A U.S. court has decided the clock on FBAR penalties starts when the tax forms are due and not when penalties are assessed – and that even the death of the taxpayer doesn’t alter the deadline.

Survivors of an American who filed untimely U.S. international tax reports are liable for penalties that the Internal Revenue Service assessed against their late relative.

In U.S. v. Hendler, the federal district court for the Southern District of New York has decided that the widow (Hanna Hendler) and surviving daughter (Danielle Benishai) of David Benishai, who died in 2021, are liable for almost $87,000 in penalties and interest for the deceased’s failure to timely file Reports of Foreign Bank and Financial Accounts (FBARs) for overseas accounts.

“The [U.S. government’s] claims accrued prior to Benishai’s death and are not abated by it, meaning they may be collected against his estate,” the court decreed.

Background

David Benishai was a U.S. citizen who, from 2004 through 2010, had a financial interest or signature authority over nine bank accounts in Israel. Three of these accounts were personal; the remaining six were in the name of two corporate entities. In the years in question, the accounts had combined balances of at least $10,000 in U.S. dollars.

Regulations require filing a single annual FBAR for anyone with an aggregate balance over $10,000 in foreign accounts. The penalty for non-willful violation is up to $10,000. Benishai did not timely file FBARs for the accounts during these years. Around March 2015, he did file FBARs, acknowledging his ownership of the accounts and their combined balances of more than $10,000 for the years in question. The IRS launched an examination of his FBARs that October, and Benishai and his representatives agreed in writing repeatedly to extend the time in which the government could assess FBAR penalties, ultimately through June 30, 2021.

David Benishai died on Jan. 6, 2021. That April, the IRS assessed FBAR penalties totaling $250,000 against him and sent a letter regarding these penalties to the last known address of Benishai’s estate. The letter was returned as undeliverable.

Not long after, the U.S. Supreme Court decided in Bittner v. United States that $10,000 penalties for non-willful failure to file FBARs are per-report and not per-account; the IRS trimmed Benishai’s penalties to $70,000. Tacking on penalties and interest, by October 2023 Benishai’s estate owed $81,934.53.

The federal government brought suit against Hanna Hendler and Danielle Benishai, designated distributes, among other roles, of Benishai’s estate.

The arguments

Benishai’s two survivors simply – and unsuccessfully – argued that the Government cannot assess FBAR penalties against a taxpayer’s estate and that his death invalidated previous federal claims regarding FBAR penalties.

Defendants contesting similar FBAR penalties could benefit from learning more about the arguments and how the court refuted them. First, the defendants contended that the FBAR penalties accrued at the time they were assessed in 2021 after Benishai had died, and such penalties could not be assessed against a decedent.

“[Defendant’s] premise is incorrect, because the penalties at issue accrued before Benishai died,” the court countered. “FBARs must be filed by June 30 of the year following a calendar year in which a taxpayer held interests in foreign accounts over $10,000. The FBARs at issue in this lawsuit concern accounts Benishai maintained in 2004 through 2010, meaning the [g]overnment’s right to levy an assessment regarding Benishai’s failure to file FBARs for the final year in question accrued on June 30, 2011, (while Benishai was still alive) [and] not in 2021, when the assessments were actually assessed (and after he had already passed away).

“Now that Benishai is deceased, the Government may pursue its claims against his estate,” the court noted, adding that the U.S. Second Circuit has stated:

“It seems impermissible for the estate of a deceased taxpayer, who during his lifetime established a pattern of conduct by which he fraudulently avoided taxes, to avoid a liability that the taxpayer himself could not have avoided if his conduct had been uncovered while he was alive. If [the taxpayer] were still living he would be liable for the civil fraud addition. Also, if the tax fraud were committed and a fraudulent return filed before the taxpayer’s death but the fraud was not discovered until after his death, liability for a civil fraud addition imposed as a result of the taxpayer’s tax evasion activities during his lifetime would survive his death and be borne by his estate.”

Other courts outside the Second Circuit have held that an FBAR liability accrues on the date the FBAR form is due, not on the date of assessment, observers have noted.

The district court in New York also concluded that FBAR penalties are “remedial” rather than “penal,” that whether they survive or are extinguished upon the death of a party is determined by “the nature of the cause of action for which the suit is brought,” and, essentially concurring with the government’s argument, as such were not “extinguished upon the death of the taxpayer.”

The court noted that other U.S. circuit courts have held that civil FBAR penalties are not a fine and that the U.S. Constitution’s Excessive Fines Clause of the Eighth Amendment does not apply, which Hendler had contended. Another of her arguments, concerning extension of the statute of limitations, was also discarded by the court.

The final tab ordered against the Benishai estate after accruing interest and penalties: $86,727.13

The clock on FBAR penalties starts with the forms are due, not when penalties are assessed even if that latter date is after the taxpayer’s death – a major takeaway for FBAR-filing taxpayers in Hendler. Further, non-compliant filers shouldn’t expect courts to entertain arguments regarding constitutional exclusions of FBAR penalties.

Your tax specialist needs to stay on top of this and many other issues of wealth, foreign income and tax enforcement. If we can help, please let us know.

About the Author 

Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high-net-worth families and their advisors.

Alicea has more than 20 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm.

Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection.

Alicea also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S.

Alicea is fluent in Spanish and has a working knowledge of Portuguese.

Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York State Society of Certified Public Accountants (NYSSCPAs), the American Institute of Certified Public Accountants (AICPA), the International Fiscal Association (IFA), a member of Clarkson Hyde Global, a world-wide association of accountants, auditors, tax specialists and business advisors and the Global Referral Network (GRN).

Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA Forty Under 40 Award. She was selected as someone that has notable skills and is visibly making a difference in the accounting profession.

In 2021 and 2022, Alicea was the Gold and Silver Winner, respectively, of Citywealth’s Powerwomen Awards in the category USA – Woman of the Year – Business Growth (Boutique). In 2023, she continued her winning streak by receiving the Gold award for Company of the Year Female Leadership (Boutique) and the Silver award for Accountancy Firm of the Year at the Magic Circle Awards. Furthermore, Alicea has consistently secured her position in the Global Elite Directory for four consecutive years, being recognized as a Private Client Global Elite Advisor and is currently listed for 2024 as a Non-Legal Adviser. This exclusive directory annually highlights the world’s elite lawyers and outstanding wealth advisors serving ultra-high net-worth clients.

Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.