In an increasingly globalized society, many people choose to open offshore accounts to deposit a portion of their wealth. When doing so, it’s important to follow the IRS’s strict foreign accounts reporting requirements. In a nutshell, if you have a financial interest in or signature authority over any foreign accounts, including bank accounts, brokerage accounts, mutual funds or trusts, you must disclose those accounts to the IRS and you may have additional reporting requirements. (more…)
Posts tagged ‘FBAR’
FBAR, Form 8938 filings increase as taxpayers become more aware of reporting requirements
Six years ago, Congress passed the Foreign Account Tax Compliance Act (FATCA), which set in motion a wave of new reporting and disclosure requirements by individuals, foreign financial institutions, and others. In response, the IRS created a host of new rules and regulations; and new forms for these reporting requirements. One key FATCA form – Form 8938, Statement of Specified Foreign Financial Assets – has seen usage steadily increase since passage of FATCA, the IRS recently reported. At the same time, more individuals are filing a related form – FinCEN Form 114, Report of Foreign Bank and Financial Accounts (known as the FBAR), which reached a record high in 2015. (more…)
An individual taxpayer has learned the hard way that the IRS does not look kindly upon the failure to read all the items on a tax return and its instructions. Even though he voluntarily chose to participate in the IRS’s Offshore Voluntary Disclosure Program (OVDP) by reporting foreign assets, the IRS nevertheless held him liable for the maximum civil penalty for his failure to file the Report of Foreign Bank and Financial Accounts (FBAR).
The IRS and district court (during the subsequent litigation) held the taxpayer liable for this penalty for each of the four year at issue. The district court found that the taxpayer had ignored the instructions for Form 1040, Schedule B, when preparing his own tax returns. When he did hire a professional tax return preparer, however, he still chose not to disclose his interest in the foreign accounts. Therefore, he lacked reasonable cause for the failure.
Ultimately, the district court found that the taxpayer’s behavior suggested a willful failure. As such, the IRS was surely entitled to impose the maximum penalty for a non-willful failure.
The IRS is responsible for enforcing 31 U.S.C. §5314 of the Bank Secrecy Act of 1970, which requires a person residing in the United States who has foreign accounts totaling more than the threshold amount at any time during the year to report them to the IRS by June 30 of that year on Form TD F 90-22.1 (currently known FinCEN Form 114, Report of Foreign Bank and Financial Account, or “FBAR”). A person has reasonable cause for failing to file an FBAR when the failure is committed despite an exercise of ordinary business care and prudence. The person may be excused from the penalty if he can show he had reasonable cause.
The tax years in question in this case range from 2005 to 2008. The taxpayer began to timely file FBARs in 2009 after learning of the IRS’s Offshore Voluntary Disclosure Program. The taxpayer voluntarily participated in the IRS’s program and amended six years of tax returns to report previously unreported income for each of those years from his foreign accounts. Nevertheless, the IRS recommended the maximum penalty ($10,000) for the taxpayer’s non-willful failure to file an FBAR for each of the four years at issue.
The district court found that the taxpayer, a U.S. resident who had kept a bank account with a branch of a Swiss bank located in the Bahamas from 1989 until 2003, did not have reasonable cause for failing to file the FBAR for 2005 through 2008. Although the individual claimed that he had asked a Bahamian law firm about the tax implications of incorporating and running a business in the Bahamas while a U.S. citizen, he did not point to any advice he received that made him believe he was free from any obligation to report the business’s account to the IRS.
Furthermore, the district court found that the taxpayer had ignored the question on Form 1040, Schedule B, asking whether he had an interest in or signature authority over a foreign financial account. The court found that this showed a lack of exercise of ordinary business care or prudence. Had the taxpayer read this question and the instructions for the FBAR during the years in which he prepared his own tax returns, the individual would have discovered that he should have answered “yes” to the question on Form 1040, Schedule B. Furthermore, during the years when the taxpayer hired a tax return preparer, the evidence showed that he answered “no” to the question on the preparer’s tax organizer asking whether he had an interest or signature authority over a foreign financial account.
For all these years, the taxpayer admitted that he had understood that he owned more than 50-percent of the stock of a corporation that owned a foreign bank account. The court noted that the fact that the taxpayer appeared to have ignored these questions on Schedule B and the tax organizers suggested the taxpayer had actually committed a willful failure to file—a higher violation than the one at issue.
The years in question range from 2005 to 2008. The taxpayer began to timely file FBARs in 2009 after learning of the IRS’s Offshore Voluntary Disclosure Program. After learning about the program, the taxpayer amended six years of tax returns to report income for each of those years from his foreign accounts. Nevertheless, the IRS recommended the maximum penalty ($10,000) for the taxpayer’s non-willful failure to file an FBAR for each of the four years at issue.
U.S. taxpayers with foreign financial accounts must file an FBAR (Report of Foreign Bank and Financial Accounts) if the aggregate value of their accounts exceeds $10,000 at any time during the calendar year. The FBAR must be filed by June 30 of the current year to report the taxpayer’s financial accounts for the prior year.
A U.S. taxpayer must report the account not only if the taxpayer has a financial interest in the account, but also if the taxpayer has signature authority over the account. The account must be reported even if it produces no income, and whether or not the taxpayer receives any distributions from the account.
Reporting is required by the Bank Secrecy Act (BSA), not by the Internal Revenue Code. Taxpayers submit the proper form to Treasury’s Financial Crimes Enforcement Network (FinCEN), not the IRS. The form is not submitted with a tax return. However, FinCEN has delegated FBAR enforcement authority to the IRS.
New Form 114
In the past, taxpayers reported their accounts on Form TD F 90-22.1. However, effective for 2014 and subsequent years, taxpayers must report their accounts on new FinCEN Form 114. The June 30 deadline is firm; there is no extension for filing the form late. However, persons who belatedly discover the need to file an FBAR for a previous year can file on Form 114.
In the past, too, taxpayers reported their accounts on a paper form, but Form 114 is only available online, through the BSA E-Filing System website. Paper Form TD F 90-22.1 has been discontinued. This BSA E-Filing System allows the taxpayer to designate the year being reported, so taxpayers may use the same form to file late reports for a prior year. In addition, persons can now authorize a tax professional, such as an attorney, CPA, or enrolled agent, to file on their behalf, by designating an agent on BSA Form 114a.
If two persons jointly maintain an account, each must file an FBAR. However, spouses now qualify for an exception, and can file only one FBAR, provided the nonfiling spouse only owns accounts jointly with the filing spouse. The couple can complete a Form 114a, to authorize one spouse to file for the other, because the electronic system only accepts one signature for an FBAR.
Signature authority is authority to control the disposition of assets held in a foreign financial account. A person with a power of attorney over a foreign account must file an FBAR, even if the person never exercises the power of attorney.
FinCEN has considered amending the rules regarding signature authority. In the meantime, because there is some uncertainty about the meaning of signature authority, FinCEN has deferred FBAR filing by certain individuals that only have signature authority over, but no financial interest in, foreign financial accounts of their employer or a closely related entity. FinCEN Notice 2011-1 first provided an extension for these persons. In Notice 2013-1, FinCEN extended the due date for these persons to file, to June 30, 2015, while FinCEN further considers changes to the rules.
A U.S. person with financial interests in or signature authority over foreign financial accounts generally must file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) if, at any point during the calendar year, the aggregate value of the accounts exceeds $10,000. The FBAR form is due by June 30 of the calendar year following the calendar year being reported. Thus, FBARs for 2011 are due by June 30, 2012. An FBAR is not considered filed until it is received by the Treasury Department in Detroit, MI.
Aggregate value. To determine whether a U.S. person has interests in or authority over foreign accounts with an aggregate value of at least $10,000 during the year, the maximum values of all of the accounts are added together. An account’s maximum value is a reasonable approximation of the greatest value of currency or nonmonetary assets in the account during the year. Account value is determined in the currency of the account.
Signatures. An FBAR filed by an individual must be signed by the filer identified in Part I. The filer’s title should be provided only if the FBAR reports signature authority over a foreign account. In that case, the title should be the one on which the individual’s signature authority is based.
An FBAR filed by an entity must be signed by an authorized individual, whose title must also be provided. If spouses file only one FBAR to report their jointly owned accounts, they must both sign the FBAR.
Jointly owned accounts. Generally, when one account has more than one owner, each owner that is required to file an FBAR must report the entire maximum value of the account. Each owner must also provide the number of other owners of each account. The FBAR should use the identifying information for the principal owner. Simpler rules apply when joint owners are also spouses. If one spouse files an FBAR the other spouse is not required to file a separate FBAR if: (1) all of the nonfiling spouse’s foreign financial accounts are jointly owned with the filing spouse; (2) the filing spouse reports all of those jointly-owned accounts on a timely filed FBAR; and (3) both spouses sign the FBAR.
Where to file. The FBAR is not filed with the taxpayer’s federal income tax return. Instead, it is filed with the Treasury Department (although the IRS accepts hand deliveries for forwarding).
There are four methods for filing an FBAR. (1) Mail the FBAR to: Department of the Treasury, PO Box 32621, Detroit MI 48232-0621; (2) Send the FBAR via an express delivery service to: IRS Enterprise Computing Center, ATTN: CTR Operations Mailroom, 4th Floor
985 Michigan Ave., Detroit MI 48226; (3) Hand deliver the FBAR to any local IRS office (including IRS attaches located in U.S. embassies and consulates) for forwarding to the Treasury, Detroit MI; or (4) File the FBAR electronically. E-filers must first apply to become a BSA (Bank Secrecy Act) e-filer.
Record-keeping. Persons who must file FBARs must also retain records that show: the name in which each account in maintained, the account number or other designation, the name and address of the foreign financial institution that maintains the account, the type of account, and each account’s maximum account value during the reporting period.
These records must be kept for five years following the FBAR’s due date. The records must also be available for inspection by the Treasury Department.
FATCA. Keep in mind that you may also be required to file new IRS Form 8938, Statement of Specified Foreign Financial Accounts. The Foreign Account Tax Compliance Act (FATCA) of 2010 created separate and distinct reporting requirements for certain taxpayers holding specified foreign financial assets. New Form 8938, Statement of Specified Foreign Financial Assets, is similar to the FBAR but has some important differences.
The threshold for filing Form 8938 is higher than the FBAR (and the threshold varies depending on the taxpayer’s status and location). Form 8938 also applies – at this time – to only specified individuals and covers only specified foreign financial assets. Unlike the FBAR form, Form 8938 is filed together with your Form 1040 tax return if required.
Please call our office at (908) 725-4414 if you are not sure whether you must file an FBAR Form or you are unsure about what information to report. While the Treasury has waived some penalties in the past when FBAR reporting was new, it has indicated that it will be less forgiving, if at all, for FBAR Forms required by the June 30, 2012 deadline.
Effective immediately, filers of Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (known as the “FBAR”) may opt to file the FBAR electronically. The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced the long-awaited e-file option for the FBAR.
United States persons are required to file an FBAR if they had a financial interest in or signature authority over at least one financial account located outside of the United States; and the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.
Filers do not file the FBAR with their federal income tax return. The FBAR must be received by the IRS on or before June 30 of the year following the calendar year being reported. Previously, the only option for filers was to file the FBAR on paper. Electronic filing was not an option until now.
To electronically file the FBAR, filers must apply and obtain a user ID. FinCEN reported it will review the application for accuracy and issue a user ID. Additionally, filers must download a free forms viewer, which allows for the preparation of electronic returns and their transmittal. The e-filing platform also has certain operational system specifications.
FinCEN noted that its current capability only allows for one digital signature on an e-filed FBAR. Therefore, each spouse must file a separate FBAR if they choose to file electronically, FinCEN explained. Additionally, FinCen reported that tax preparation software cannot, at this time, be used to create and file the FBAR. FinCEN added it is working to create that capability.
Paper option retained
Filers may continue to file the FBAR on paper if they choose. Any change in that policy will be announced by FinCEN.
(FinCEN News Release, July 18, 2011)
The IRS and Treasury’s Financial Crimes Enforcement Network (FinCEN) have announced new extensions for certain filers to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (known as the “FBAR”). At the same time, the IRS has suspended filing requirements under the Foreign Account Tax Compliance Act (FATCA) title of the Hiring Incentives to Restore Employment (HIRE) Act of 2010 for certain filers.
U.S. taxpayers may be required to report their foreign accounts under the long-standing FBAR rules or the new FATCA rules. In February 2010, FinCEN issued final FBAR regulations. The IRS is currently developing FATCA rules.
In recent months, the IRS and FinCEN discovered that some taxpayers have experienced difficulties in meeting the FBAR deadlines. In response, the IRS provided an extended filing deadline (November 1, 2011) for filers having signature authority over, but no financial interest in, a foreign account in 2009 or earlier years for which the reporting deadline had been extended by Notice 2009-62 or Notice 2010-23.
FinCEN has extended the filing deadline for calendar year 2010 FBARs to June 30, 2012 for officers and employees of investment advisors that have signature authority over, but no financial interest in, foreign accounts of persons that are no registered investment companies under the Investment Company Act of 1940. Earlier in 2011, FinCEN extended the filing deadline for 2010 FBARs for certain financial professionals.
Taxpayers will use new Form 8938, Statement of Foreign Financial Assets to report under FATCA. However, the IRS has not yet published Form 8938. Therefore, the IRS has suspended the filing requirement until it publishes Form 8938. The IRS also has suspended the filing requirement under FATCA for Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, until that form is revised. After the forms are released, taxpayers will be required to file the forms for the year in which the filing requirement was suspended.
If you have questions about the FBAR or FATCA filing requirements, please contact our office.