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.
FBARs and Offshore Hedge Funds
The California Tax Lawyer (Summer 2009 Edition) published my article: FBARs and Offshore Hedge Funds. Please see copy below.
FBARs and Offshore Hedge Funds
After the landmark agreement between the U.S. and Swiss government over secret UBS Swiss bank accounts held by U.S. citizens, the IRS is now focusing on hedge funds in the Cayman Islands. Recently, IRS officials advised that certain U.S. investors in off-shore hedge funds must file a FBAR.
On June 12, 2009, an IRS official stated that the term “financial interest” (which requires a FBAR filing) includes hedge funds that “function as mutual funds.” It appears the IRS and Justice Department will identify U.S. taxpayers who evade U.S. taxes by investing with off-shore hedge funds. The IRS and Justice Department are pressing foreign financial institutions to provide them with information about Americans with “foreign, secret bank accounts.”
Senate Finance Committee Chairman Max Baucus (D., Mont.) has introduced legislation that would require an FBAR to be filed with a tax return. It would also require U.S. financial institutions to report to the IRS transfers of money into any foreign financial account. This would make it possible for the IRS to have information about the creation of a foreign account at the beginning.
Penalty Regime for Foreign Bank Account Filing (FBAR)
The California Tax Lawyer (Summer 2009 Edition) published my article: Penalty Regime for Foreign Bank Account Filing (FBAR), please see copy below.
Penalty Regime for Foreign Bank Account Filing (FBAR)
Each U.S. person who has a financial interest in, or signature or other authority over, one or more foreign financial accounts (valued over $10,000, at any time during a calendar year) is required to report the account on Schedule B/Form 1040, and TD F 90-22.1 (Report of Foreign Bank and Financial Accounts (FBAR)), due by June 30 of the succeeding year (I.R.M. 5.21.6.1. (2/17/09)). The IRS has six years to assess a civil penalty against a taxpayer who violates the FBAR reporting rules.
Failure to file the required report or maintain adequate records (for 5 years) is a violation of Title 31, with civil and criminal penalties (or both). For each violation a separate penalty may be asserted.
(I) Non Willful Violation: Civil Penalty - Up to $10,000 for each violation.
(II) Negligent Violation: Civil Penalty - Up to the greater of $100,000, or 35 percent of the greatest amount in the account.
(III) Intentional Violations -
(1) Willful Failure to File FBAR or retain records of account: (a) Civil Penalty - Up to the greater of $100,000, or 50 percent of the greatest amount in the account; (b) Criminal Penalty - Up to $250,000 or 5 years or both.
(2) Knowingly and Willfully Filing False FBAR: (a) Civil Penalty - Up to the greater of $100,000, or 50 percent of the greatest amount in the account; (b) Criminal Penalty - $10,000 or 5 years or both.
(3) Willful Failure to File FBAR or retain records of account while violating certain other laws: (a) Civil Penalty - Up to the greater of $100,000, or 50 percent of the greatest amount in the account; (b) Criminal Penalty - Up to $500,000 or 10 years or both.
FBAR: Filing Requirements for Gold or other Non-Cash Assets
Under IRS (6/29/09) FAQs regarding Report of Foreign Bank and Financial Accounts (FBAR), the IRS confirmed:
1. An FBAR must be filed whether or not the foreign account generates any income;
2. An FBAR is required for account maintained with financial institutions located in a foreign country if the account holds gold (or other non-cash assets).
FBAR Filing: Domestic Corporations with Foreign Accounts
In the IRS Workbook on the Report of Foreign Bank and Financial Accounts, the IRS advised that a domestic (e.g., NY) corporation that has foreign accounts:
1. The corporation must file a FBAR for the corporations’ accounts.
2. A majority shareholder (over 50% of the value of the stock), must also file a FBAR.
For a domestic corporation with foreign accounts, both the corporation and the majority shareholder must each file a FBAR to report the foreign account (owned by the domestic corporation).
FBAR Filing: Tax Practitioners and Professional Responsibility
U.S. Taxpayers, who fail to file FBAR’s to disclose foreign bank accounts, may seek a reasonable cause exception based on their “tax preparer’s” failure to file the FBAR.
Tax Practitioners (Attorneys, CPA’s) must comply with the FBAR rules as part of their due diligence (as to accuracy) obligation under IRS Circular 230 (Section 10.22).
The FBAR (TD F 90-22.1) is not a tax return. The FBAR is an information report required under the Bank Secrecy Act (BSA) 31 USC 5314 (and related regulations CFR 103.24, 103.27). Related records are required under 31 CFR 103.24 and 103.32.
The Practitioners’ professional responsibility does not require that the Practitioner “audit” their client.
The Practitioner must:
1. Make reasonable inquiries in response to Taxpayer’s information of overseas accounts/transactions.
2. A Practitioner may rely on information provided by a client in good faith.
3. The Practitioner must make reasonable inquiries if information appears incorrect, inconsistent or incomplete.
FBAR Filings: Financial Accounts (U.S. Hedge Funds)
In the IRS 6/29/09 FAQ’s regarding FBAR filings, the IRS advised:
1. If a hedge fund is located in the U.S., with foreign operations, a financial interest in the U.S. hedge fund is not an interest in a foreign financial account for FBAR reporting purposes.
2. If a domestic partnership has a financial interest in a foreign financial account, then it may have to file a FBAR.
3. If a U.S. Person who is an officer, employee or partner of the partnership has a financial interest in, or signature or other authority over a foreign financial account then that person may have to file a FBAR.
4. If a person owns an interest in more than 50% of the profits of the partnership or more than 50% of the capital of the partnership, then that person has a financial interest (for FBAR reporting purposes) in the foreign financial accounts of the partnership and may have to file a FBAR.
Sixth UBS Client Pleads Guilty to Tax Charges
By WebCPA.com Staff
A retired Boeing sales manager is the latest UBS client to plead guilty to filing a false tax return after the Swiss bank agreed to disclose the identities of some of its U.S. clients.
Robert Cittadini of Bellevue, Wash., accepted responsibility for hiding up to $1.86 million in accounts at the Swiss bank and failing to report the income he earned from the accounts on his 2001 to 2003 tax returns. Cittadini also did not file a Report of Foreign Bank and Financial Accounts, or F-BAR form, for each of those years.
Cittadini initially opened an account with UBS in the early 1990s in his own name, but around 2001, Swiss banker Hansruedi Schumaker, who was indicted in August 2009 on conspiracy charges, helped him transfer assets from his UBS account to an account named for Mataropa Finance Limited, a nominee Hong Kong corporation that helped him hide the assets. Swiss lawyer Matthias Rickenbach, also indicted in August, was a director of the Hong Kong entity.
Sentencing in Cittadini’s case is scheduled for Jan. 8, 2010. He faces up to three years in prison and a $250,000 fine. He also has agreed to pay a civil F-BAR penalty based on 50 percent of the highest account balance from 2001 to 2007.
“This is a time of reckoning for those who thought they had found a safe haven for cheating,” said U.S. Attorney Jenny A. Durkan in a statement. “People who avoid paying their fair share hurt all of us who follow the law and conscientiously pay our taxes.”
In February 2009, UBS entered into a deferred prosecution agreement in which the bank admitted to helping U.S. taxpayers hide accounts from the IRS. As part of the agreement, UBS provided the U.S. government with the identities and account information of some U.S. customers of the bank’s cross-border business. Cittadini’s case is the sixth guilty plea arising from that information.
In June 2009, Steven Michael Rubinstein, a Boca Raton, Fla., accountant, pleaded guilty to filing a false tax return. In April 2009, another UBS client, Robert Moran, a Ft. Lauderdale, Fla., yacht broker, pleaded guilty to filing a false tax return. In July 2009, Jeffrey Chernick, of Stanfordville, N.Y., pleaded guilty to filing a false tax return. In August 2009, John McCarthy, a resident of Malibu, Calif., pleaded guilty to failing to report his ownership of and interest in a foreign financial account. In September 2009, Juergenn Homann of Saddle River, N.J., pleaded guilty to failure to file an F-BAR form.
Over the summer, UBS agreed to hand over information on an additional 4,450 U.S. clients under an agreement brokered by the Swiss and U.S. governments.
FBAR Tax Compliance Issues (U.S. Taxpayer)
FBAR rules are not found in the Code. Rather, they are set forth in the Bank Secrecy Act, first enacted by Congress in 1970. Since 2003, however, the IRS bears responsibility for enforcing these rules.
The FBAR rules require that every U.S. Person report (i) any financial interest or authority over a (ii) financial account in a foreign country with (iii) an aggregate value over $ 10,000 at any time during the taxable year. The report must be filed on a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (hence the acronym “FBAR”). U.S. Persons must also disclose the existence of the account on their Form 1040, Schedule B, Part III. This is commonly referred to as “checking the ‘B’ box.”
Taxpayers who fail to disclose the account on their Form 1040 could be subject to criminal sanctions for filing a false tax return.
The FBAR report is due on June 30th. This due date is not subject to extensions. The FBAR report must be filed separately from the U.S. Person’s tax return.
Financial Interest Or Authority
A U.S. Person has a financial interest in a foreign account if he or she is the legal or beneficial owner. Attribution rules apply in making this determination. A person serving as a shareholder, partner, and trustee may also be deemed to hold a financial interest if the owner of the account is (i) a person acting as an agent on behalf of the U.S. Person, (ii) a corporation where the U.S. Person owns, directly or indirectly, more than 50 percent of the outstanding stock, (iii) a partnership in which the U.S. Person owns more than 50 percent of the profits, or (iv) a trust in which a U.S. Person has either a present interest in more than 50 percent of the assets or from which the U.S. Person receives more than 50 percent of the income. If these thresholds arc met, the U.S. Person has an FBAR reporting obligation, regardless of whether he or she has any authority over the account.
Non-owners with authority over a foreign account are also subject to the FBAR reporting rules. Authority means the U.S. Person has the ability to order a distribution or disbursement of funds or other property held in the account. This is not limited to signature authority, but includes the ability to order distributions by verbal commands or other communication. Authority does not include persons who have the right to invest, but not distribute, the foreign account funds.
There is no limitation for taxpayers who have authority over a foreign account, but only in an official capacity. (For example, the president of a corporation, the general partner of a partnership, or the manager of an LLC may be subject to these rules.)
Both the entity, as beneficial owner, and the representative, who has control over the account, may be required to file an FBAR report. Similarly, when more than one U.S. Person has authority over an account, i.e., president and vice president, both persons may have an FBAR reporting obligation.
Even when the account is subject to joint control, and the signature of someone other than the taxpayer is required to cause a distribution, the taxpayer is still considered to have authority over the account for FBAR reporting purposes.
Financial Account In A Foreign Country
The term financial account is broadly defined as any asset account and encompasses simple bank accounts (checking or savings), as well as securities or custodial accounts. It also includes a life insurance policy or other type of policy with an investment value (i.e., surrender value).
Foreign country naturally refers to any country other than the United States. Puerto Rico, U.S. possessions and territories are included as part of the United States (as they should) for these purposes. Accounts held by U.S. Persons in these areas are not foreign accounts subject to FBAR reporting.
The IRS has indicated that a traditional credit card with a foreign bank is not a foreign account. However; use of a credit card as a debit or check card could trigger foreign account status and thus an FBAR reporting obligation.
$10,000 Threshold
To be reportable, the account must have assets the value of which during the year, exceeds $10,000.
The Instructions to the FBAR report state that if the aggregate value of all financial accounts exceeds $10,000 at any time during the year, the U.S. Person must file an FBAR report. A U.S. Person who possesses multiple foreign accounts, all of which have less than $10,000, but which collectively exceed $10,000, may have an FBAR reporting obligation.
Taxpayers may transfer an appreciating asset to a foreign account, such as stock or securities. As these assets increase in value, they may trigger an FBAR reporting requirement.
Whether the account generates any income is not relevant.
Penalties
In an attempt to improve compliance, Congress enhanced the FBAR penalties in 2004. Under pre-2004 law, civil penalties applied only to willful violations. In 2009, civil penalties up to $10,000 may be imposed on non-willful violations. This penalty may be avoided if there was reasonable cause and the U.S. Person reported the income earned on the account. 31 U.S. C. §5321(a)(5).
Although reasonable cause is not defined, the IRS will likely apply the reasonable-cause standard for late-payment/late-filing penalties.
The penalty for willful violations is far more severe. It is equal to the greater of $100,000 or 50 percent of the balance of the account at the time of the FBAR violation. No reasonable cause exception exists for a willful violation. 31 U. S. C. §5321(a)(5)(c) .
The IRS has six years to assess a civil penalty against a taxpayer that violates the FBAR reporting rules.
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