Look Again in the Rear View Mirror-- How Foreign Filing Issues Re-Emerge After Death07 / 26 / 2019
Tax Forms: Form 3520, Form 3520-A
Tax Troubles: When Patriarch Dies, Foreign Filing Issues Re-Emerge
Look Again in the Rear View Mirror--How Foreign Filing Issues Re-Emerge After Death
With all of the OVDI and other streamlined programs offered to taxpayers to come in from the cold, and report their foreign accounts (FBARs), foreign trusts (Forms 3520), foreign corporations (Form 5471), foreign partnerships (Form 8865), and foreign assets (Form 8938), U.S. taxpayers who have come forward may be of the view that they no longer have to look in the rear view mirror. Three case studies inform the analysis:
1. Fituri v. Bernath & Rosenberg, CPA, PC---CPA Malpractice (failure to file IRS Forms 3520)
Earlier this year, in Fituri v. Bernath & Rosenberg, C.P.A., P.C., Case No. 1:19-cv-2791, Muna El Fituri sued a NY CPA firm, Bernath & Rosenberg for professional negligence, arising over the CPA firm's failure to file IRS Forms 3520. This is not to say that they will succeed. What is of importance are the facts as they appear in the complaint, suggesting that the CPA firm was on notice of huge amounts of distributions coming from foreign sources.
The IRS assess penalties of $893,430 against Fituri for Bernath's failure to file IRS Forms 3520 for 2013-2015. But after incurring significant professional fees, Fiture is able to get these penalties abated. Fituri incurs professional fees in excess of $140,000 as a result of Bernath's failure to file her 2013-2015 tax returns and its failure to file IRS Forms 3520 (with the appropriate disclosure statements).
2. United States v. Jung Joo Park (N.D. Ill. 5/24/2019)
In this case, Que Te Park ("Mr. Park") was an Illinois businessman, who set up various business entities, QT, Inc. and Q-Ray Company, through which Mr. Park sold "Q-Ray" bracelets. These bracelets were "ionized" jewelry that purported to relieve pain and arthritis by affecting the wearer's "chi" and the businesses purportely sell sales of Q-Ray bracelets, netting sales of approximately $87 million. In May, 2003, the FTC files suit against Mr. Park, the business entities, and Mrs. Park for false advertising. The FTC looks to disgorge of $16 million. Mr. Park allegedly returns $11.8 million of the $16 million due to them, and the FTC then moves for the appointement of a receiver.
In February, 2007, Mr. Park files for Chapter 7 bankruptcy protection, 2 days after the FTC filed its motion for appointment of a receiver. By May, 2007, the trustee appointed an examiner to investigate Mr. Park's affairs and determine whether he had concealed assets. Mr. Park, facing deposition, flees the country. At that point, trustee files an adversary proceeding to contest the discharge of Mr. Park's debts, alleging that he had concealed assets.
The US DOJ purse orders allowing them to access Swiss Bank acocunts. By June, 2010, Mr. Park filed an amended Form 1040 for 2007 showing additional income from foreign bank accounts totaling $240,000. On delinquent FBARs, 10 foreign bank accounts were identified.
Mr. Park dies in 2012. Prior to his death, in 2011, the IRS initiates an audit of Mr. Park's tax accounts. It is during this audit that IRS eventually learns of Mr. Park's death in July, 2012. Under the terms of the Will, Mr. Park's assets were to be placed in the revocable trust, which becomes irrevocable at his death. Mr. Park is alleged to have also owned substantially property in South Korea.
In the probate of the estate overseas in South Korea, arrangements are made to sell the South Korean property and distribution of the proceeds of over $3.6 million. Each of the kids receive $400,000 from the sale, whereas Mrs. Park received $2,300,000.
The IRS also assesses a penalty of $3,5 million, 50 percent of the value of the foreign bank accounts (willful failure to file timely FBARs for 2008).
A proper assertion of fiduciary liability is alleged, citing to 31 U.S.C. Section 3713. Here, the focus is on whether the fiduciary distributed estate assets before paying an claim of the government.
U.S. v. Garrity, Case No. 3:15cv-243 (D.Conn. 2019)
In the case, there was evidence that Mr. Garrity and his sons made efforts to keep a foreign account's existence a secret. Arguments that the penalty asserted was "grossly disproportional" to Mr. Garrity's violation were rejected. The court noted how Mr. Garrity had failed to report his interest in a foreign account for almost 2 decades and how his violations prevented the US from investigating and prosecuting other potential crimes. In other words, his violation was serious and may have helped to conceal other misconduct. Because so much time has passed, the court wonders if the government will ever be able to glean a full picture of Mr. Garrity's assets abroad. At issue is whether the government was deprived of taxes on a substantial amount of investment gains.
The court felt it appropraite to maximize the civil penalty, capping that at $936,691, proportionate to the harm caused by his violation.
These cases show how even after an initial effort is made to bring current Forms 5471 or FBARS, there are still the other returns that may be due to be filed.