Your Agent under your durable Power of Attorney for Property may be liable for penalties for not filing a Foreign Bank and Financial Accounts Report (“FBAR”) for your foreign accounts. If you have an interest in a foreign account, you know that you are required to file FinCEN (U.S. Treasury Financial Crimes Enforcement Network) Form 114 if the aggregate maximum value of your foreign financial accounts exceed $10,000 at any time during the calendar year.
The requirement for filing the FBAR also applies to those individuals who have “signature authority” over such accounts. Under an example set forth in the recently published IRS “Reference Guide on the Report of Foreign Bank and Financial Accounts”, if your Agent under your property power of attorney has signature authority over your financial accounts (as most powers of attorney provide), your Agent is responsible for filing an FBAR for such accounts and may be subject to penalties for not filing.
Chuck Rubin in Leimberg’s Estate Planning Newsletter on May 22, 2014 points out that the definition of “signature authority” and the accompanying example in the Reference Guide are particularly troubling:
“Signature authority is 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.
Example: 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).
The reverse would also be true. Assume your business partner, your spouse, or son or daughter has named you as their Agent without your knowledge, the agency takes effect immediately, and the power of attorney authorizes the Agent to access the principal’s financial accounts. Under the example, you could be held liable for not reporting the principal’s foreign accounts.
Powers of attorney are typically animals of state law. In most state statutes, the Agent is not liable for not acting under a power of attorney and liability attaches only when the Agent undertakes to act pursuant to the power of attorney. Under the Reference Guide example, the Agent would be required to file an FBAR, even if he or she had never exercised authority over your financial accounts.
This interpretation of “signature authority” may be alarmist, since many foreign financial institutions do not recognize our powers of attorney. Such authority is typically only recognized if a principal has specifically appointed an Agent in the records of the institution and the Agent has accepted the authority.
Further, it is unlikely that the IRS could impose the affirmative duty for FBAR reporting on an Agent if: (1) the Agent does not even know he or she has been appointed as a principal’s Agent; or (2) the principal has not made the Agent privy to his or her financial affairs.
Nevertheless, since the IRS has been quite zealous about its FBAR reporting requirements, as a default, it may be prudent to restrict the power granted to an Agent under our powers of attorney for property, unless the client wishes to specifically authorize the Agent to manage his or her foreign accounts and be responsible for filing the FBAR.
The “Reference Guide on the Report of Foreign Bank and Financial Accounts” can be found at www.irs.gov/pub/irs-utl/IRS_FBAR_Reference_Guide.pdf.