IRS Says Agents Acting Under Power of Attorney Subject to FBAR Reporting
We have covered the Foreign Bank and Financial Accounts (FBAR) requirements at the tax schools during the past couple of years. Those rules require U.S. persons that have an interest in a foreign account to file FinCEN Form 114 every year if the aggregate maximum values of all of the foreign financial accounts exceed $10,000 at any time during the calendar year. The form is electronically filed. Simply having signature authority over a foreign account is enough to trigger the filing requirement. Failure to file when required results in stiff penalties and criminal penalties can also be triggered.
Now, IRS has taken the position in their “FBAR Reference Guide” that “signature authority” includes “the authority of an individual (alone or in conjunction with another individual) to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or otherwise) to the bank or other financial institution that maintains the financial account.” In an example, IRS explains that this definition includes agents acting under a power of attorney (POA). It is immaterial if the power has ever been exercised. The agent (along with the principal) is subject to the FBAR filing requirements if the POA gives the agent signature authority over a foreign account that exceeds the dollar threshold.
Estate planners should immediately advise all clients where POA’s are in place of this requirement. It is standard practice to give agents authority over bank accounts of their principal. Remember, it is the agent that has liability for non-filing, along with the principal. That means that the agent must stay on top of where the bank accounts of the principal are located and should be notified when the principal opens new accounts. Estate planners must take care to ensure that all agents named in POAs know that they have been named (this can be an issue with respect to durable POAs) that are not delivered to the agent until necessary. Clearly, the best practice is to have the agent sign the POA along with the principal. As for POAs that “spring to life” upon the principal’s incapacity (as defined in the POA), the IRS position raises a question as to liability for the FBAR filing requirements as between the principal and the agent. Battles over when the agent’s authority was triggered could occur. The non-filing penalties vary based on lack of knowledge or negligence, so an uninformed agent under a POA could get into litigation with the IRS over the appropriate penalty and whether the agent’s lack of knowledge of the filing requirement is a complete defense to FBAR penalties. Whether the POA is even effective in a foreign jurisdiction could also be an issue.
In any event the IRS position should be discussed with clients having existing powers and must be a part of the counseling when a new POA is drafted. The FBAR penalties are just too big to ignore.
Here’s the link to the IRS FBAR Reference Guide: http://www.irs.gov/pub/irs-utl/IRS_FBAR_Reference_Guide.pdf
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