Failure to file the FBAR can result in serious civil and criminal penalties. The civil penalty for a willful violation to file is the greater of $100,000 or 50% of the amount in the unreported account and the penalty must be assessed within 6 years of the violation. Further, the US Government must commence a civil action within 2 years of the later of the date the penalty was assessed or the date any judgment becomes final in any criminal action.
On September 30, 2014 (within 6 years of 2008) the Internal Revenue Service (“IRS”) assessed a civil penalty against Steven for failure to file the FBAR in 2008 in the amount of $614,300 (1/2 of the balance in the account of $1,228,600). Steven never paid the penalty.
Steven died in Florida on August 21, 2015. The IRS had no knowledge of the death. While Steven had a will, no estate was opened in the Florida probate court. On September 29, 2016, (within 2 years of the assessment), the US Government sued Steven to reduce the penalty to a judgment and sent the complaint to the last known address of Steven.
On October 27, 2016, Robert’s attorney notified the IRS that Steven had died and the IRS filed an amended complaint on December 14, 2016 and included the estate and Robert as a defendant.
The Defendants moved to dismiss the complaint on three grounds:
The amended complaint was filed after the statute of limitations expired (September 30, 2016) and argued that the amended complaint could not “relate back” to the date of the properly filed original complaint of September 29 2016.
The Estate could not be sued as there was no Estate opened.
The civil penalty claim abated upon Steven’s death.
While too comprehensive to report in this short blog, the court, in a thorough 37 page opinion, analyzed federal case law and determined that “the weight of authority supports the conclusion that a complaint filed against a deceased individual is capable of amendment to cure that defendant’s lack of capacity”. Thus, an amendment was available to the Government to reflect the change from a living defendant to the estate. The next issue was whether the amended complaint could “relate” back in time to the date of the original complaint. The court determined that Rule 15(c) of the Federal Rules of Civil Procedure applied. Ultimately, the court found that “even though the Government knew of Robert Schoenfeld’s, existence, its belief that Steven Schoenfeld was alive constitutes a mistake for purposes of Rule 15(c)” and permitted the complaint to relate back to the date of the original complaint. Thus, the amended complaint was filed within the proper statute of limitations.
Next, the Government argued that the action could be asserted against the estate under Section 2404 of the United States Code. The court determined that such statute only applied to cases that were commenced PRIOR to the date of death of the defendant. In this case, the action commenced AFTER the date of death and thus, the estate was not the proper party to be sued. The court further found that Robert as the sole distributee of Steven’s estate could be a party to the lawsuit.
ADVICE: This case illustrates the importance of making sure that all prior taxes have been paid and that all taxes of a decedent are paid after death. The FBAR penalties are severe and if you or your client have not reported foreign accounts, it is imperative to discuss with a knowledgeable tax attorney to not only deal with the civil penalties but to avoid criminal sanctions for purposely avoiding the payment of the penalties and filing of the reports.
WORD OF THE WEEK: Scienter is a mental state consisting of the INTENT to deceive, manipulate or defraud. For example, in securities fraud cases, a plaintiff must prove that the defendant acted with scienter before establishing a claim for damages.
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