IRS Can Collect FBAR Penalties from Estate Distributees, Court Says
They say that nothing is certain except death and taxes. A recent decision by the United States District Court for the Southern District of New York says, between the two, taxes win. The judge granted the IRS authority to collect FBAR penalties from estate distributees after their father and husband died saying the penalties had already accrued 10 years earlier.
Husband, Father Dies During Audit, IRS Imposes Penalties Anyway
David Benishai was a U.S. citizen with several bank accounts in Israel. Between 2004 and 2010, he maintained three personal accounts and had signatory authority over six business accounts for two corporate entities. The accounts had a combined balance of at least $10,000, which meant that Benishai had an obligation to report those foreign financial accounts to the IRS by filing FBARs every year in addition to his tax returns.
He didn’t. Instead, on March 18, 2015, Benishai filed untimely FBAR forms covering the entire six year period. This triggered an audit, with the IRS investigating his failure to file FBARs in the intervening period. The investigation began in October 2015, and extended six times with the taxpayer’s consent. The last consent to extend the IRS’s six-year statute of limitations was filed on October 30, 2020, extending the government’s deadline to April 21, 2021.
But then, on January 6, 2021, Benishai died. His wife, Hanna Hendler, was named the personal representative of his estate, of which she and their daughter, Danielle Benishai, were estate distributees. Three months later, on April 21, 2021, the IRS imposed non-willful FBAR penalties totaling $250,000 against the now-deceased Benishai. (This amount was later reduced to $70,000 after a U.S. Supreme Court decision ruled that non-willful FBAR penalties could only be imposed one per yearly report, rather than per account not disclosed.) When the deceased failed to pay his debts (or receive his mail), the IRS sued his estate distributees, along with the estate itself, to collect the penalties.
Court Says IRS Can Collect FBAR Penalties from Estate
The case came before the United States District Court for the Southern District of New York. The estate distributees asked the Court to rule that the IRS waited too long to assess the FBAR penalties, and could not do so after Benishai died. They also asked the Court to determine that the taxpayer’s death extinguished the penalties, so the IRS couldn’t collect from the estate distributees later on.
But the District Court wasn’t convinced. The Judge said that the FBAR penalties accrued at the time the FBAR filings became overdue – that meant between 2005 and 2011 – not when they were imposed by the IRS. Even though the IRS did not assess the penalties until a decade later, the taxpayer’s liability was established while he was still alive. Now that the taxpayer died, the Court said the IRS could collect those penalties from the estate and its distributees.
Nor did the taxpayer’s death extinguish the debt. Unlike some claims, the Court said FBAR penalties don’t expire when the taxpayer does. The Court explained that whether a claim is extinguished by the death of the taxpayer depends on whether that claim is “penal” or “remedial” in nature. The Court said that, despite the name, FBAR penalties were designed in part to “reimburse the Government for its loss through fraud” and the costs of investigating and uncovering the unreported assets. This was enough to determine that FBAR penalties were remedial and therefore survived the taxpayer’s death.
This isn’t the first time a taxpayer’s estate has been held liable for his debts. In United States v Gaynor, and other cases, other courts have reached the same conclusion. In United States v Toth, which the Benishai Court cited, the First Circuit Court said that the remedial nature of the penalty also meant it wasn’t limited by the Eighth Amendment’s prohibition against excessive fines.
Estate Distributees’ Constitutional Defenses Fail, Too
The defendants in Benishai tried to raise constitutional defenses too, but the death of the taxpayer meant those defenses were worded differently than in Toth. The estate distributees argued that because Benishai was dead he necessarily could not exercise his Fifth Amendment right to Due Process, so the case could not be brought against him. However, the Court said that the estate could defend the deceased’s interests, and in fact had done so by filing a motion for summary judgment.
The estate distributees also argued that since the taxpayer had died any penalty was necessarily excessive under the Eighth Amendment. Unlike Toth, it was not the amount of the penalty that was being challenged. (The IRS had imposed a comparably limited $70,000, apparently finding the failure to file non-willful.) Instead, they argued “a punitive fine levied on someone who is dead is always excessive in any amount.” But as described above, the Court did not agree that the FBAR penalty was punitive. It had decided the FBAR penalty was not a fine and was remedial in nature. As a result, like in Toth, the Court held that the Eighth Amendment did not apply and the estate distributees were liable for their loved one’s unpaid FBAR penalties.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 35 years experience. If you have questions about an estate distributee’s obligation to pay FBAR penalties, contact Joe Viola to schedule a free consultation.
