Foreign Bank Account Report (FBAR)

IRS FBAR Alert

IRS announces limited FBAR reporting relief

A new notice provides administrative relief to certain persons who may be required to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), for calendar year 2009 and earlier calendar years. Background. Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing TD F 90-22.1, with the Department of the Treasury on or before June 30, of the succeeding year. On Aug. 31, 2009, IRS published Notice 2009-62, 2009-35 IRB 260 , which extended the filing deadline for (i) persons with no financial interest in a foreign financial account but with signature or other authority over that account (“signature authority”); and (ii) persons with a financial interest in, or signature authority over, a foreign financial account in which the assets are held in a commingled fund (“foreign commingled funds”). This extension was provided in order for the Treasury Department to have the time necessary to develop comprehensive FBAR guidance.

Since the issuance of Notice 2009-62 , the Treasury Department has published proposed FBAR regs, as well as proposed revisions that clarify instructions for the FBAR

New relief. To provide taxpayers with guidance on who is required to file FBARs due on June 30, 2010, and in particular to provide immediate guidance to taxpayers on how to answer FBAR-related 2009 federal income tax return questions (e.g., Schedule B of Form 1040, the “Other Information” section of Form 1041, Schedule B of Form 1065, and Schedule N of Form 1120), IRS is providing the following administrative relief: 

• Signature authority. Persons with signature authority over, but no financial interest in, a foreign financial account for which a FBAR would otherwise have been due on June 30, 2010, will now have until June 30, 2011, to report those foreign financial accounts. This new deadline applies to FBARs reporting foreign financial accounts over which the person has signature authority, but no financial interest, for the 2010 and prior calendar years. 
  
  
• Certain foreign commingled funds. Persons with a financial interest in, or signature authority over, a foreign commingled fund that is a mutual fund are required to file a FBAR unless another filing exception, as provided in the FBAR instructions or other relevant guidance, applies. IRS won't interpret the term “commingled fund” as applying to funds other than mutual funds with respect to FBARs for calendar year 2009 and prior years. Thus, IRS won't apply its enforcement authority adversely to persons with a financial interest in, or signature authority over, any other foreign commingled fund with respect to that account for calendar year 2009 and earlier calendar years. A financial interest in, or signature authority over, a foreign hedge fund or private equity fund is included in this relief. 
  
  
• FBAR-related questions on federal tax forms. Provided the taxpayer has no other reportable foreign financial accounts for the year in question, a taxpayer who qualifies for the filing relief provided in Notice 2010-23 should check the “no” box in response to FBAR-related questions found on federal tax forms for 2009 and earlier years that ask about the existence of a financial interest in, or signature authority over, a foreign financial account.

IRS Clarifies Requirement for Filing FBAR Form

June 5th, 2009 - WASHINGTON — Internal Revenue Service officials announced today that they would allow taxpayers to rely on the definition of a United States person as set forth in the prior instructions to the FBAR form when determining their filing requirement. This announcement affects those preparing for the coming June 30, 2009 deadline. The IRS took this action to reduce burden after concerns and questions were raised regarding  the  new instructions issued last year on who must file the revised Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, or FBAR). For this year, taxpayers and others can rely on the definition of a United States person included in the prior instruction: “United States Person The term “United States person” means (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust.” All other requirements of the current version of the FBAR form and instructions (revised in October 2008) are still in effect.  The current version of the form must be used when filing an FBAR. This substitution affecting who must file the FBAR applies only to FBARs due on June 30, 2009.   The IRS will be following up with additional guidance on the requirement to file for future years.  

For further information, please see attached Announcement 2009-51.

NEW! View Frequently Asked Questions about FBAR

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In recent months there has been a flurry of activity and discussion among both the IRS and tax practitioners regarding the new version of Form TD F 90-22.1 (“Report of Foreign Bank and Financial Accounts” or “FBAR”) that was issued in late 2008. While FBAR reporting requirements have been in place since 1970, significant revisions to the form and associated penalties for non-compliance have garnered the attention of many taxpayers and practitioners over the last six months. The Internal Revenue Service (IRS) has determined that there is a significant amount of non-compliance in this area and has therefore indicated that they will be stepping up enforcement of potentially considerable penalties related to non-filing.

Many United States taxpayers are simply unaware of the requirements to report such foreign account information.  The following is a summary of some of the basics related to FBARs and a description of a recently announced Voluntary Compliance Program that the IRS has put forward in an effort to bring non-filers into compliance with the laws.

FBAR - Financial Account Basics

FBAR Purpose: The general purpose of the FBAR is for each United States person (see discussion below) to disclose a financial interest or signature authority in financial accounts located in foreign jurisdictions. 

Financial Accounts Defined: Financial accounts are defined to include any of the following:

• Bank accounts (savings, demand, checking, deposit or any other account maintained with a financial institution)
• Security accounts (brokerage)
• Mutual funds
• Securities, derivatives or financial instrument account
• Debit and Prepaid Credit Cards maintained with a financial institution
• Certain types of Annuities or pension accounts

What is Financial Interest?  A financial interest in a financial account means an interest, for a United States person, described in one of the three situations below: 

1. An account for which such person is the owner of record or has legal title
2. An account for which the owner of record or holder of legal title is: 

• A person acting as an agent, nominee, attorney or in some other capacity on behalf of a US person
• A corporation in which the US person owns directly or indirectly more than 50 percent of the vote or value of all shares of stock
• A partnership in which the US person owns an interest in more than 50 percent of the profits or capital of the partnership
• A trust in which the US person either has a beneficial interest (directly or indirectly) in more than 50 percent of assets or receives more than 50 percent of current income

    3.  An account for which the owner of record or holder is a trust for which a trust protector has been appointed.

The mechanism for reporting the FBAR information is filing Form TD F 90-22.1.  The form is required when the sum of the highest values in all of a taxpayer’s financial accounts exceeds $10,000 during the calendar year. It should be noted that when determining if one should file the TD F 90-22.1, all foreign (non-US) financial accounts must be aggregated using their highest value during the calendar year.  A common misconception is that if an account is under $10,000, no filing is required and this may not necessarily be the case.

Who Must File FBAR?

FBAR filings are required for any “United States person” to report the existence of foreign bank, brokerage and similar accounts.  After the recent revisions to the FBAR rules, a US person fits into one of the following categories: 

• A citizen or resident of the United States
• Green Card holders
• Domestic Partnerships
• Domestic Corporations
• Domestic Trusts
• Any person “in and doing business in the United States”
• Individuals that have signing authority over a non-US account (if such person can control the disposition of money or other property)

ALERT: Per Announcement 2009-51, The IRS Clarified Requirement for Filing FBAR Form Due This Month. There is a temporary suspension of FBAR filing requirements for Persons who are not Citizens, Residents or Domestic Entities However, this substitution affecting who must file the FBAR applies only to FBARs due on June 30, 2009. Additional guidance will be issued with respect to FBARs due in subsequent years.  

However, for subsequent years under the recent expansion of the definition of US persons, the new FBAR requirements apply to persons in and doing business in the US.  The effect of this change to the definition and its potential ramifications are: 

• Non-resident aliens working in the US (as an employee or independent contractor) may be subject to FBAR filings because that individual is “in and doing business in the US” and has signing authority over foreign financial accounts.
• Foreign corporations, partnerships, trusts, etc. that are doing business in the US may also be subject to FBAR filings.  For example, foreign corporations with branches in the US or foreign investors in US partnerships that are doing business in the US are deemed to be doing business themselves in the US and therefore may be subject to the FBAR filing requirements.
• Entities that are disregarded for tax purposes are not disregarded for FBAR reporting purposes.
• Individuals who meet the “substantial presence test” (ie. “snowbirds”) would need to file even if they fail to file the IRS Form 8840.

Under these new revisions, in certain circumstances, taxpayers may be exempt from US federal income taxation under a Tax Treaty with their country of residence, yet will still be subject to the FBAR filing requirements.

Penalties for Failure to File FBAR

In most of its recent correspondence, the IRS has announced that it intends to vigorously enforce penalties for FBAR non-compliance, going as far back as 6 years (the statute of limitations under the Bank Secrecy Act, Title 31).

The maximum annual penalties for failure to file are as follows:

 

• Civil Penalties:
• $10,000 for non-willful noncompliance
• $100,000 or 50% of the amount of underlying accounts balance at the time of the violation if determined to be willful
   
• Criminal Penalties:
• $250,000 fine and 5 years imprisonment
• $500,000 fine and 10 years imprisonment if in tandem with any other US law

What to Do if you Haven’t Filed?

On March 23rd, 2009 the IRS announced a Voluntary Disclosure program related to FBAR’s and other information returns that have not been filed.  An overview of the IRS initiative provides for the following with regard to FBARs:

  

• This program is not available to taxpayers that have already been contacted by the IRS regarding this issue.
• A new penalty framework will apply for voluntary disclosures that are true, timely, and complete and presented with full cooperation of taxpayers in all areas, including payment.
• Assurance that those taxpayers who qualify will not be subject to criminal or civil fraud penalties (see penalties for failure to file above).
• Establishes specific sets of procedures and guidelines for how disclosures will be handled which expires on September 23, 2009.
• Is the only means by which offshore non-compliance may be resolved
• Covers the six year period 2003 to 2008.

There are two scenarios that may apply under this Voluntary Disclosure program.  The IRS initiative generally provides the following:

1. Failure to file FBAR and to report foreign income and pay tax:

• File six years of amended or delinquent tax returns and FBARs.
• Pay all taxes and interest due for the six years
• Pay a 20% accuracy penalty or 25% delinquency penalty
• Pay a one-time 20% penalty in the year with the highest aggregate account balance.  In certain circumstances this penalty will be reduced to 5%.

    2.   Failure to file FBAR only:

• Assumes all income from foreign accounts has been reported and taxes have been paid.
• Taxpayer should file delinquent FBAR’s and attach an explanation for late filing.
• IRS will not impose a penalty (see Penalties for failure to file above) for the failure to file the FBARs.

What Should You Do Next?

Please contact a member of our International Tax team. We at Freed Maxick/RSM McGladrey are poised to assist you in becoming compliant with regard to your FBARs and work with you regarding the Voluntary Disclosure Program.  The IRS latest rhetoric is that they know there is a significant amount of non-compliance in the FBAR area.  As discussed above, the potential penalties can be devastating and the recently announced Voluntary Disclosure initiative could greatly reduce the penalties compared to what may result if taxpayers don’t come forward and are identified by the IRS.

As IRS commissioner Doug Shulman recently 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”.

We Serve all 50 States - Contact us to do your tax work We may be based in New York State, however Freed Maxick provides tax services to business all over the U.S., no matter your location: Alabama, AL; Alaska, AK; Arizona, AZ; Arkansas, AR; California, CA; Colorado, CO; Connecticut, CT; Delaware, DE; Florida, FL; Georgia, GA; Hawaii, HI; Idaho, ID; Illinois; IL; Indiana, IN; Iowa, IA; Kansas, KS; Kentucky, KY; Louisiana, LA; Maine, ME; Maryland, MD; Massachusetts, MA; Michigan, MI; Minnesota, MN; Mississippi, MS; Missouri, MO; Montana, MT; Nebraska, NE; Nevada, NV; New Hampshire, NH; New Jersey, NJ; New Mexico, NM; New York; NY, North Carolina, NC; North Dakota, ND; Ohio, OH; Oklahoma, OK; Oregon, OR; Pennsylvania, PA; Rhode Island, RI; South Carolina, SC; South Dakota, SD; Tennessee, TN; Texas, TX; Utah, UT; Vermont, VT; Virginia, VA; Washington, WA; West Virginia, WV; Wisconsin, WI; Wyoming, WY

 

 

 

 

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Contact our International Tax Management Team:

Freed Maxick’s International Tax Group and has extensive experience (including Big Four experience) working with U.S. based companies doing business abroad as well as foreign-owned companies doing business in the U.S. The group provides tax and consulting services to privately held and public (SEC) companies. Affiliated with RSM McGladrey, the 5th largest accounting firm in the U.S., Freed Maxick has vast national and international resources to help your business expand nationally and internationally. Additionally, through the international network of RSM McGladrey (RSM International) we have immediate access to one of the highest levels of international tax expertise in the world.

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Howard Epstein, CPA	Bill Iannarelli, CPA
Director	Senior Manager