What if Someone Dies Owning an Undeclared Foreign Financial Account? What Should The Executor & Heirs Do?

Henry Seggerman has first-hand experience with this type of situation. Without hesitation, my guess is that he’ll tell you to get the Estate into an IRS Voluntary Disclosure Program (“VDP”).

Here is the tale of the unenviable case of the Seggermans! Henry was the son of a prominent New York businessman who passed away. Henry was named as executor of his father’s estate, valued in excess of $24 million. Unfortunately, however, over half of this wealth was maintained in secret and undeclared foreign bank accounts located in Switzerland and other jurisdictions. The father worked with his Swiss lawyer and other parties, arranging for over $12 million in the undeclared accounts to be left to his surviving spouse and five of his children, including Henry.

Henry’s position as executor charged him with various responsibilities, including filing an estate tax return for his deceased father. Henry signed the estate tax return for his father’s estate falsely underreporting its assets by over $12 million. Generally speaking one can say that an executor of an estate steps into the shoes of the deceased. Henry not only did that, he went a step further and perpetuated the fraud of the deceased. While this may possibly have pleased the deceased, it certainly did not please the IRS or the Department of Justice.

In order to access the undisclosed funds, the Swiss lawyer assisted Henry and three of his siblings (Suzanne Seggerman, Yvonne Seggerman, and Edmund Seggerman), in creating undisclosed Swiss bank accounts to hold the hidden money that they had inherited from their father. In order to tap the funds, Henry and his brother worked together, transferring funds from the brother’s Swiss account to a bank account for a foundation controlled by Henry. Henry then transferred the funds into the United States, in the guise of loan repayments.

Well, things didn’t quite work out as the Seggerman’s had hoped as they eventually plead guilty to various tax-related crimes. At the end of August 2013, Henry pled guilty to the following charges: conspiracy to defraud the United States, subscribing to a false and fraudulent estate tax return, as well as aiding and assisting in preparing false tax returns for his brother. In addition to promising to make a partial payment of restitution in the amount of $600,000, Henry was faced with a maximum prison sentence of 11 years. Three of his siblings also pleaded guilty to conspiring to defraud the United States, as well as subscribing to false and fraudulent tax returns with each facing the same maximum sentence of 11 years in striped suits (and not pin-striped suits, either)!

What Could and Should the Family Have Done?

The family should have immediately taken the opportunity to come clean with the IRS and could have avoided all criminal liability. Had they acted quickly after the death of the father by using special provisions in the then-existing Offshore Voluntary Disclosure Program (“OVDP”) they probably could have qualified for significantly reduced penalties for those who have inherited undisclosed foreign accounts.

Offshore Voluntary Disclosure Program – NOW CLOSED:

So, in order to avoid transferee liability and/or fiduciary liability as well as possible criminal charges a la Henry Selligman and his siblings, the best advice is to come clean very quickly about the decedent’s undisclosed offshore accounts.  Unreported offshore accounts continue to plague both executors and heirs after death of the account holder. Now, with the closure of the Offshore Voluntary Disclosure Program the situation is far more precarious.

In March, the IRS announced the OVDP was ending on the 28th of September. The IRS made clear that it would continue to hold taxpayers with undisclosed offshore holdings accountable after the program closes.  A reminder was made on September 4 in this  IRS announcement.  The IRS stated it “will maintain a pathway for taxpayers who may have committed criminal acts to voluntarily disclose their past actions and come into compliance with the tax system. Updated procedures will be announced soon.” My comments on the IRS announcement are in a separate blog post.

Depending on the particular facts, it may be possible for the Streamlined Procedure to be used to rectify the decedent’s past tax noncompliance. Read more at my US tax blog post  here.  If you need assistance with unreported offshore assets, please contact me.  Action should be taken quickly because the IRS has been grumbling and reminding taxpayers that the Streamlined Procedures (in place in one form or another since 2012) may close at any time.

Tax Liability Can Follow the Property Into the Hands of a Third Party

Don’t forget – the arm of the IRS is very long, indeed. In order to prevent taxpayers from avoiding their responsibilities to pay tax, the law has developed several theories under which the IRS can satisfy one party’s tax debts by following property that has been transferred by that party to another party. The theories vary, but fall into the general categories of “Nominee Liability”, “Alter-Ego Liability” and “Transferee Liability”. In the case of heirs receiving property from the estate, the unpaid taxes of the decedent might be collectible by the IRS on a theory of so-called Transferee Liability. Special rules impose personal liability against the transferee of an estate in cases when the estate did not pay estate taxes due. A special lien for estate tax automatically arises on the death of the decedent and attaches to property transferred from the estate. The transferee’s liability is generally limited to the fair market value of the property received. The Estate executor will also face fiduciary liability for unpaid taxes if he transfers property before paying the IRS.  It’s a dangerous game – don’t play it!

Posted October 5 2018

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