FBAR: handle with care.

• Author: Andreozzi, Randall P.
• Position: Report of Foreign Bank and Financial Accounts

Under the Bank Secrecy Act, (1) U.S. persons with certain interests in bank or other financial accounts located in foreign countries are subject to a reporting requirement if the value of the accounts exceeds $10,000. Where the rule applies, the taxpayer must file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly known as an "FBAR."

Prior to 2004, these requirements often received limited attention from taxpayers and their advisers, for a variety of reasons. (2) All that has changed. Now, a U.S. person who ignores the FBAR requirements is exposed to a significant penalty regime, including civil and criminal sanctions; the civil penalties alone can generate a liability greater than the value of the foreign account. (3) These provisions are in addition to those that apply under the tax laws, such as the 75% civil fraud and the 20% or 40% accuracy-related penalties. (4)

To encourage FBAR filings, the IRS offered a voluntary program in 2009, known as the Offshore Voluntary Disclosure Program (OVDP). The OVDP provided the opportunity for reduced reporting penalties for those who came forward under its terms. The IRS offered a second voluntary disclosure initiative last year, which gave taxpayers who had not previously met the reporting rules another opportunity to become compliant. Under the 2011 program, labeled the Offshore Voluntary Disclosure Initiative (OVDI), U.S. persons who chose to participate were subject to various requirements, including filing original or amended tax returns and FBAR forms for the years in question, and possibly paying a penalty equal to 25% of the highest aggregate balance in the foreign accounts for the period covered by the initiative. (5) The 2011 OVDI closed on Sept. 9, 2011.

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In the wake of these two programs, tax practitioners with clients holding unreported foreign bank accounts find themselves in interesting circumstances. Those with clients who elected to participate in either the OVDI or OVDP are likely still embroiled in the complex examination regimes of those programs. (6) Those with clients who, for whatever reason, did not participate in either program, face the question "What do I do now?" The IRS anticipated this issue and addressed it on Jan. 9, 2012, announcing yet another voluntary disclosure initiative. This time, the program remains open indefinitely.

Under the 2012 rules, the 25% 2011 penalty, applicable in some cases to the highest aggregate balance in foreign accounts covered by the initiative, has been replaced by a higher penalty rate of 27.5%. Otherwise, the terms of the new voluntary disclosure program are substantially similar to the 2011 OVDI. With this new and potentially permanent program, the IRS has created a unique doorway to FBAR compliance that not-so-coincidentally dovetails with the new reporting requirements of the Foreign Account Tax Compliance Act (FATCA), which was enacted in March 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. (7) For practitioners, this confluence of events reinforces the importance and pervasiveness of the FBAR rules, especially in light of the punitive nature of the sanctions that can apply when the rules are violated and the fact that many taxpayers appear to be unaware of the FBAR and now FATCA obligations that may apply. (8)

This article examines the FBAR provisions and describes when reporting is required and what information must be provided. It also discusses the consequences of noncompliance, including the civil and criminal penalties that may apply under Title 31 and under the Internal Revenue Code. The article includes a discussion of how tax advisers should handle FEAR requirements and considers specifically what to do for clients who have failed to provide the mandated reports, including those who have made so-called quiet disclosures. (9) Finally, it suggests steps that should be adopted to minimize FEAR problems for both clients and advisers and describes what is required under the new FATCA provisions.

Disclosure Requirements In General

The FBAR rules apply to "United States persons" with offshore financial interests that exceed $10,000. The term "United States person" includes citizens, residents, and entities such as corporations, partnerships, limited liability companies, or similar organizations created under U.S. laws. (10) Estates are subject to the disclosure rules, as are trusts, including cases where trust income, deductions, or credits are reported by another taxpayer under income tax rules (11) (e.g., a grantor trust). In general, a "resident" refers to a noncitizen who is present within the United States a certain number of days in the current and preceding two years. (12)

The disclosure requirements are triggered when the maximum aggregate value of the accounts held by the U.S. person exceeds $10,000 at any time during the calendar year. The maximum value is the largest amount of assets appearing on any quarterly or more frequent account statement issued for the applicable year. (13) Where the funds are held in foreign currency, the determination of maximum value is calculated by converting the account into U.S. dollars, using the Treasury Department's Financial Management Service rate from the last day of the calendar year. (14)

One of the most significant questions for practitioners is whether their client is even required to file. Although not everyone must file and not every type of account is reportable, the filing requirement applies to a broader range of assets than most advisers might think. For example, updated regulations expand the class of interests that must be reported to include gold and expand the individuals subject to disclosure to citizens living abroad, dual citizens, etc. (15) The possibility of future regulations further increasing FBAR obligations cannot be ruled out; practitioners must stay alert to changes in all disclosure rules affecting offshore assets. (16)

Accounts Triggering Disclosure

"Foreign financial accounts" that are reportable under the FBAR rules include bank accounts; (17) accounts with persons engaged in the business of buying, selling, trading, or holding stock or other securities; and "other" financial accounts. This last term includes insurance and annuity policies with a cash value and also accounts with mutual funds or similar pooled investments. (18) An account with a broker or dealer for futures or options transactions in a commodity on a comodity exchange also qualifies. (19)

Investments with foreign hedge funds and private equity funds apparently are not reportable. (20) Disclosure also is not required for individual bonds, notes, or stock certificates held by the taxpayer. (21) This means that a U.S. person who owns stock directly, for example, is not required to report, while the same shares held through a typical brokerage account at a foreign broker will trigger an FBAR requirement. (22)

The disclosure rules apply only to "foreign" financial accounts. Foreign refers to the location of the account, not the institution.23 In other words, an account with a branch of a Canadian bank that is located in Detroit would not trigger a filing requirement. (24) However, a deposit with the Toronto branch of a U.S. bank would be treated as foreign. (25)

Financial Interest

A U.S. person with a "financial interest" in a reportable account is subject to the FBAR rules. "Financial interests" include the obvious, such as ownership of record or legal title. (26) However, the term also encompasses more indirect stakes in an offshore investment. For example, a U.S. citizen who directly or indirectly owns more than 50% of the total value or voting power of the stock in a corporation has a financial interest in the foreign financial accounts the corporation owns. (27) Similar rules apply to partnerships and to trusts. (28) A U.S. person cannot avoid FBAR requirements by placing ownership of a reportable account in the name of an agent, nominee, or someone else acting on the U.S. person's behalf. (29)

A financial interest also exists if a U.S. person has signature authority over a foreign financial account. This means the U.S. person has authority to control the investment by direct communication with the bank, for example, that maintains the account. (30) This apparently extends to internet authorization of a transaction through the use of passwords. (31)

If more than one individual has signature authority, each is treated as having a financial interest. (32) In some situations involving, for example, certain bank officers or employees, persons with signature authority but no financial interest in an account are not required to make an FBAR report. (33) A modified disclosure is required when a U.S. person with signature authority over his or her employer's offshore account lives outside the United States and the employer also is located outside the country. (34)

It is possible that multiple parties have a reportable interest in an investment and are subject to a disclosure requirement. This could occur, for example, because of who has signature authority over an account or because of coownership. If both persons use the same tax accountant, the adviser may be placed in a difficult position, as where one client chooses to satisfy the FBAR requirements but the other does not. In that case, the tax accountant should consider AICPA guidance when preparing returns. Under the AICPA's Statements on Standards for Tax Services (SSTS), a CPA is required to take into account information actually known from another person's return, to the extent it is relevant and its consideration is necessary to properly prepare the taxpayer's return. (35) It is possible withdrawal from the engagement may be necessary. (36)

Where an offshore investment is jointly owned by a husband and wife, special rules exist that may permit only one FBAR to be filed on the couple's behalf. (37) This exception does not...