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Based on my 32 years of experience as a senior attorney at the International office of the IRS, I am revealing some of the strange and exotic problems that I came upon while auditing roughly 1,500 estate tax returns and preparing about 300 of the same in the last few years.

After we get through the information about the decedent himself, we reach an area of the return, Part III, General Information. Most of it is pretty obvious but… The first area of major concern may be whether the decedent died intestate. Many people who have assets in several countries have country specific wills, for instance one for the United States and one for say Canada, England etc. If the decedent did die testate, one should always include the US will. If there are other wills, go through them carefully before you submit them to the IRS because they make contain data which would create questions or problems with the IRS. In the alternative, many folks have a Universal Will which covers the disposition of assets in all countries. Because of the difference of rules from country to country, such a universal will may create problems with assets passing to a surviving spouse or a charity. 

Question five relates to whether the decedent owned jointly held property in the United States. If the taxpayer plans to include 100% of the value of the asset, then this question should pose no problems. Two potential problems come to light: if the decedent came from a community property jurisdiction, is one half of the value of the asset excluded by operation of law in the foreign country? If one wishes to exclude a portion of an asset from a decedent in a non-community property jurisdiction, Section 2040 of the IRC places the onus again, of proving contribution on the surviving co-tenant. This can sometimes be a very difficult task, especially if the property is been held for a substantial number of years and many records/canceled checks etc. have been destroyed over the years. 

Question six asks whether the decedent had ever been a US citizen. If the answer to the initial question is yes but at the time of death, the decedent is no longer a US citizen, it is necessary to include in the paperwork sent to the IRS some evidence that the decedent properly expatriated from the United States. Based on the timing, if this happened shortly before death, it could raise the issue of expatriation to avoid tax. Again, getting this information before preparing the return is a good way to avoiding embarrassment at  the examination.

Have a US Estate Tax Problem?

 

Estate Tax Problems Require

an Experienced Estate Tax Attorney

 

 

 

Contact the Tax Lawyers at

Marini & Associates, P.A.

 

 

 for a FREE Tax Consultation Contact US at

www.TaxAid.com or www.OVDPLaw.com

or Toll Free at 888-8TaxAid (888 882-9243).

 

Robert S. Blumenfeld  - 

 Estate Tax Counsel

Mr. Blumenfeld concentrates his practice in the areas of International Tax and Estate Planning, Probate Law, and Representation of Resident and Non-Resident Aliens before the IRS.

Prior to joining Marini & Associates, P.A., he spent 32 years as the Senior Attorney with the Internal Revenue Service (IRS), Office of Deputy Commissioner, International.

While with the IRS, he examined approximately 2,000 Estate Tax Returns and litigated various international and tax issues associated with these returns.As a result of his experience, he has extensive knowledge of the issues associated with and the preparation of U.S. Estate Tax Returns for Resident and Non-Resident Aliens, Gift Tax Returns, Form 706QDT and Qualified Domestic Trusts.

 

 

 

The Court of Federal Claims, granted summary judgment in IRS' favor earlier this year, determining that a taxpayer's failure to file a Report of Foreign Bank and Foreign Accounts (FBAR or FinCEN Form 114 was willful and upheld IRS's imposition of a $697, 229 penalty, i.e., an amount greater than the $100,000 maximum set out in regs that have not been removed despite a statutory increase in the penalty amount.

Under 31 USC 5314(a) and 31 C.F.R. 1010.350, every U.S. person that has a financial interest in, or signature or other authority over, a financial account in a foreign country must report the account to IRS annually on an FBAR. The penalty for violating the FBAR requirement is set forth in 31 USC 5321(a)(5). 31 USC 5321(a)(5)(A) provides that the Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of 31 USC 5314(a).

The maximum amount of the penalty depends on whether the violation was non-willful or willful. The maximum penalty amount for a nonwillful violation of the FBAR requirements is $10,000. (31 USC 5321(a)(5)(B)(i)) The maximum penalty amount for a willful violation is the greater of $100,000 or 50% of the balance in the account at the time of the violation. (31 USC 5321(a)(5)(C), 31 USC 5321(a)(5)(D)).

The penalty amounts described above reflect a 2004 law change that increased the maximum civil penalties that can be assessed for willful failure to file an FBAR. Before that change, the maximum penalty was $100,000. Regs that were promulgated before the statutory increase continue to reflect the former $100,000 maximum (as opposed to the "greater of $100,000 or 50%" maximum). (31 C.F.R. 1010.820(g)). There is currently disagreement amongst courts as to whether the 2004 statutory amendment invalidated the $100,000 cap established by 31 C.F.R 1010.820. 

Alice Green, the taxpayer, is a U.S. citizen. Sometime prior to '80, her parents opened an investment account at the Union Bank of Switzerland (UBS account) and designated Alice as a joint owner.Alice's father was Jewish, and members of his family had been killed in the Holocaust. According to Alice, her father's intent with respect to the UBS account was to provide Alice with funds in case she needed to escape America. The money in the UBS account was only to be used in an emergency, and its existence was to be kept a secret.

In 2008, Alice learned from a newspaper article that the U.S. was “putting pressure on UBS to reveal the names of people who had secret accounts in UBS" and retained counsel to comply with foreign reporting requirements. On June 30, 2008, the balance in the UBS account was $1,365,662, and the balance in the HSBC account was $134,130.

Alice didn't report any investment income from either account on her original income tax returns from 2004 through 2008 despite having income each year. She also answered a question on those tax returns regarding the existence of reportable foreign financial accounts in the negative for three of those returns, and left the question blank on the fourth. The instructions for that question indicated that a "yes" answer would mean that an FBAR should be filed. Alice didn't file FBARs during these years.

In 2009, Alice applied, and was accepted, to the Offshore Voluntary Disclosure Program (OVDP). As part of her participation in the OVDP, in 2011, she filed amended tax returns for 2003 through 2008 reflecting the unreported investment income. On her 2007 amended returns, she also changed her answer to "yes" regarding the existence of a foreign account, but left it unchanged on the others.
She negotiated a closing agreement with IRS in 2012 that required her to pay the tax liability due as well as a $377,309 penalty.

She Decided Later To Withdraw From The OVDP,
On Account Of The Penalty Amount and 

"Take Her Chances." 

 

 

IRS began an examination in 2013 and concluded that Alice's failure to file an FBAR for 2007 was willful based on facts including the value of the UBS account, her repeated failure to disclose the accounts and income therefrom, her efforts to conceal their existence, and her active involvement with them. IRS recalculated the total penalty as $697,229, i.e., 50% of the UBS account balance in 2007 and assessed the penalty in 2016, which Alice paid in full then filed a claim for refund. 

The Court of Federal Claims concluded that Alice's 2007 failure to file an FBAR was willful, finding that her actions were voluntary and that she knew of the requirement vis-a-vis her affirmative answer to the question on her amended 2007 return regarding the existence of foreign reportable accounts. In so holding, the Court rejected Alice's construction of the term "willfulness" as meaning criminal behavior and requiring more than a simple failure to check a box and file an FBAR, and found that Supreme Court precedent supported treating reckless conduct as "willful" for various purposes.

Finally, the Claims Court found that the $100,000 maximum in the regs was no longer valid in light of the new statutory maximum. The Court noted that IRS has stated, in the Internal Revenue Manual (IRM), that while its regs hadn't been revised to reflect the change in the penalty ceiling, the statute raising the maximum was "self-executing and the new penalty ceilings apply." (IRM § 4.26.16.4.5.1)

The Court found that the reasoning of recent district court cases reaching a contrary conclusion (e.g., U.S. v. Colliot, (DC TX) 121 AFTR 2d 2018-1834) conflicted with the reasoning of the Federal Circuit in Barseback Kraft AB v. U.S., (CA Fed Cir 1997) 121 F.3d 1475, which held that certain pricing regs, while not formally withdrawn, had been rendered invalid by an intervening law change.

Now Alice Kimble has asked the appeals court in a brief filed on April 30, 2019, to reverse the U.S. Court of Federal Claims’ ruling that she had willfully failed to disclose her account at UBS AG. She asked the court to decide that the Internal Revenue Service by law cannot impose a penalty of greater than $100,000 for willful failure to file a Foreign Bank and Financial Accounts report.

Do You Have Undeclared Income

From An Offshore Bank ?

 

 

Is Your Name Being Handed Over to the IRS?

  

Want to Know Which Remaining IRS Program

 is Right for You? 

 

Contact the Tax Lawyers at 

Marini & Associates, P.A.   

 

 

for a FREE Tax Consultation contact us at:

www.TaxAid.com or www.OVDPLaw.com or

Toll Free at 888-8TaxAid (888) 882-9243