Estate Argues In Favor Of Lower Fine Following Unreported Foreign Holdings
July 30, 2021
The American government makes efforts to ensure that taxpayers are not keeping money in offshore accounts without paying the necessary tax on those funds. While people may sometimes get away with hiding money, the matter can be exposed later on. In a recent case heard by the United States Court of Appeals for the Second Circuit, the estate of a deceased individual was ordered to pay over half of $8,000,000 that the deceased had kept in offshore accounts.
Deceased failed to report foreign bank holdings
The deceased, “HK,” died with $8,529,456 in holdings at two foreign banks. The executors of his estate were ordered to pay the government $4,264,728 of these funds as a result of the deceased’s failure to report that money during his lifetime. A summary judgment came down in favour of the government, which stated that the deceased was in violation of 31 U.S.C. § 5314, which required him to file a Report of Foreign Bank and Financial Accounts (“FBAR”). The penalty for the offense was 50% of the income not reported.
The estate argued that a 1987 Treasury Department Regulation had a lower penalty, which was capped at $100,000, and that the Regulation trumps the statute, which was amended to have the increased penalty in 2004.
Huge delta between penalties
The court began its analysis by looking at the regulation and the statute. The former, which was introduced in 1970, requires that Unites States persons report relationships with foreign financial institutions, stating that a willful failure to comply comes with a penalty that “shall not exceed” $100,000.
Fast forward 20 years, and in 1990 the Financial Crimes Enforcement Network was established, which sought to enforce FBAR regulations. Congress eventually proposed that new penalties be put into place in order to exceed the limit contained in the Regulation. Ultimately, the statute came to state that the penalty shall be the greater of $100,000 or 50% of what was unreported.
The use of “shall” in both the regulation and the statute is important. The word carries significant weight and imposes a responsibility to strictly abide by the instructions that follow it. This is contrary to the use of the word “may” which provides discretion.
The court found that the two pieces of law are not harmonious, and ruled in a split decision that the government intended to raise the penalty in light of reports of significant offshore holdings going unreported.
These types of conflicts are not new. In fact, or own Mark Feigenbaum, has a similar file where the penalty was on 5471 returns. He went so far as to petition for a writ of certiorari to the United States Supreme Court.
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