IRS focuses on the FBAR.

• Author: Dudley, Ryan
• Position: Report of Foreign Bank and Financial Accounts

With the closing of the voluntary disclosure program on October 15, 2009, Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (commonly known as the FBAR), has graduated from a little-known, often forgotten filing requirement to a priority issue that should be at the top of every tax return preparer's checklist. If the IRS was trying to raise the profile of the FBAR, it has succeeded. But in raising the profile for tax compliance purposes, it also raises questions about the guidance provided with the amended FBAR in October 2008 (the 2008 instructions), the reasoning for certain disclosures, and the appropriateness of the associated penalty regime.

The FBAR

The FBAR is an annual report that U.S. persons file to disclose interests in foreign bank and financial accounts (foreign accounts). Those with a financial interest, or a signatory or similar interest, in a foreign account are required to file. It is an information report only. The report is not filed with the tax return, discloses no information about the income derived in a foreign account, and is not used to calculate any tax obligations.

The requirement to file an FBAR comes from the Bank Secrecy Act and related Treasury regulations, not the Internal Revenue Code. However, the regulations specifically delegate the FBAR's administration to the IRS commissioner.

IRS Focus on the FBAR

While there has been an obligation to file FBARs for many years, some taxpayers were not aware of their filing obligations or overlooked them. Prior to 2009, the IRS had not aggressively enforced this filing requirement, which likely contributed to taxpayer complacency about FBAR obligations.

In recent years there has been growing awareness of offshore bank accounts worldwide. Various international groups, including the Organisation for Economic Co-operation and Development, the European Union, and the G-20, have announced programs to reduce offshore tax planning that relies on bank secrecy laws. Particular emphasis has been placed on information exchange programs with countries that have traditionally facilitated offshore finance businesses. The United States has been very active in seeking tax information exchange agreements.

At the same time, UBS, a global financial services company, has been accused of encouraging U.S. customers to take advantage of Swiss bank secrecy rules by opening Swiss bank accounts. There may be as many as 52,000 such accounts with UBS alone, potentially hiding billions of dollars from the IRS. This has highlighted the widespread use of foreign accounts to evade U.S. taxes at a time of record budget deficits, attracting the ire of Congress and outrage on Main Street.

In 2009 alone, the IRS and the administration collectively have announced that more than 1,500 workers will be recruited to enforce international tax rules, with a focus on the deferral of income by corporations and hidden foreign accounts of individuals.

With strong political support, international consensus, new tools such as information exchange agreements, and more agents available to pursue these accounts, the IRS is ideally positioned to find these accounts and hunt down tax evaders.

Who Must File an FBAR?

A "person" is defined in 31 C.F.R. Section 103.11(z) as an "individual, a corporation, a partnership, a trust or estate, a joint stock company, an association, a syndicate, joint venture, or other unincorporated organization or group, an Indian Tribe (as that term is...