Who Has to Disclose Foreign Financial Accounts on FBARs?

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Understanding the reporting requirements for U.S. taxpayers with finances overseas can be confusing. It isn’t as easy as whose name is on the account. A recent Court decision provides a helpful guide to determine who has to disclose foreign financial accounts on FBARs.

Foreign Financial Assets Expand Across 271 Accounts in 10 Countries

Margelus Burga was a Romanian-born United States citizen who founded the mechanical engineering firm, Marburg Technologies, Inc. Francis Burga was a Philippine-born United States citizen who co-founded Magnebit Corporation. Their international financial holdings were broad and complicated.

The couple began a romantic relationship in 1990. They had two children in 1991 and 1993, and then they married in 1995. The couple then founded a new company in Glide/Write USA (GWUSA), with Francis holding officer positions in the company.

According to Francis, throughout their relationship, Margelus was physically and mentally abusive toward her, and was financially controlling, often preventing her from asking questions about the business’s finances. As a result, she often signed documents without asking what they were, or reviewing them.

In 1993, the couple opened a joint numbered bank account at what would later become Union Bank of Switzerland (UBS). This account was later divided into six sub-accounts, which were all included on the same statements.

In May 1995, Margelus hired Peter Meier, a financial advisor at the Liechtenstein Global Trust, to set up an entity called Aljohn in Lichtenstein to receive commissions from Lichtenstein, Japan, and Singapore. The next year, Margelus and Mr. Meier created the Romphil Foundation, a Liechtenstein stifung (like a trust), to hold Aljohn and other assets. The IRS called this the Structure. Margelus was the sole primary beneficiary of the stifung during his lifetime, with Francis and their children being named secondary beneficiaries upon his death.

In 1998, the Structure purchased Bakewell Assets, a British Virgin Islands shell company. Margelus, Francis, and Mr. Meier were all named directors and signed a resolution authorizing Bakewell to open bank accounts and purchase a property in Hawaii.

IRS Says Husband-and-Wife Business Owners Created Tax Fraud Structure

The IRS began investigating the Structure in 2007. The same day he was interviewed by the IRS, Margelus transferred the couple’s funds from the UBS accounts into a new stifung, Micadema. Over the next year, he also transferred all assets held by Romphil Foundation to Marfan, a third stifung in the Structure.

The Structure’s proceeds were used to buy a multi-million dollar home in Saratoga, California, real estate in Hawaii, pay the children’s boarding school tuition, purchase a vineyard in Italy, a luxury tile business, a Swiss investment company. According to the IRS, the Structure diverted $17 million in GWUSA profits.

No one filed FBARs for the couple for tax years 2004-2008. Then Margelus died in January 2010. Following his death, Francis learned about the Structure when she opened IRS letters to Margelus left in the home. She filed an FBAR on behalf of Margelus’s estate for 2009, but only reported 85 of the foreign accounts. She did not file an FBAR for her own accounts. As a result, following its audit, the IRS imposed the highest willful FBAR penalty in history against Margelus’s Estate and Francis Burga, seeking to collect “duplicative amounts of $52,581,604” for their failure to disclose 271 foreign accounts held in 10 separate foreign countries. The IRS then sued Francis Burga to collect the unpaid willful FBAR penalties.

When is an FBAR Required?

The Bank Secrecy Act requires filing of annual Reports of Foreign Bank and Financial Accounts (FBARs) if:

  1. The taxpayer is a United States citizen or lawful permanent resident
  2. The taxpayer “has a financial interest in, or signature or other authority over, a bank securities, or other financial account in a foreign country” (more on this below)
  3. The account has a total balance of $10,000

The IRS can impose FBAR penalties whenever the taxpayer was required to file an FBAR for a given tax year, but failed to do so. While non-willful failures can result in a penalty of up to $10,000 per year, if the taxpayer acted willfully the maximum penalty is increased to $100,000 or 50% of the balance of the account.

Who Has to Disclose Foreign Financial Accounts on FBARs?

The IRS asked the Court to decide who had to disclose foreign financial accounts on FBARs: Margelus, Francis, or both. Francis admitted that Margeus had a financial interest in all the accounts, but said that she only had a financial interest in the primary UBS account. In response, the District Court reviewed the three ways a person can be required to disclose a financial account:

Financial Interest

A person has a “financial interest” in an account if they are:

  • The owner of record
  • Hold legal title directly
  • Hold legal title through agent or nominee
  • Own at least 50% of a corporation that holds legal title over the account
  • Is a trust beneficiary receiving at least 50 percent interest where the trust holds legal title over the account

The IRS provided documentary evidence showing Francis’s signature on the primary UBS account, and bank statements showing each sub account listed under the primary account. This was sufficient to show Francis had a financial interest in all 7 accounts. However, after Margelus transferred the funds to Micadema, the Government was unable to show that the new bank considered Francis an owner of these accounts.

Signatory Authority

A person has “signature authority” if she can dispose of assets or property held by the account by delivering a document bearing her signature to the bank or account holder.

The IRS produced a bank document showing Francis’s signature on a 10,000 EUR withdrawal from one of the Structure’s accounts in December 2009. Even without a signature card, that withdrawal statement was enough to establish Francis had signature authority over the account. Similarly, the IRS presented a signature card in Francis’s name on another account in the Structure. Even though Francis ever exerted her signature authority, the Court said that the card was enough to show she “would have been able to transact with the bank using her signature.”

The Bakewell Assets were also analyzed based on Francis’s signatory authority. Here, the 1998 resolution she signed allowed Bakewell to open a bank account and purchase the Hawaii property. This was enough to show that she had signatory authority over those accounts.

Other Authority

For FBAR filings, “other authority” means that a person is able to “exercise comparable control over an account by direct communication” to the bank or account holder. This can include where the funds are at the person’s disposal, or where a disguised ownership structure allows a taxpayer to direct offshore investment of corporate profits.

The Court said that the IRS had failed to show that Francis held any other authority over the remaining accounts. She was not considered a beneficial owner under the stifungs until after Margelus’s death, and there were no documents showing she had an interest in the accounts. While Francis played a significant role in GWUSA’s business dealings, she was not involved in the company’s financial affairs, and was excluded from them through Margelus’s abuse. This meant a trier of fact could find she had no authority over the Structure’s remaining bank accounts.

Can Abuse Negate Willfulness for FBAR Penalties?

The Court here found that there was no question that Margelus willfully failed to comply with the FBAR filing requirements. However, Francis “presents a different set of circumstances” creating many questions about whether Francis should have known about the FBAR filing requirements, or could have found them out prior to Margelus’s death. Margelus maintained control over the company, the family finances, and their tax preparation, as a form of financial control and abuse. The Court said her signature on the tax returns were not enough to show willfulness. Her testimony about the abuse meant she could not easily have asked questions about the Structure or the family’s finances without facing further abuse.

However, after Margelus’s death, Francis took over operations of the company, and received letters from the IRS investigating the family’s offshore entities. By failing to disclose the family’s foreign financial accounts on her tax return and failing to file an FBAR in her own name that year, the Court said she willfully violated the FBAR reporting requirements for 2009. Similarly, she willfully failed to disclose all the foreign bank accounts held by the Estate that year. The Court said a reasonable person would have fully investigated the Structure and its holdings after Margelus’s death. Based on this, the Court granted the IRS a partial summary judgment, upholding willful FBAR penalties on some, but not all the family’s accounts.

The Burga case shows that knowing who has to disclose foreign financial accounts on FBARs isn’t always easy, or straightforward. It is important to fully disclose your financial holdings and work with an accountant and tax attorney who understand the foreign reporting requirements. Otherwise, you could end up facing willful FBAR penalties like Francis.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 35 years experience. If you have questions regarding willful FBAR penalties, contact Joe Viola to schedule a free consultation.

Categories: FBAR