Foreign Bank Account Reporting – Are you up to date and compliant?

By Stuart Lyons March 7, 2011

The IRS continues to amass more information and pursue people internationally; the risk to individuals hiding assets offshore is increasing. One of the major IRS’ “Big Sticks” to pursuing US taxpayers hiding assets and income offshore is the requirement that a US taxpayer report a financial interest or a signature authority over such a financial interest. Such form is known as the FBAR form and its actual form name is TD F 90-22.1.

The IRS is obtaining all kinds of information from foreign banks about US taxpayers that have foreign accounts and that used to be thought of as “secret”. If that information is matched against a taxpayer that has not filed an FBAR, then the IRS can assess draconian penalties for willful failures to file. It does not even have to go through the litigious tax fraud process. Just two years of not filing can result in confiscation of 100% of the foreign account, through the assessment of these penalties.

The following is a discussion of some of the important definitions and issues concerning the filing of this foreign bank account reporting obligation.

The FBAR is used to report a financial interest in, or signature or authority over, one or more financial accounts in foreign countries. No report is required if the aggregate value of the accounts does not exceed $10,000. Filings for the previous calendar year are due June 30 of the following year.

Executive summary

• Requires US person to file a report a financial interest in or signature authority over foreign financial accounts.
• Reporting obligation only if value of accounts during the calendar year exceeds $10,000.
• US person is an individual, corporation, partnership, LLC, estate or trust.
• Financial account- bank account, securities account, insurance policy, account with a broker dealer, mutual fund or pooled investment account. Does not currently include hedge funds or private equity funds.
• Foreign – Located outside US, Indian lands, US territories, and US possessions.
• Significant penalties for not filing timely.
• Consolidated filing procedures are available for officers and affiliated entities that have signature authority over such accounts.
• The IRS has announced that they will not assert failure to file penalties if there are no underreported tax liabilities related to foreign assets and foreign information returns (FBAR, 5471, 8858, 8865, 926, 3520, and 3520A forms) are filed by August 31, 2011.
• Both regular and a special Voluntary Disclosure procedure(s) are available to correct past non-filing violations. The special voluntary disclosure procedure ends on August 31, 2011.

Purpose of the reporting obligation

The original reporting law was enacted in 1970 to address the increasing concern that U.S. persons were using offshore bank accounts to evade taxes. Accordingly, Form TD F 90-22.1 is an informational report required under the Title 31 of the U.S. code. It is not an income tax return required under the Internal Revenue Code.

General rule

According to 31 U.S.C. Section 5314 (not part of the Internal Revenue Code), which has not changed in 20 years;

“The Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business, in the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency.”

Who must file an FBAR

U.S. citizens, residents, and certain other persons (this would include all US organized entities such as Corporations, Partnerships, and LLC’s)  having a financial interest in or signature authority over financial accounts in a foreign country if for any calendar year, the aggregate value of all foreign accounts exceed $10,000 at any time during the year.

A person who holds a foreign account may have a reporting obligation even though the account produces no taxable income. Checking the appropriate box on Form 1040, U.S. Individual Income Tax Return, Schedule B, and filing the FBAR, satisfies the account holder’s reporting obligation.

Under IRS Notice 2010-23, persons with signature authority over, but no financial interest in, or signature authority over, a foreign commingled fund, have until June 30, 2011, to file a FBAR for the 2009 and earlier calendar years with respect to any such foreign account or fund. Under this same IRS Notice 2010-23, persons with a financial interest in, or authority over, a foreign hedge fund or private equity fund do not have to file FBARs with respect to these accounts for calendar year 2009 and earlier years. (The new final regulations have “reserved” treatment of these accounts for possible future reporting, but as of February 2011, no reporting is required for 2010 and prior years.)

Late filed FBARs

There is NO extension of time available for filing an FBAR. Extensions of time to file a federal tax return does NOT extend the time for filing an FBAR. If a delinquent FBAR is filed, attach a statement explaining the reason for the late filing. This form does NOT follow the federal timely mailing rule. It must arrive at the required place of filing by June 30.

Financial interests

What is a financial interest?

The term “financial interest” is now defined as an interest held by a U.S. person if the person is the owner of record of the interest or the U.S. person has legal title over the interest “whether the account is maintained for his or her own benefit or for the benefit of others, including non-United States persons”. So now “financial interests” can include the following:

1. Accounts at foreign financial institutions held for the benefit of minor children
2. Accounts at foreign financial institutions held by an asset protectorate trust
3. Accounts at foreign financial institutions where a son or daughter has alternative signatory authority over the account for that of a elder parent
4. Foreign financial accounts of a
   1. corporation in which the United States person owns directly or indirectly more than 50% of the shares or controls more than 50% of the voting power for all the shares of stock;
   2. partnership in which the United States person owns an interest in more than 50% of the profits or more than 50% of the capital;
   3. trust in which the United States person has a present beneficial interest , either directly or indirectly , in more than 50% of the assets or from which such person receives more than 50% of the current income.
   4. financial accounts of lower tier foreign subsidiaries and partnerships for which the 50% control test has been met.
5. Any foreign account in which the assets are held in a commingled fund, and the account holder holds an equity interest in the fund; e.g. foreign mutual fund.
6. An account that is a insurance policy with a cash value or an annuity policy.
7. Debit and prepaid credit cards held in the name of a foreign financial institution.

A reportable financial interest does not exist for individual bonds, notes, or stock certificates held by the filer, or an unsecured loan to a foreign trade or business that is not a financial institution.

Application to parent-subsidiary corporate relationships

A corporation which owns directly or indirectly more than a 50 percent interest in one or more other entities required to file a FBAR will be permitted to file a consolidated report, on behalf of itself and such other entities. Each foreign account has to be listed with the corporate name, identifying number and address of the foreign financial account as shown on the books of the financial institution.

What about the corporate officer or employee with signatory authority over the foreign financial account? Is there a separate filing required for this person? Generally, yes. There is a dual filing requirement, where both the individual with signing authority must file and the company must file.

However, there is an exception for publicly held corporations whose stock is traded on a U.S. national securities exchange or a corporation which has assets exceeding $10 million and has 500 or more shareholders. This exception from filing also requires that the officer or employee be notified in writing by the chief financial officer or similar responsible officer of the corporation that the corporation has filed a current report, which includes that applicable foreign account.

Specific value required

In the past, reporting the value (size) of foreign accounts was in bands: you could check the box for under $10,000, $10,000 to $99,000, $100,000 to $1 million. Now you report the “maximum” value as shown on statements. What was a relatively simple approach has been made more complicated. In the past, you could make a stab at the size of the account and check one of the boxes. Now you have to review past account statements for the highest value during the year.

Joint accounts

For joint accounts, taxpayers are required to provide the name and address of the other joint owner (or principal joint owner if there is more than one). For spousal joint accounts, spouses may file a single FBAR.

Penalties for not filing

For Minor Violations- 31 U.S.C. Section 5321(a)(5) imposes a penalty of up to $10,000 for any failure to comply with these rules, unless both (a) the violation was due to reasonable cause and (b) income from the account was properly reported on the relevant income tax return.

For Willful Violations – For willful violations, the penalty is the greater of $100,000 or 50% of the balance o the account. Criminal penalties may also apply for failure to file form TDF 90.22.1; the imposition of criminal penalties does not preclude the imposition of a civil penalty.

The statute dramatically increases the exposure for willful violations and, theoretically, with a two-year failure to file, the entire account could be subject to civil penalty since one half the principal is subject to penalty each year.

Voluntary disclosure for previous non- filers

For cases where the income from the foreign accounts have been reported, but FBARs just have not been filed, it is recommended that such late FBARs be reported with a detailed explanation as to the reasons for the late filing. If late filed FBARs are filed before August 31, 2011, the IRS has announced that they will not assess any failure to file penalties.[1] This late filing program also applies to other late filed foreign information returns for IRS forms 5471, 8858, 8865, 926, 2520 and 3520A.

For cases where the income from the foreign accounts has not been reported, the IRS has a new Program, titled the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI). Participating taxpayers must file new or amended tax and information returns for all years covered by voluntary disclosure, including Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). Qualifying taxpayers must pay (i) all taxes and interest due from 2003 to 2010, (ii) either an accuracy or delinquency penalty for each year on the amount of additional tax due, and (iii) a penalty equal to 25% of the amount in the foreign bank accounts in the year with the highest aggregate account balance during the period from 2003 to 2010. The 25% penalty may be reduced to 12.5% for taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the program, or to as low as 5% in a very limited number of cases. Time is of the essence, however, since these benefits are available only to those who complete all requirements before September 1, 2011.

If you have further questions or issues on this subject, please do not hesitate to contact Stuart Lyons, BNN’s International Practice Leader, at 1.800.244.7444.