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April 23, 2024

Cross-Border Update

Q2, 2024—"FBAR Filing Requirements and Powers of Attorney: What Estate Planning Attorneys in the United States and Abroad Need to Know"

Many US trusts and estates attorneys don’t think about international or cross-border issues when they are retained to draft a client’s estate planning documents—but they should. Serious cross-border estate planning issues may arise when clients possess foreign accounts; however, not all trusts and estates attorneys are aware of the severity of these issues. 

As required by the Bank Secrecy Act of 1970, any US citizen, resident, or entity (a “United States person”) with “a financial interest, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists,” if the combined value of any foreign accounts exceeds $10,000.1

A United States person with this kind of interest or control must file the form prescribed under 31 USC 5314, otherwise known as the Report of Foreign Bank and Financial Accounts (FBAR). The FBAR is due annually on April 15, but the filer is allowed an automatic extension until October 15 without filing a request.2 The IRS advises that those required to file an FBAR must keep records of foreign accounts for five years.3

Failure to comply with FBAR filing requirements may result in severe penalties, which are adjusted annually for inflation. In 2024, a nonwillful violation can incur a civil penalty of up to $16,117. The nonwillful penalty amount applies per annual report, regardless of how many foreign accounts the violator failed to report.4 A willful violation can incur up to the greater of $161,166 or 50 percent of the amount in the account(s) at the time of the violation.5 Further, a willful failure to file the FBAR or retain the required records subjects the violator to criminal penalties of up to $250,000 or five years in prison.6 Given that even nonwillful violations can result in significant civil penalties, ignorance of the FBAR filing requirement may not be a successful defense.

Of particular importance for estate planning attorneys in the United States and abroad is the potential of unknowingly subjecting an agent under a power of attorney to these requirements, which carry serious penalties in the event of noncompliance. A power of attorney, depending on the jurisdiction and the principal’s authorizations, may give the agent signature authority over the principal’s foreign financial accounts.

The regulations define signature authority as “the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds, or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained”—precisely the authority granted to an agent under a power of attorney in many jurisdictions.7 Whether or not the agent actually exercised the authority is irrelevant to the FBAR filing requirement.8 Even in instances where the agent’s signature authority is only exercisable with another individual, such as when the accounts possess a “dual authorization” requirement or co-agents are not authorized to act separately,9 the agent may still be subject to FBAR filing requirements. 

There are two common scenarios in which an agent named in a power of attorney may be responsible for filing an FBAR. First, a US citizen or resident could be named as an agent under a foreign power of attorney, thus granting the US person signature authority over a foreign account under the foreign power of attorney. Second, a US citizen or resident maintaining foreign accounts who appoints a United States person as agent under a power of attorney may thereby grant signature authority to the agent and subject them to the FBAR filing requirements. Attorneys should note that, aside from the issues arising from granting signature authority over an account by power of attorney, this is also an issue of concern for joint foreign account holders. 

Unless specifically drafted to provide otherwise, a New York State statutory power of attorney grants an agent signature authority over all of the principal’s accounts, domestic and foreign. In other jurisdictions, whether a power of attorney grants the same signature authority is dependent on the laws of the jurisdiction governing the document. 

There are options to effectively avoid or delay subjecting an agent to the FBAR filing requirements, including drafting the power of attorney to: 

  • Exclude power over any foreign account unless or until the agent expressly accepts that power in writing
  • Specifically exclude authority over any non-US accounts
  • Be held unsigned by the agent until needed 
  • Be a “springing” power of attorney, which is only effective upon the principal’s incapacitation

In other states and countries, there are jurisdictions in which agents do not have to sign the instrument to be effectively appointed under a power of attorney. This could result in an individual who is unaware of their appointment as agent being subjected to FBAR filing requirements, which is especially troubling given that ignorance may not be a successful defense for failure to file. Attorneys in these jurisdictions must be especially vigilant when working with clients with foreign accounts.

Considering the severe penalties for noncompliance with FBAR filing requirements, attorneys in the United States and abroad must understand how clients and their fiduciaries may be affected by the FBAR filing requirements and be able to advise them accordingly.

Barclay Damon’s Canada-US Cross-Border Team routinely assists domestic and international clients and counsel with estate planning and tax matters as well as with cross-border business formation, commercial litigation, labor and employment issues, real estate transactions, state and local tax compliance, and more. For more information about this or other cross-border or international legal topics, reach out to any member of Barclay Damon’s Canada-US Cross-Border team.
                                                                                     
131 CFR 1010.350(a); IRS FBAR Reference Guide.
2Internal Revenue Service. (2023, July 5). Report of Foreign Bank and Financial Accounts (FBAR).
3IRS FBAR Reference Guide.
4Bittner v. United States, 598 U.S. 85 (2023).
5IRS FBAR Reference Guide; 31 CFR 1010.821.
631 USC 5322(a); 31 CFR 1010.840(b).
731 CFR 1010.350(f).
8Portfolio 6085-1st: Report of Foreign Bank and Financial Accounts (FBAR)(II)(D)(1).
9Portfolio 6085-1st: Report of Foreign Bank and Financial Accounts (FBAR)(II)(D)(1).

 

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