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“Agents Beware”- IRS Sets New Trap

June 04, 2014

With its increasing attention on foreign accounts maintained by US taxpayers, the IRS recently published its Reference Guide on the “Report of Foreign Bank and Financial Accounts” (FBAR). For the past several years the IRS has required that 

“a United States person must file an FBAR if that person has a financial interest in or signature authority over any financial account(s) outside of the United States and the aggregate maximum value of the account(s) exceeds $10,000 at any time during the calendar year.”  

This reporting requirement has always been understood to impose an affirmative duty on people who are aware of their involvement in foreign financial accounts. The IRS’ revised position, however, now extends past conscious involvement, potentially leading to significant civil and even criminal penalties to persons who have no financial interest in a foreign financial account.

In its most current FBAR Reference Guide, the IRS expands the level of possible liability to an agent who acts under a power of attorney. The IRS uses the following example of a situation in which an agent acting under a power of attorney is subject to the FBAR reporting requirements:

Megan, a United States resident, has a power of attorney on her elderly parents’ accounts in Canada, but she has never exercised the power of attorney. Megan is required to file an FBAR if the power of attorney gives her signature authority over the financial accounts. Whether or not the authority is ever exercised is irrelevant to the FBAR filing requirement. [Emphasis added.]

Historically, powers of attorney generally lie dormant and are often relied upon only in specific circumstances like emergency situations. In fact, sometimes individuals are designated as agents under a power of attorney document without even knowing that they have been named as agent. In light of the IRS’ example above, however, agents under powers of attorney suddenly have an affirmative duty to inquire about assets owned by the principal (i.e., your parents or that neighbor who asked you to serve as power of attorney because they do not have family close by). When an agent agrees to hold a power of attorney "just in case" or as a favor, the idea of asking for information about foreign account balances every year is likely to be the last thing they would consider.  

Nevertheless, if an agent under a power of attorney has the ability to control foreign accounts (regardless of whether they actually exercise that control), an affirmative duty arises. If they fail to report foreign accounts that exceed $10,000 in value, the agent is subject to civil penalties up to 50 percent of the value of the account each year.  In addition, the willful failure to file an FBAR report may result in criminal penalties up to $500,000 and/or 10 years imprisonment. FBAR reports are due by June 30 for the prior calendar year.

Smith Haughey encourages those with powers of attorney and those who may be named as agent under a power of attorney to review the instruments carefully and consider incorporating modest changes to address this issue. If you have any questions or concerns about how the IRS FBAR requirements may affect you, please contact the attorneys of Smith Haughey.

 

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