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Most married couples manage their money together. They may hold accounts jointly, or each keep their names on their own assets. But according to a recent complaint filed by the United States Secretary of Treasury, even keeping accounts in one spouse’s name only may not be enough to prevent married couples from owing double when willful FBAR penalties are assigned.
Michael Ho has been a U.S. citizen all his life. He met his wife Li H. Tay overseas and she immigrated to the U.S. in 1994. Now they live together in California.
According to a complaint filed by the U.S. Treasury Department to collect civil FBAR penalties, Mr. Ho has retained a bank account with DBS Bank Ltd. in Singapore since 1991. In 2003, Ms. Tay was added as a joint account holder. The government says that each spouse used and benefited from the account personally, including using funds from the account to buy a life insurance policy on Mr. Ho’s life through a foreign insurance company.
In 2013 or 2014, the government says that Mr. Ho traveled to Singapore and opened a second account at OCBC Bank in his name only. Still, the government says that both spouses held a beneficial financial interest in the account. Specifically, it says the OCBC account was used to buy a rental property in Bangkok, Thailand.
Despite holding the DBS Bank account for years, the IRS says that Mr. Ho and Ms. Tay failed to disclose either bank account on their tax returns for 2011 through 2014 or file FinCEN Form 114 reports, called “Reports of Foreign Bank and Financial Accounts” or FBARs.
The Internal Revenue Service (IRS) started looking into Mr. Ho’s accounts as early as 2009. However, during audit interviews in 2009, 2013, and 2016, the Treasury Department says Mr. Ho denied having any foreign bank accounts. Ms. Tay said the same in 2016. However, later that year, their representative disclosed the DBS account, and the OCBC account came to light the following year. Mr. Ho and Ms. Tay then filed FBARs for 2015 and 2016, reporting their interests in the two accounts.
Based on these disclosures, the IRS determined that Mr. Ho and Ms. Tay had willfully failed to file FBARs on the two accounts (which together totaled more than $10,000 each year between 2011 and 2014). The IRS assessed the maximum penalty of $50,000 for each account each year except in 2012, when the penalty assessed was $30,489. With interest and late penalties, the total amount of the willful penalties was $249,808.90 as of May 1, 2020.
Those penalties were assessed against each spouse. In its complaint, the Treasury Department claimed that because both spouses were signatories or held a beneficial financial interest in each account, they each had a responsibility to disclose them by filing FBARs, and they each could be assessed separate penalties for failing to do so. As a result, the married couple owed double the willful FBAR penalties as would have been assessed against the same accounts held by one person alone.
While the Treasury Department says Ms. Tay was added as a signatory on the DBS Bank account in 2003, it makes no such claim regarding the OCBC account. Instead, its claim for willful FBAR penalties on the OCBC account was based on Ms. Tay’s beneficial financial interest in the account. According to the IRS FBAR Reference Guide, a financial interest could include:
Generally spouses are not required to file two copies of the same FBAR. However, to avoid paying willful FBAR penalties, the non-filing spouse must show that:
Where, as here, the IRS says the FBARs are missing, each spouse will be held responsible for the FBAR violation as long as each had a financial interest in the account.
However, it is not clear from the complaint alone how the Treasury Department determined that Ms. Tay held a beneficial financial interest in the OCBC account. She was not the title owner of that account or a joint signatory. It appears the government is attributing the purchase of the Bangkok rental property to her. However, the complaint does not say that the rental property was obtained in her name or for her benefit.
Whether the Treasury Department will prevail against both Mr. Ho and Ms. Tay remains to be seen. However, if successful, the government’s complaint shows that when spouses control foreign financial accounts together for their mutual benefit, they each must be certain that the IRS FBAR filing requirements are met. If they don’t, the married couple could end up owning double in willful FBAR penalties.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding spouses’ obligations regarding FBAR requirements or penalties, contact Joe Viola to schedule a consultation.