Complying with the FBAR

If you have a foreign financial account, the federal Bank Secrecy Act may require you to report the foreign bank and financial account (“FBAR”) yearly to the I.R.S. by filing Form TD F-90-22.1.  The purpose of the FBAR is to help the U.S. government investigate persons who may be using foreign financial accounts for illegal purposes, including counter-terrorism, and to identify unreported income maintained in a foreign financial account.

What Constitutes a ‘Foreign Financial Account’?

A financial account includes a savings or checking account, securities or brokerage account, futures or options account, an insurance or annuity policy with a cash value, shares in a mutual fund or similar pooled fund, and other accounts maintained with a financial institution.  A financial account is “foreign” if the institution is physically located outside of the United States.  FBAR is not required for an account maintained with a branch, agency, or other office located in the U.S., even if the financial institution is foreign.  An account is not deemed foreign merely because it may contain holdings or assets of foreign entities, as long as the owner maintains the account with a financial institution located in the United States.

Who Qualifies as a ‘U.S. Person’?

A “U.S. person” must file an FBAR if (i) the U.S. person had a financial interest in or signature authority over at least one financial account located outside of the United States, and (ii) the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

For this purpose, a “U.S. person” means a U.S. citizen or a U.S. resident, as well as a corporation, partnership, limited liability company, and trust and estate formed under the laws of the United States or a state thereunder.

Generally, a U.S. person has a “financial interest” in a foreign financial account if she is the record owner or has legal title in the account, whether or not she is the beneficial owner.

Moreover, a U.S. person has a financial interest in a foreign account held by a nominee, if the beneficial owner of the foreign account is a U.S. person.  Also, a U.S. person has a financial interest in a foreign account where a corporation, partnership, or a trust is the record owner or has legal title in the foreign account, if a U.S. person owns more than 50% of the (i) total value of shares or voting stock of a corporation, (ii) partnership’s profits or capital, or (iii) the trust’s assets or income, as applicable.

A person has a “signature authority” if she has the authority 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.

Filing an FBAR

Exceptions to the FBAR reporting are found in the FBAR instructions, including participants in retirement plans that hold foreign financial accounts.

On the FBAR form, taxpayers must report their interest in the foreign financial account and identify the foreign country where the account is maintained.

The FBAR is not filed with the tax return and must be received by the IRS on or before June 30 of the following calendar year being reported.  A request for extension for filing the FBAR is not allowed.

Consequences of a Failure to File

A civil penalty not in excess of $10,000 per violation could apply to a failure to file an FBAR.  No penalty will be imposed if there is a reasonable cause for the failure and the balance in the account is properly reported.  Willful failure to file an FBAR may trigger a civil monetary penalty equal to the greater of $100,000 or 50% of the balance in the account at the time of the violation as well as criminal penalties.  Willfulness is generally determined by a voluntary, intentional violation of a known legal duty.

In the past few years, the Tax Division of the U.S. Department of Justice criminally indicted several taxpayers and advisors for activities associated with U.S. persons holding undeclared interests in foreign financial accounts, and many others are targets or subjects of ongoing federal criminal investigations.  In February 2009, UBS, under threat of criminal prosecution from the U.S. Department of Justice, turned over “secret” bank account information related to 280 of their U.S. clients and subsequently agreed to turn over information on many thousand more.

Credit Suisse reportedly started issuing letters to their US clients stating that a request for information on U.S. account holders has been received and that Credit Suisse has been ordered to turn over the information to the Swiss Federal Taxing Administration, which will then turn them over to the IRS, unless the US clients can demonstrate the turnover of information would violate Swiss law, including the U.S.-Swiss Tax Treaty.

IRS Voluntary Disclosure Programs

Taxpayers with undisclosed foreign accounts can become compliant with the U.S. tax laws by directly participating in the IRS voluntary disclosure program or by merely filing an amended or delinquent returns and FBARs for prior years.  The IRS had issued voluntary disclosure programs in 2009 and 2011 for undeclared interests in foreign financial account.  Under the 2011 program, eligible taxpayer must contact the IRS Criminal Investigation to request participation in the program, must file all original and amended income tax return as applicable, and pay any taxes owed (including interest and penalties).  Under the IRS long-standing voluntary disclosure practice, taxpayers who voluntarily disclosed their foreign bank accounts under the voluntary program are able to avoid potential criminal prosecution.

On January 9, 2012, the IRS reopened the offshore voluntary disclosure program “to help people hiding offshore accounts get current with their taxes.”  The IRS announced that it received over 33,000 voluntary disclosures and collected more than $4.4 billion so far from the two previous voluntary disclosure programs.  Under the 2012 program, a single penalty of 27.5% of the highest aggregate balance in foreign bank accounts during the eight full tax years prior to the disclosure will apply, up from 25% in 2011.  Some taxpayers will be eligible for 5 or 12.5% penalties, same as 2011.

In addition, participants must file an original and amended tax return, pay back taxes and interest for up to eight years, and pay any applicable accuracy-related and/or delinquency penalties as applicable.  Unlike the 2011 program, there is no set deadline for people to apply, and the terms of the program (e.g., penalties may be increased for all or some taxpayers) could change at any time going forward.

Conclusion

Generally under the voluntary disclosure program, taxpayers can reasonably calculate the total cost of resolving all offshore tax issues and avoid potential criminal prosecution.  Taxpayers who do not make voluntary disclosure risk detection by the IRS, substantial penalties (including the civil fraud penalty and foreign information return penalties), and possible criminal prosecution.