FBAR Penalty Relief Under Certain Circumstances

Penalty Relief: Foreign Financial Account Signature Authority

On June 17, 2011, FinCEN issued Notice 2011-2 to facilitate more accurate compliance with FBAR filing requirements. This notice provides administrative relief for certain officers or employees of investment advisors registered with the Securities and Exchange Commission who have signature or other authority but no financial interest in certain foreign financial accounts. The deadline to file an FBAR has been extended to June 30, 2012, for those specified individuals working for advisors registered with the Securities and Exchange Commission.

On May 31, 2011, the Financial Crimes Enforcement Network (FinCEN) issued FinCEN Notice 2011-1 revised June 6, 2011, to provide administrative relief for certain individuals with signature authority over but no financial interest in foreign financial accounts. The deadline to report signature authority has been extended to June 30, 2012, for the following individuals:

• An employee or officer of an entity who has signature or other authority over and no financial interest in a foreign financial account of a controlled person of the entity; or
• An employee or officer of a controlled person (a United States or foreign entity more than 50 percent owned directly or indirectly) of an entity who has signature or other authority over and no financial interest in a foreign financial account of the entity, the controlled person, or another controlled person of the entity.

A United States person, as described above, with signature or other authority and a financial interest in a foreign domiciled bank, securities, financial account or commingled mutual fund or similar pooled funds is required to file the FBAR if the aggregate account value exceeds $10,000 at any time during the calendar year.

Signature authority exists if a person can control the disposition of money or other property in an account by delivery of a document containing his or her signature to the bank or person with whom the account is maintained.

Other authority exists if a person can exercise comparable power over an account with the bank or person with whom the account is maintained directly or through a representative on behalf of the U.S. person, either orally or by some other means.

Penalty Relief: FBAR Voluntary Disclosure Programs (VDP)
Starting in 2009, the IRS has offered delinquent FBAR filers an opportunity to come forward under various Voluntary Disclosure programs to help people hiding offshore accounts get current with their taxes and FBAR filings.  Each of the programs has provided different penalty frameworks for taxpayers coming forward.  A history of the various VDP’s are as follows:

2012 Offshore Voluntary Disclosure Initiative (OVDI)
On January 9, 2012 the IRS announced the 2012 Offshore Voluntary Disclosure Initiative.   In this announcement the IRS indicated that more details about the program would be forthcoming within the next month, yet the program would offer terms similar to the 2011 OVDI (see discussion below) but with a few key differences such as:

• There is no set deadline for people to apply, however the terms of the program could change at any time going forward.  For example, the IRS may increase the penalties at any time or end the program entirely at any point.
• For taxpayer at the highest penalty category the penalty is 27.5% of the highest aggregate balance during the full eight years prior to the disclosure.  That amount is up from 25% in the 2011 OVDI.

The basic similarities between the 2011 and 2012 Offshore Voluntary Disclosure Initiatives are as follows:

• Taxpayer must provide copies of previously filed original (and/or amended) federal income tax returns for the tax years 2003 – 2010.
• Taxpayer must provide complete and accurate amended federal income tax returns for 2003 – 2010 if returns were not previously filed or foreign income was not reported on the originally filed returns.
• Taxpayer must file complete and accurate TD F 90-22.1 Report of Foreign Bank Accounts for calendar years 2003 – 2010.
• Pay the following penalties on any tax due for all years:
  20% accuracy penalty on the full amount of the underpayment of tax for all years
  Failure to file penalties  (IRC §6651 (a) (1))
  Failure to pay penalties (IRC §6651 (a) (2))
• The 27.5 % penalty could be reduced to a 12.5 or 5% penalty in certain cases

For a taxpayer with offshore accounts that, in aggregate, don’t surpass $75,000 in any calendar year a 12.5% penalty rate would apply.  Additionally, the 5% penalty may apply for long-term nonresidents of the U.S. who have the minimum amounts of U.S. sourced income and have been compliant in their country of residence with their tax obligations.

Similar to the 2011 OVDI, if a taxpayer believes that the penalties applicable to them under the 2012 OVDI is disproportionate, there are provisions for them to “opt out” of the program.  Once a taxpayer opts out, they will undergo an IRS examination under which they can attempt to get the IRS to impose a lesser penalty.

The IRS has recently issued a Fact Sheet (FS-2011-13) regarding information for US Citizens and Dual Citizens Residing Outside the US who have not filed their FBARs or Income Tax returns.  The Fact Sheet  provides certain situations under which no FBAR or Income Tax penalties may apply and discusses procedures to follow. 

Check out Information for U.S. Citizens or Dual Citizens Residing Outside the U.S. FS-2011-13 here for more information.

2011 Offshore Voluntary Disclosure Initiative (OVDI)
On February 9, 2011 the IRS rolled out a second voluntary disclosure initiative.  This new initiative related to undisclosed foreign financial accounts for the 2003 – 2010 tax years and was available through August 31, 2011.  The program, referred to as the 2011 Offshore Voluntary Disclosure Initiative (OVDI), carriedhigher penalties than the March 29, 2009 Initiative.  Yet, the penalties under the OVDI could be mitigated under certain circumstances. For 2011 OVDI Frequently Asked Questions and Answers, check out the
Q&A information on the IRS website

The basic terms of the 2011 Offshore Voluntary Disclosure Initiative are as follows:

• Taxpayer must provide copies of previously filed original (and/or amended) federal income tax returns for the tax years 2003 – 2010.
• Taxpayer must provide complete and accurate amended federal income tax returns for 2003 – 2010 if returns were not previously filed or foreign income was not reported on the originally filed returns.
• Taxpayer must file complete and accurate TD F 90-22.1 Report of Foreign Bank Accounts for calendar years 2003 – 2010.
• Pay the following penalties on any tax due for all years:
  20% accuracy penalty on the full amount of the underpayment of tax for all years
  Failure to file penalties  (IRC §6651 (a) (1))
  Failure to pay penalties (IRC §6651 (a) (2))
• In lieu of the statutory FBAR penalties in place, pay a Miscellaneous Penalty equal to 25 percent of the amount in the foreign account on any day during the year with the highest aggregate account and asset value.
• The 25 percent penalty could be reduced to a 12.5 or 5 percent penalty in certain cases

If a taxpayer believes that the penalties applicable to them under the 2011 OVDI is disproportionate, there are provisions for them to “opt out” of the program.  Once a taxpayer opts out, they will undergo an IRS examination under which they can attempt to get the IRS to impose a lesser penalty.

It should be noted that the  2011 OVDI is not available if the IRS has initiated a civil examination of the taxpayer regardless of whether it relates to FBARs or not.  Additionally, taxpayers under criminal investigation by the IRS’s Criminal Investigation division are also ineligible.

An IRS news release stated, “The 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution.”

2009 Offshore Voluntary Disclosure Program
On March 23, 2009 the IRS announced the framework of its initial voluntary disclosure program, the Voluntary Disclosure Initiative (VCI) related to FBARs.  Under the VCI, taxpayers had until October 15, 2009 to make timely voluntary disclosures of their Foreign Bank Accounts under the following terms:

• Taxpayer was required to file or amend income tax returns for tax years 2003 – 2008.
• Taxpayer was required to file Form TD F 90-22.1 Report of Foreign Bank Accounts (also referred to as  an “FBAR”)
• Tax and interest was to be assessed on any tax due on the returns filed
• The IRS assessed either a 20 percent accuracy related penalty or a 25 percent delinquency penalty on the income tax owing for each year.
• In lieu of the statutory FBAR penalties in place, the IRS assessed a Miscellaneous Penalty equal to 20 percent of the amount in the foreign account on any day during the year with the highest aggregate account and asset value
• The 20 percent penalty could be reduced to 5 percent if the following applied:
  • The taxpayer did not open or cause any foreign accounts to be opened or foreign entities to be formed
  • There has been no activity in the foreign account or entity (no deposits, withdrawals, etc.) during the period the account was controlled by the taxpayer
  • All applicable US taxes have been paid on the funds deposited into the foreign accounts.

While the March 23, 2009 VCI raised awareness of the FBAR filing requirements acutely, the IRS believed there were still many taxpayer’s that had not come forward and there was still a lot of non compliance.

What Should You Do Next?
Please contact a member of our International Tax team.  We at Freed Maxick  are poised to assist you in assessing your FBAR filing requirements, assimilating the necessary information and preparing your current and past due FBARs.  We also have considerable experience in helping taxpayer’s that have not been historically compliant to deal within the IRS guidelines and minimize their potential penalties through the various IRS Voluntary Disclosure Programs that have been available.

As IRS Commissioner Doug Shulman has stated  “for taxpayers who continue to hide their head in the sand, the situation will only become more dire.  They should come forward now under our Voluntary Disclosure Practice and get right with the government”.

Do You Need Our Help?
Unsure if you are affected? Take our FBAR survey to find out if you may need assistance from our team. We will be happy to get in touch with you as soon as possible to address your FBAR tax needs.

Related Links
International Tax Services
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Foreign Bank Account Report (FBAR)
Failure to File FBAR | Penalties
Recent FBAR Developments
Foreign Account Tax Compliance Act (FATCA)
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