FBAR Filing 2010 Updates
In March 2010, the IRS suspended TD F 90-22.1 (FBAR) filing requirements for persons other than U.S. Citizens and domestic entities (including those “in and doing business in the U.S.”). (IRS Announcement: 2010-16)
On 8/7/09, IRS Notice 2009-62, extended the deadline for filing FBAR’s for 2008 (and prior years) for persons with signature authority (but no financial interest) in foreign financial accounts until June 30, 2010.
In March 2010, the IRS extended the 2008 FBAR filings due June 30, 2010 until June 30, 2011 (for FBAR filings due for 2010 and prior years) for “persons with signature authority” (but no financial interest) in foreign financial accounts, defined as including: “Those in which the assets are held in a commingled fund and the account owner holds an equity interest in the fund (including mutual funds). (IRS Announcement: 2010-23)
FBAR: FinCEN (2010 Proposed Regulations)
In March 2010, the Journal of Accountancy published the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) Proposed Regulations (RIN 1506-AB08, amending 31 CFR Part 103) which:
1. Defined a U.S. Person required to file FBAR for foreign accounts (“U.S. Citizen, resident or domestic entity”).
2. Defines signature authority (control assets held in foreign account).
3. Clarifies financial interest in a foreign financial account to include a U.S. Person who has a more than 50% ownership interest (i.e., stock interest [in a corporation], capital interest [in a partnership], beneficial interest in the assets or current income [of a trust]).
Please see the Journal of Accountancy March 2010 discussion, IRS Extends Relief for Some FBAR Filers; Prop. Regs Clarify Certain FBAR Definitions
FBAR Filings and Non-Resident Aliens
Non-resident aliens file Form 1040 NR to report U.S. taxable income. Form 1040 NR does not require a Schedule B (to report foreign accounts by completing boxes 7(a) and 7(b) on Form 1040 Schedule B).
If the person filing Form 1040 NR has foreign accounts, he is not required to attach Schedule B to his tax return (to report the foreign accounts).
Artists, athletes, and entertainers who are not citizens or residents of the U.S. do not have to file FBAR’s (if they occasionally come to the U.S. to participate in exhibits, sporting events or performances).
Generally, a foreign person has to file FBAR’s if they are considered to be doing business in the U.S. (i.e., conducting business in the U.S. on a regular and continuous basis).
FBAR Filings: Financial Interest/Signatory Authority
The FBAR is not a tax return. The FBAR is a financial disclosure (i.e., a report of the Taxpayer’s foreign financial accounts). The FBAR must be filed even if the reported accounts generate no interest or other taxable income. All income earned on the foreign account must be reported on the tax return of the beneficial owner which is an entirely separate reporting from the FBAR. However, once a Taxpayer discloses a foreign account on their Form 1040 Schedule B, the FBAR must be filed.
The FBAR form is designed to disclose the US Taxpayer’s connection to a foreign financial account. The form details the US Taxpayer (e.g., name, address, identification number and balance held in the account over $10,000). The form asks for the name of the financial institution, the country and the account number for each account, if more than one. If there are joint owners, their names and identification numbers are requested and if the person who is reporting claims to have no financial interest in the account (such as a person holding a power of attorney or a corporate officer who has no shares in the corporation), then the name and the identification number of the beneficial owner must be disclosed.
Any US Person who has a financial interest in, or signatory authority over, any financial accounts in a foreign country if the total value of such accounts exceeds $10,000 at any time during the calendar year must file a FBAR. The accounts in Puerto Rico, Guam, and the Northern Mariana Islands, American Samoa, and the US Virgin Islands are exceptions to this rule (see Workbook on the Report of Foreign Bank and Financial Accounts (FBAR) )
US Taxpayers include resident aliens and other foreign individuals who are considered US Persons under the Substantial Presence Test (i.e., because of the time spent in the US in a given year [IRC §§7701(b)(1)(A)(ii) and 7701(b)(3)]). (FBAR rules also apply to a domestic trust, estate, partnership or corporation.)
A US Taxpayer has a required financial interest in an account if they:
1. Are the owner of the account.
2. Have legal title to the account (even if it is for someone else’s benefit).
Both financial interest and the signatory authority generate the requirement to file the FBAR. When the account is in joint names, all joint owners must file their own FBAR (even though the funds may belong to only one of them). An exception to the joint account rule applies only if the joint owners are husband and wife (if they live together).
FBAR - Possible Criminal Charges
According to IRS FAQ (#14) of May 6, 2009, Taxpayers who do not report income from foreign bank/financial accounts or file FBAR’s face up to 19 years in jail:
What are some of the criminal charges I might face if I don’t come in under voluntary disclosure and the IRS finds me?
Possible criminal charges related to tax returns include tax evasion (26 U.S.C. § 7201), filing a false return (26 U.S.C. § 7206(1)) and failure to file an income tax return (26 U.S.C. § 7203). The failure to file an FBAR and the filing of a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C.§ 5322.
A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.
FBAR: Civil Pentalties
IRS FBAR FAQ #15 (posted on 5/06/09) states: Taxpayers who fail to report foreign bank/financial accounts face civil penalties (based on the entity tax reporting due).
What are some of the civil penalties that might apply if I don’t come in under voluntary disclosure and the IRS finds me? How do they work?
The following is a summary of potential reporting requirements and civil penalties that could apply to a taxpayer, depending on his or her particular facts and circumstances.
• A penalty for failing to file the Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”). United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign accounts exceeded $10,000 at any time during the year. Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account. See 31 U.S.C. § 5321(a)(5). Nonwillful violations are subject to a civil penalty of not more than $10,000.
• A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under section 6048. This return also reports the receipt of gifts from foreign entities under section 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
• A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under section 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is five percent of the gross value of trust assets determined to be owned bythe United States person.
• A penalty for failing to file Form 5471, Information Return of U.S. Person with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under sections 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
• A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by sections 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
• A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under section 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
• A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under sections 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
• Fraud penalties imposed under sections 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
• A penalty for failing to file a tax return imposed under section 6651(a)(1). Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
• A penalty for failing to pay the amount of tax shown on the return under section 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
• An accuracy-related penalty on underpayments imposed under section 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.
FBAR Filing: Statute of Limitations
On 6/24/09, in FAQ #31, the IRS confirmed they will be able to assess taxes under a 6 year statute of limitations if the IRS can prove a substantial omission of gross income:
How can the IRS propose adjustments to tax for a six-year period without either an agreement from the taxpayer or a statutory exception to the normal three-year statute of limitations for making those adjustments?
Going back six years is part of the resolution offered by the IRS for resolving offshore voluntary disclosures. The taxpayer must agree to assessment of the liabilities for those years in order to get the benefit of the reduced penalty framework. If the taxpayer does not agree to the tax, interest and penalty proposed by the voluntary disclosure examiner, the case will be referred to the field for a complete examination. In that examination, normal statute of limitations rules will apply. If no exception to the normal three-year statute applies, the IRS will only be able to assess tax, penalty and interest for three years. However, if the period of limitations was open because, for example, the IRS can prove a substantial omission of gross income, six years of liability may be assessed. Similarly, if there was a failure to file certain information returns, such as Form 3520 or Form 5471, the statute of limitations will not have begun to run. If the IRS can prove fraud, there is no statute of limitations for assessing tax.
Currency Transaction Report (CTR) & Suspicious Activity Report (SAR)
U.S. financial institutions file Currency Transaction Reports (CTR) and Suspicious Activity Reports (SAR) with the IRS Detroit Computing Center (uploaded into the IRS/DCC Currency Banking and Retrieval System database at the IRS/DCC).
The combined CTR/SAS currency transaction reports provides a paper trail (or roadmap) for investigations of financial crimes and illegal activities including: tax evasion, embezzlement and money laundering. Between 1994 - 1997, the IRS criminal Investigation Division initiated 1030 investigations as a result of CTR/SAR (Currency Transaction Reports).
Report/Requirements
Currency Transaction Report (CTR) - Filed by financial institutions that engage in a currency transaction in excess of $10,000.
Currency Transaction Report Casino (CTRC) - Filed by a casino to report currency transactions in excess of $10,000.
Report of Foreign Bank and Financial Accounts (FBAR) - Filed by individuals to report a financial interest in or signatory authority over one or more accounts in foreign countries, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year.
IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business - Filed by persons engaged in a trade or business who, in the course of that trade or business, receives more than $10,000 in cash in one transaction or two or more related transactions within a twelve month period.
Suspicious Activity Report (SAR) - Filed on transactions or attempted transactions involving at least $5,000 that the financial institution knows, suspects, or has reason to suspect the money was derived from illegal activities. Also filed when transactions are part of a plan to violate federal laws and financial reporting requirements (structuring).
FBAR: Foreign Land and Artwork
On 6/24/09, the IRS updated their Voluntary Disclosure FAQ clarifying the FBAR reporting requirements for foreign land and artwork owned in the taxpayer’s own name.
In FAQ #37, the IRS confirmed that the FBAR filing for foreign land and artwork owned in the taxpayer’s own name, is due once the asset becomes income-producing (i.e., yields current income, or gain from the sale).
If the foreign land/artwork is held in an entity, the taxpayer is required to file tax information returns (Trust: Form 3520) (Corporation: Form 5471).
Re: FAQ 20 A taxpayer owns valuable land and artwork located in a foreign jurisdiction. This property produces no income and there were no reporting requirements regarding this property. Must the taxpayer report the land and artwork and pay a 20 percent penalty?
FAQ 20 relates to income producing property for which no income was reported. Under those circumstances, no distinction is made between assets held directly and assets held through an entity in computing the 20 percent offshore penalty. However, if the taxpayer owns nonincome producing property in the taxpayer’s own name, there has been no U.S. taxable event and no reporting obligation to disclose. The taxpayer will be required to report any current income from the property or gain from its sale or other disposition at such time in the future as the income is realized. Because there has as yet been no tax noncompliance, the 20 percent offshore penalty would not apply to those assets. If the foreign assets were held in the name of an entity such as a trust or corporation, there would have been an information return filing obligation that may need to be disclosed.
FBAR: Foreign Accounts with Multiple Signatories
On 6/24/09, the IRS updated their Voluntary Disclosure FAQ clarifying the FBAR reporting requirements for foreign accounts with multiple signatories:
If parents have a jointly owned foreign account on which they have made their children signatories, the children have an FBAR filing requirement but no income. Should the children just file delinquent FBARs as described by FAQ 9 and have the parents submit a voluntary disclosure? Will both parents be penalized 20 percent each? Will each have a 20 percent penalty on 50 percent of the balance?
Only one 20 percent offshore penalty will be applied with respect to voluntary disclosures relating to the same account. In the example, the parents will be jointly required to pay a single 20 percent penalty on the account. This can be through one parent paying the total penalty or through each paying a portion, at the taxpayers’ option. For those signatories with no ownership interest in the account, such as the children in these facts, they may file delinquent FBARs with no penalty as described in FAQs 9 and 41. However, any joint account owner who does not make a voluntary disclosure may be examined and subject to all appropriate penalties.
If there are multiple individuals with signature authority over a trust account, does everyone involved need to file delinquent FBARs? If so, could everyone be subject to a 20 percent offshore penalty?
Only one 20 percent offshore penalty will be applied with respect to voluntary disclosures relating to the same account. The penalty may be allocated among the taxpayers making the disclosures in any way they choose. The reporting requirements for filing an FBAR, however, do not change. Therefore, every individual who is required to file an FBAR must file one.
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