience to deter non-compliance, rather than simply compensating the government for the cost of pursuing those who violated the reporting regulations. In addition, the IRS Manual itself says FBAR penalties are designed to “promote compliance with FBAR reporting and recordkeeping requirements” in deciding whether to exercise discretion in assessing penalties. Still, the court wasn’t convinced the assessment was necessarily a penalty.

Can the IRS Collect Non-Willful FBAR Penalties from a Deceased Taxpayer’s Estate?

Other district courts had previously gone through similar analyses, labelling FBAR penalty collections remedial and able to survive the taxpayers’ deaths. These cases said that the collection of FBAR penalties was based on harm done to the government by requiring an investigation into the undisclosed accounts, and the possibility of unpaid taxes. They found the awards in those willful cases proportional to the scope of that investigation, since the penalties increased based on the size of the accounts. However, every one of those cases sought to collect a willful FBAR penalty. Did it matter that the IRS agreed Mr. Gill’s failure to file was non-willful?

The court observed that willful and non-willful FBAR penalties were different in two ways:

  1. Only willful FBAR penalties address the taxpayer’s state of mind when failing to file reports
  2. Non-willful FBAR penalties are based on the number of accounts, not their balances

However, these two factors did not sway the court from “remedy” to “punishment.” The court said that the non-willful FBAR penalties were still proportionate since the penalties increased with the number of unreported accounts, and therefore, the amount of work the IRS had to do to investigate them.

The lack of a mental state requirement “weighs even more heavily against a finding that the statute is penal since the violation here is not willful.” However, the court was not willing to dismiss the entire non-willful FBAR collections case based solely on the legal arguments, calling the issue a “close call.” The court denied the motion to dismiss to allow the parties to develop the case further before it made a final ruling after both sides presented evidence.

Collections of unpaid non-willful FBAR penalties can substantially reduce a taxpayer’s estate, leaving less money to provide for their families and their legacy. Without a binding decision from a higher court, those families will be left with uncertainty over whether the IRS can collect non-willful FBAR penalties from a deceased taxpayer’s estate.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding non-willful FBAR penalties against estates, contact Joe Viola to schedule a free consultation.

Categories: FBAR, Tax News

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