Could Your Estate Have to Pay Your FBAR Penalties?
When the IRS issues FBAR penalties against elderly taxpayers, they may have an instinct to ignore the issue and hope it goes away after their death. However, a recent United States District Court case, United States v Gaynor, says your estate could have to pay your FBAR penalties, even if you die before the collections case is ever filed.
Oil Heiress Assessed FBAR Penalties
George H. Gaynor (George Sr.) was the owner of Gery Trading, a Panamanian corporation, which held bank accounts in Switzerland starting in 2000. The funds moved between Swiss banks, before finally landing at Bank Frey. In July 2003, after 40 years of marriage, George Sr. passed away, leaving his wife, Lavern Gaynor, a United States citizen, as the sole beneficial owner of the Swiss account.
Lavern failed to file mandatory financial disclosures called FBAR reports between 2009 and 2011, during which time the Swiss account contained between $31.8 and $33.1 million U.S. dollars in 2009, between $32.3 and $34.6 million in 2010, and between $30.9 and $34.6 million in 2011. (The IRS and Gaynor’s estate disagree on the high balances in the accounts, and the matter has not yet gone to trial.) Given the high balances of those accounts, Lavern was legally required to file FBAR reports for each of the three years, even though her husband opened the accounts and she merely inherited them. The IRS assessed willful FBAR penalties against Lavern Gaynor:
- $5.7 million for 2009
- $6.1 million for 2010
- $5.5 million for 2011
IRS Sues Personal Representative for Unpaid FBAR Penalties
However, the IRS never sued Lavern Gaynor to collect the unpaid FBAR penalties. She died in April 2021. One month later, on May 14, 2021, the IRS sued her son, George N. Gaynor (George Jr.), who had been named her personal representative, to collect the penalties out of her estate. But George Jr. argued that he didn’t have to pay his mother’s FBAR penalties because the fines did not survive her death. The IRS then filed a motion for partial summary judgment, asking Judge John Badalamenti, of the United States District Court for the Middle District of Florida, Fort Myers Division, to determine whether FBAR penalties survive a taxpayer’s death and whether an estate has to pay for a dead taxpayer’s FBAR penalties.
At court, the parties agreed that Lavern had a legal obligation to file FBAR forms in 2009 through 2011, and that she hadn’t filed them until 2013. The question of whether those violations were willful was up to the jury to decide and not part of the IRS’s motion for summary judgment.
Court Says Fines Survive Death: Heirs Have to Pay FBAR Penalties
The Court focused on whether Levore’s estate would have to pay her FBAR Penalties. This issue had come up in other courts, where the judges had held that FBAR penalties do not abate (go away) on death. However, the issue was still unresolved in the Eleventh Circuit, and by extension the Middle District of Florida.
The Court noted that the Bank Secrecy Act does not contain any statutory language regarding survivability or indication of the Legislature’s intent. Thus, the question depended on whether the FBAR penalty was “remedial” or “penal”. Remedial action compensates a person for a harm suffered, while penal actions impose damages for a general wrong done to the public. Remedial actions generally survive the death of the party, but penal actions do not. The Court weighed 3 factors to decide if FBAR penalties were remedial or penal:
- Whether the purpose of the statute was to redress individual wrongs or more general wrongs to the public;
- Whether recovery under the statute runs to the harmed individual or to the public; and
- Whether the recovery authorized by the statute is wholly disproportionate to the harm suffered.
The Court also considered whether the statutory scheme was punitive, converting a civil remedy into a criminal penalty. Seven “Kennedy factors” applied to this consideration:
- Whether the sanction involves an affirmative disability or restraint
- Whether it has historically be regarded as a punishment
- Whether it comes into play only on a finding of scienter (wrongful intent)
- Whether its operation will promote the traditional aims of punishment – retribution and deterrence
- Whether the behavior to which it applies is already a crime
- Whether an alternative purpose to which it may rationally be connected is assignable for it
- Whether it appears excessive in relation to the alternative purpose assigned
These factors were used primarily in the context of Double Jeopardy for criminal cases. However, the Court found these factors instructive and broad enough to cover the three-factor test above.
The Court found that FBAR penalties were civil, rather than criminal, based on the title of the statute authorizing the sanction and the enforcement resting with the IRS, rather than the Justice Department. It found that
- Monetary fines are not an affirmative disability or restraint
- Nor are monetary penalties historically treated as punishment
- Because the IRS can issue a money penalty on any person who violates the filing requirement, there was no wrongful intent required, even though the amount of the penalty depended on willfulness.
- The Court acknowledged that “the FBAR penalty does seem to promote retribution and deterrence” but said all civil penalties do so, and some other civil penalties were still found to be remedial.
- It acknowledged that willful failure to file FBARs can result in criminal prosecution, but said that the separate criminal penalty “underscores Congress’s intention” that the monetary penalties “be regarded as remedial.”
- FBAR violations were held to deprive the Government of taxes on foreign investments and to force the government to spend resources investigating foreign accounts and prosecuting crimes, which meant the penalties redressed individual wrongs done to the individual, in this case the IRS.
- The FBAR penalties were neither excessive nor wholly disproportionate to the harm done to the government since the amount of the penalty correlated to the balance of the account.
Based on these reasons, the Court found that willful FBAR penalties were remedial and did not abate upon the taxpayer’s death. As a result, the estate could be required to pay Levore’s FBAR penalties. The Court refused to grant a windfall to FBAR violators simply because they passed away after violating the reporting requirements but before the IRS filed suit.
The Court’s decision in Gaynor is similar to decisions made elsewhere in the country about whether your estate may have to pay your FBAR penalties. For elderly taxpayers concerned about their loved ones’ ability to receive their inheritances after death, it demonstrates the importance of resolving your tax issues now, rather than leaving them unresolved in the hopes your death will erase what is owed.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 35 years experience. If you have questions about an estate’s obligation to pay FBAR penalties, contact Joe Viola to schedule a free consultation.