FBAR penalties are not extinguished upon taxpayer’s death

A district court held that FBAR penalties accrue on the date the FBAR form is due and that an individual’s death did not extinguish these penalties or make them excessive under the Eighth Amendment to the U.S. Constitution. Furthermore, the government was not barred by the statute of limitation in assessing these penalties, since the individual, while still alive, had agreed to extend the statutory period beyond the deadline.

Facts: David Benishai, a U.S. citizen, had a financial interest or signature authority over nine bank accounts in Israel for calendar years 2004 through 2010. Three of these accounts were personal, while the other six were in the name of two corporations over whose bank accounts Benishai had signature authority. For the years in question, the accounts had combined balances of at least $10,000. Benishai did not timely file Forms TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBARs), for any of the accounts and years in question.

In March 2015, Benishai filed untimely FBARs, noting his ownership of the accounts, along with their combined balances of more than $10,000 from 2004 through 2010. In October 2015, the IRS began an examination of Benishai’s FBAR accounts. In connection with this examination, Benishai and his representatives agreed in writing to extend the assessment period several times, ultimately through June 30, 2021.

On Jan. 6, 2021, Benishai died. In April 2021, the IRS assessed $250,000 in FBAR penalties in a letter to the last known address of Benishai’s estate, which was returned as undeliverable. Following the Supreme Court’s decision in Bittner, 598 U.S. 85 (2023), which held that, as a matter of statutory interpretation, the penalties for a nonwillful failure to file FBARs accrue on a per report, not a per account basis, the IRS reduced the penalties against Benishai to $70,000, comprising $10,000 for each of the seven years of unreported FBARs. Including interest and penalties, Benishai’s estate, as of Oct. 3, 2023, owed a total of $81,934.

The government brought an action against Hanna Hendler, Benishai’s wife and administrator of his estate, and Danielle Benishai, Benishai’s daughter and, along with Hendler, a beneficiary of the estate, seeking unpaid tax assessments. Both the government and Hendler cross-moved for summary judgment.

Issues: The government first claimed that since the FBAR penalties accrued prior to Benishai’s death, they were not abated by his death, meaning that they could be collected against his estate.

Hendler countered that the government was unable to assess FBAR penalties against a taxpayer’s estate and, to the extent that the government had a claim against Benishai prior to the April 2021 assessments, it was extinguished by his death. The court concluded that both arguments lacked merit and that the liability accrued no later than June 30, 2011.

As to Hendler’s first argument, the court held that the “penalties at issue accrued before Benishai died.” At that time, FBAR returns had to be filed by June 30 of the year following the year in which the account holder met the $10,000 threshold (31 C.F.R. §103.27(c)). (For 2016 and subsequent reporting years, the filing due date is April 15 of the year after the year in which the account holder meets the $10,000 threshold, with a maximum sixmonth extension to Oct. 15 (§2006(b)(11), Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, P.L. 114-41).)

Therefore, the IRS had a right to levy an assessment against Benishai while he was alive and, in turn, to pursue its claim against his estate for any accrued FBAR penalties through June 30, 2011, the final year in question, not in 2021. The court noted that the Second Circuit has stated in a case concerning tax fraud that “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” (Kahr, 414 F.2d 621 (2d Cir. 1969)). Other courts outside the Second Circuit have applied Kahr to hold that an FBAR liability accrues on the date the FBAR form is due, not on the date of assessment. Also, a tax deficiency arises by operation of law on the date the return is “due but not filed,” irrespective of any “formal demand or assessment” by the government, the court stated (Park, 389 F. Supp. 3d 561 (N.D. Ill. 2019), relying on Drachenberg, 623 F.3d 122 (2d Cir. 2010)).

As to Hendler’s second argument, the court held that in determining whether a claim survived or is extinguished upon the death of a party is determined by “the nature of the cause of action for which the suit is brought.” Claims that are penal extinguish upon death, while claims that are remedial survive (Beth Israel Medical Center, 603 F. Supp. 2d 677 (S.D.N.Y. 2009)). Even though there was no binding case law regarding the FBAR penalties at issue in this case, the court determined that there was enough persuasive authority to indicate that FBAR penalties are remedial and do not extinguish upon the individual’s death.

In Kahr, it was held that liability under the antifraud provisions of the Code survived the taxpayer’s death since the provision protected the tax revenue along with reimbursing the government for funds that were expended during the investigation process. Some courts, in citing Kahr regarding whether the FBAR penalty survives the death of a party, have held that the FBAR penalty is remedial and thus survives an individual’s death (Wolin, 489 F. Supp. 3d 21 (E.D.N.Y. 2020); Schoenfeld, 344 F. Supp. 3d 1354 (M.D. Fla. 2018)).

Next, the court determined that the government’s assessment was timely. A six-year statute of limitation for violations related to FBAR begins “on the date of the transaction with respect to which the penalty is assessed” (31 U.S.C. §5321(b)(1)). Hendler countered that the assessment was untimely, since the government was unable to extend the statute by consent and, alternatively, even if it could extend the statute by consent, it could not do so after the statutory period had expired. The court concluded that these arguments also lacked merit.

The parties again did not identify any binding case law on the permissibility of consent agreements in extending the statute of limitation, but the court identified a string of district court decisions in the Eleventh Circuit that held such agreements are permissible. These cases have held that the statute of limitation “can be extended by consent agreement even after its expiration,” since 31 U.S.C. Section 5321 “is not jurisdictional” (Solomon, 570 F. Supp. 3d 1195 (S.D. Fla. 2021)).

Hendler, citing no relevant authority, claimed that she relied on the fact that the Bank Secrecy Act (BSA), P.L. 91-508, “does not contain an explicit grant of authority to the IRS to extend the statute of limitations.” However, Schwarzbaum, No. 18-cv-81147, at *4 (S.D. Fla. 8/23/19), did not expressly prohibit such extensions, while other courts have allowed parties to extend the statute of limitation when it came to FBAR penalties, thereby negating Hendler’s claim. The statute of limitation is an affirmative defense “that must be pleaded; it is not jurisdictional.” Therefore, it follows that the defense may be waived by a party “who fails to raise it at the appropriate time” (Mulgrew v. U.S. Department of Transportation, No. 24 Civ. 81 at *5 (E.D.N.Y. 2/17/24)). Hendler further argued that an extension of the statute would allow “the law to be disregarded and rendered null by the Secretary of the Treasury.” However, the court found this argument unpersuasive since Benishai agreed to the extensions for all the years in question while still alive.

Lastly, Hendler argued that the FBAR penalties violated the Fifth Amendment (Due Process Clause) and Eighth Amendment (Excessive Fines Clause) to the U.S. Constitution.

In relation to Hendler’s Fifth Amendment argument, she claimed that the government “cannot offer a meaningful opportunity for due process to a dead individual, prior to assessing FBAR penalties.” However, Hendler provided no legal authority for this proposition. As mentioned above, FBAR penalties can be assessed against a decedent’s estate. As noted by the court, “death may be an avenue of escape from many of the woes of life, but it is no escape from taxes” (Wolin, 489 F. Supp. 3d at 27–29, quoting Kahr, 414 F.2d at 626). The court held that Hendler’s dueprocess argument failed, since Benishai’s estate was afforded due process through “a full and fair opportunity to contest the FBAR penalties.”

Hendler further claimed that FBAR penalties are punitive rather than remedial, making them subject to the Eighth Amendment’s prohibition on excessive fines. Hendler also contended that a fine levied against a deceased individual is “always excessive in any amount.” However, the court noted, the First Circuit has held that civil FBAR penalties are not a fine; therefore, the Excessive Fines Clause of the Eighth Amendment does not apply to them (Toth, 33 F.4th 1 (1st Cir. 2022), cert. denied, 143 S. Ct. 552 (2023)). The court found persuasive the holding in Toth that FBAR penalties are “primarily remedial.” The court, though, declined to decide definitively the issue of the applicability of the Excessive Fines Clause, instead rejecting Hendler’s argument “that any fine levied against an estate is per se excessive fails.” At no time did Hendler show that death renders a permissible penalty excessive, and the court declined to be the first court to hold that “any FBAR penalties assessed against an estate are per se excessive.”

Holding: In granting the government’s and denying Hendler’s motions for summary judgment, the court held that the FBAR claim did not extinguish upon Benishai’s death, that Benishai agreed to the extension of the six-year statute of limitation, and that the FBAR penalties did not violate the Fifth and Eighth amendments to the U.S. Constitution.

■ Hendler, No. 23 Civ. 3280 (DEH) (S.D.N.Y. 9/17/24)

John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice in accounting and taxation in the SC Johnson College of Business, and Matthew Geiszler, Ph.D., is a lecturer in accounting in the Brooks School of Public Policy, both at Cornell University in Ithaca, N.Y. To comment on this column, contact Paul Bonner, the JofA’s tax editor.