Offshore Voluntary Disclosure Initiative and Estates
BY: Amy L. Holbrook, Esq.
As the Offshore Voluntary Disclosure Program/Initiative (OVDP/OVDI ) has settled into its third iteration — the new, open-ended program that kicked off in 2012, one type of case we are seeing more and more often is that of an estate with potential problems with its offshore assets.
If you are the administrator or executor of the estate, one of the basic responsibilities associated with settling the estate is filing and paying any income tax returns, including a final 1040 for the deceased on the individual income tax during the final year of his life, as well as a form 1041 for any income (i.e., interest or dividends) earned by the estate itself while it is being administered.
Of course, all you need in order to qualify to be an executor, you only need to be over the age of 18. No special training in taxation, domestic or internal is necessary. Administrators and executors are chosen for their fidelity and fondness, not because they can understand every nuance of the incredibly complicated international taxing regime the IRS has put in place.
So, it seems fairly obvious that as an executor or administrator, you have come across an estate that has undisclosed foreign accounts or assets that were never declared. Perhaps you were even responsible for not having all the paperwork filed correctly.
The bad news is that the IRS is penalizing estates harshly. The good news is that you can take active steps to avoid the wrath of the IRS.
Estates with Undeclared Assets
The Office of Chief Counsel of the IRS has ruled that an estate directly assumes the responsibilities of the decedent, including any filing and paying requirements. One specific ruling was a case of unfiled Form 3250, in which any penalties for not filing had to be paid out of the estate.
What this also means is that the estate itself can, just like individuals:
- participate in the Offshore Voluntary Disclosure Program to minimize penalties associated with unreported foreign income and accounts
- file outstanding information returns, such as 3520 or FBAR, with a request for abatement of penalties, in cases where there has not been unreported income.
These are the same paths open to individuals with these problems, and participation takes much the same form. There is also the ability to lower the FBAR-equivalent penalty by arguing reasonable cause.