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Undisclosed Foreign Accounts, Part II

Executor Risk

Undisclosed Foreign Accounts

The executor of a decedent’s estate has a duty to act in a prudent manner and in accordance with the law. At times, this may result in having to take an unpopular position or action that angers the beneficiaries.

An executor’s obligations

If the executor of an estate discovers foreign accounts and/or income that the decedent failed to disclose during their lifetime, the executor has an obligation to:

  • Document any facts that might exonerate the decedent from a charge of willful nondisclosure/noncompliance – including but not limited to receipt of bad tax advice, inexperience, illness, and minimal interaction with the account.
  • Bring the decedent’s tax and informational returns into compliance through the Offshore Voluntary Disclosure Program (OVDP), Streamlined Filing Compliance Procedures, or other method of disclosure as recommended by a qualified tax attorney.
  • Settle all government debts before paying other estate debts and making distributions to beneficiaries.

As noted in Part I, although an executor has no affirmative duty to advise beneficiaries as to what forms they should file, they should in all good conscience make them aware of their responsibility to report a foreign gift.

Criminal and civil liability

It may be tempting for an executor to avoid the hassle and cost of compliance, and to simply satisfy the beneficiaries through a superficial assessment of the decedent’s debts and speedy distribution of the estate. This is not only shortsighted and irresponsible, it will result in the estate incurring greater liabilities in the long-run and can place the executor at high personal financial risk.

In addition to felony charges for tax evasion under 26 U.S.C. § 7201, executors are at risk of additional prosecution – including charges under 18 U.S.C. § 4 which makes it a crime to have knowledge of the commission of a felony and to engage in an affirmative act of concealment.

Although criminal prosecution is rare, particularly if the executor is unrelated to the decedent, civil penalties under 31 U.S.C. § 5321(a)(5) are very likely. For example, if an executor discovers previously undisclosed foreign accounts and fails to remedy the delinquency, they may be subject to:

  • Taxes and accrued interest for the previously unreported foreign income
  • Penalties under 26 U.S.C. § 6038D for failing to report certain foreign assets
  • Penalties for delinquent FBARs

The government has a six year statute of limitations to collect FBAR penalties, and there is no limitation to the imposition of Title 26 taxes and penalties.

Use an attorney

Whenever an executor is faced with a situation in which there is a potential conflict of interest with the estate beneficiaries, hiring an attorney to guide the administration process is crucial. An experienced attorney can help you plan the best course of action in a very sticky situation, mitigate the possibility of criminal charges and/or civil penalties being raised against you personally, and can represent you in any civil action brought against you by the beneficiaries. Contact our San Francisco office today for a consultation.

Undisclosed Foreign Accounts

Executor Risk

Undisclosed Foreign Accounts

Serving as Executor can at times be more of a headache than an honor. On top of a pile of paperwork and dealing with a multitude of family issues, you can be sued!

Executors have a number of responsibilities, most importantly payment of the decedent’s outstanding tax liabilities, debts and bequests – in that order. In an effort to appease beneficiaries, many executors make distributions before confirming that the first priority payees are satisfied. This constitutes a breach of the executor’s fiduciary duty and subjects to executor to personal liability for taxes owed to the government.

Priority of payments

Executors are responsible for ensuring the proper administration of an estate, including paying all of the estate’s bills, and in the right order. Per 31 U.S.C. § 3713, taxes are the first priority payments, and only after they are paid, should credit cards, utilities, or any other bills or distributions be satisfied.

In the event that insufficient funds remain in the estate to pay the IRS, the executor will be personally liable for any unsatisfied tax liability if lower priority claims were paid first. This presents a significant problem where the decedent was delinquent on his or her taxes due to undisclosed foreign accounts and income.

Discovering undisclosed foreign accounts

Some accountants recommend that their executor clients file current year FBARs, but refrain from filing any prior year FBARs or amended tax returns, and not to advise beneficiaries to file Form 3520 – information that would reveal to the government of the existence of a foreign gift. The reasoning is that executors are responsible only for the current year’s taxes and foreign account reporting, and should not engage in speculation as to whether the decedent’s noncompliance was willful (intentional) or not.

This course of action can backfire drastically. Taxes and penalties owed by a taxpayer for failure to report foreign income and assets during their lifetime, become debts of their estate after they pass away. If those debts are not satisfied because the executor first pays lower-priority debts and makes distributions to beneficiaries, the executor will become personally responsible for the tax liability. In addition, although these accountants are correct in stating that an executor should not speculate as to the willfulness of a decedent in failing to report their foreign income and/or accounts, that knowledge is not needed to remedy delinquent returns. Nor is the executor doing the beneficiaries a favor by failing to inform them that they have the duty to report gifts from foreign accounts.

Ultimately, the duty is on the executor to ensure that the government is paid first. If you are left with insufficient funds to pay a later-discovered tax bill, good luck getting distributions back from the beneficiaries! This is why it is so crucial for executors to consult with a tax attorney and accountant from the start.

In Part II, we will review an executor’s obligations, as well as applicable criminal and civil penalties.