FBAR problems and parental love – at first, it seems that nothing can be more contradictory. Yet, in reality, parental love may often cause grave US tax problems for children if this love extends to adding children to a foreign account, and especially if this is done without the knowledge of the children. In this article, I would like to explore some of the common patterns of adding children to a foreign account and how this act of parental love may cause grave FBAR problems for the children.
FinCEN Form 114 (the Report of Foreign Bank and Financial Accounts – commonly known as FBAR) is one of the most important information returns for US taxpayers. Generally, FBAR requires a US person to disclose his financial interest in and signatory authority over foreign bank and financial accounts if these accounts, in the aggregate, exceed $10,000 at any point during a calendar year.
The importance of FBAR is tied to its draconian penalties, which include willful penalties of up to 50% of the account or $100,000 (whichever is greater) per violation; each undisclosed account in each year is a violation. Criminal penalties, including jail time, are also possible.
Common Four Patterns of Adding Children to a Foreign Account
While there are many ways of adding children to a foreign account, we can distinguish the four most common patterns for the purposes of this article. The first pattern of adding children to a foreign account is creation of joint accounts with minor and student children; this usually occurs when the parents and their children still live outside of the United States. Millions of parents create joint accounts with a minor child to help him get a credit history, learn about financial responsibility and exercise control over their children’s expenses. The same pattern often applies to already adult children who begin their college lives.
These accounts often still remain in existence long after the expiration of the original purpose of adding children to a foreign account. Most often, this happens as a matter of fact – just out of habit or indifference to the account. Sometimes, the account starts to play a new role of a conduit of financial transactions between adult children and their parents. Whichever is the reason, these foreign accounts often continue to exist even after the children move to the United States.
The second common pattern of adding children to a foreign account occurs on the opposite end of the spectrum of life for estate planning purposes. Under this pattern, non-resident alien parents add their adult children (who may already be US tax residents) to their foreign accounts to make sure that the children have access to the parents’ accounts in case of an emergency or death. Furthermore, in countries with a difficult court system (India is a prominent example), adding children to a foreign account may assure that these children and no one else inherit the funds.
The third common pattern of adding children to a foreign account occurs as part of business succession planning. Children are granted shares of a foreign corporation and are provided with a signatory authority over the corporate accounts in order to assure smooth transition of business ownership and corporate leadership. This pattern is very close to the previous one, but the difference here is that the process of adding children to a foreign account here is done as an integral part of running a foreign business, whereas the second pattern is concerned mostly with non-business estate planning.
Finally, the fourth common pattern involves a situation where parents (usually operating under a power of attorney provided by their children) engage in various business and real estate transactions under their childrens names. The act of adding children to a foreign account merely constitutes one more part of these transactions. Especially in Southeast Asia (most notably, India, South Korea and China), but also in South America, the parents are conducting various transactions under their children’s names often without ever informing their children about these transactions. The parents can even sign and file local tax returns under their children’s names.
How Adding Children to a Foreign Account Can Cause FBAR Problems
Setting aside the issue of income tax compliance complications, adding children to a foreign account may be highly problematic from the FBAR compliance standpoint. The problems usually occur for three reasons.
The first and most common reason is the simple fact that, in many cases, parents never inform their children about the fact that they added them to their foreign accounts. This often occurs because the parents simply do not know that adding children to a foreign account obligates the children to report such a joint account to the IRS. Since the children do not know about their ownership of a foreign account, they cannot report it on the FBAR (assuming that they know about the existence of this form), thereby subjecting themselves to the draconian FBAR noncompliance penalties. This reason can be present in all four patterns described above.
The second reason for FBAR problems is closely tied to the first pattern of adding children to a foreign account. In cases where accounts have been open for a very long time without active usage, children may simply forget about the existence of these accounts or mentally ignore them as a matter of habit of treating these accounts as childhood accounts that should not be taken seriously.
Finally, the third reason is closely tied to the fourth pattern of adding children to a foreign account. In such cases, children often feel that the accounts do not belong to them since the parents opened them in their interests only as part of their own local business transactions. Hence, the children erroneously believe that these accounts are not reportable on their FBARs, exposing themselves to FBAR penalties. Such cases may present additional difficulties to international tax lawyers because of the amount of documentation (local tax returns under the children’s names, all transaction documents in children’s names, deposits remaining on the children’s accounts, et cetera) that may convince the IRS that FBAR noncompliance was willful.
Contact Sherayzen Law Office for Professional Help With Undisclosed Foreign Accounts and Foreign Income
Parents love their children and are prepared to do anything for them. Sometimes, though, parents may unintentionally complicate their children’s lives by adding their children to a foreign account. Failure to report such an account on FBAR may expose the children to draconian civil and criminal FBAR penalties.
In such cases, the help of an experienced international tax law firm is indispensable. Sherayzen Law Office, PLLC is a highly experienced international tax law firm that specializes in FBAR compliance, including offshore voluntary disclosures. We have helped hundreds of US taxpayers around the globe to bring their US tax affairs into full compliance and we can help you!