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  1. 1. History Foreign bank account reporting requirements were originally created as part of the Bank Secrecy Act (BSA) of 1970. The BSA authorized the Secretary of the Treasury to require residents or citizens of the United States (or a person in, and doing business in, the United States) to keep records and/or file reports concerning transactions with any foreign agency. This resulted from Congressional concern that foreign financial institutions in jurisdictions with bank secrecy laws were being extensively used to violate or evade US criminal tax and regulatory requirements. There have been few criminal and/or civil prosecutions of US persons that have not complied with the requirements. Reporting became more of a concern to Congress and IRS following 9/11. The Patriot Act of 2001 required the Treasury to study and report to Congress on methods to enhance compliance with reporting requirements. In 2003, the IRS unveiled the Offshore Voluntary Compliance Initiative which included an amnesty provision for certain FBAR non-filers. About the same time, the IRS was delegated authority to administer reporting compliance. Since the expiration of the initiative, Congress, the IRS, and the Treasury have stepped up their efforts to increase compliance. These efforts include the creation of the IRS’ Office of Fraud/BSA in 2004. The Office of Fraud/BSA has primary jurisdiction for civil FBAR enforcement. Also, civil penalties for FBAR noncompliance have been expanded, a new penalty added for non-willful failures, and the penalty for willful violations was increased to eyebrow raising levels (see discussion below). The IRS and Treasury again raised their efforts in 2008. The IRS issued Delegation Order 4-35 on March 24, 2008, which established responsibility within the IRS for the FBAR enforcement functions. The IRS has also updated the Internal Revenue Manual to provide guidance to IRS personnel who are involved in the enforcement initiative. On June 17, 2008, the IRS published IR-2008-79, reminding US persons who have bank and other financial accounts in a foreign country that they may be required to report these accounts to the US Department of Treasury by June 30 of the following year. Last October, the IRS released a revised version of the FBAR, Form TD F 90-22.1. The FBAR and Requirements The IRS posted the newly-designed FBAR on its website September 30, 2008, but did not publicize the event. The new FBAR must be used for all filings effective January 1, 2009. The FBAR is now 5 pages and consists of Parts I through V. The first page looks very similar to the previous FBAR, although an “amended” box is now in the top right corner. Part I must be completed in all cases. Part II starts on page 1 and continues on page 2 and is for reporting financial interests in foreign accounts. Part III is for reporting a joint interest in a financial account. Part IV reports foreign accounts over which the US person has signature authority or other authority. Part V is applicable to corporations filing a consolidated FBAR. Form TD F 90-22.1 is not a tax return. It is a report filed with Treasury to disclose a US person’s financial interest in, and/or signatory authority over, financial accounts in foreign countries with an aggregate value exceeding $10,000 at any time during the tax year. Another piece of the disclosure rules requires US persons to answer questions on their tax return on whether the individual has an interest in a foreign financial account. Questions similar to those at the bottom on Form 1040, Schedule B are also now included on Forms 990, 1041, 1065, 1120, and 1120-S. The instructions to Form TD F 90-22.1 contain only a partial definition of a United States person—“a citizen or resident of the United States, or a person in and doing business in the United States.” Full definitions are in 31 CFR 103.11: Foreign Bank Account Reporting: FBAR Requirements and Penalties By Max Koss, CPA “What happens here stays here” is the marketing slogan of the Las Vegas Convention and Visitors Bureau. The IRS recently began a campaign that could be described as “what happens there needs to be reported here.” The campaign’s aim is to ensure that US persons comply with the requirement to report their financial interest in and/or signatory authority over foreign bank and financial accounts. The recent agreement by Swiss bank UBS to turn over the names of approximately 250 US account holders to the IRS is the latest success in that campaign, and probably not the last. In mid-2008, the IRS published a reminder about the reporting requirement on its website. This was followed by a release of the new version of the foreign bank account report (FBAR, or Form TD F 90-22.1), which was released in October. The IRS also stated its intention to begin more diligently enforcing the penalties for FBAR noncompliance—as far back as six years. Tax preparers may also be subject to penalties in certain circumstances as described below, and they will arguably be held to a higher standard of due diligence. 55INTERIM REPORT 2nd Edition 2009
  2. 2. voting power for all shares of stock; (c) a partnership in which the United States person owns an interest in more than 50 percent of the profits (distributive share of income, taking into account any special allocation agreement) or more than 50 percent of the capital of the partnership; or (d) a trust in which the United States person either has a present beneficial interest, either directly or indirectly, in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income. (Note that the attribution rules for foreign bank account reporting differ from IRS attribution rules). 3. The owner of record or holder of legal title is a trust, or a person acting on behalf of a trust, that was established by such United States person and for which a trust protector has been appointed. A trust protector is a person who is responsible for monitoring the activities of a trustee, with the authority to influence the decisions of the trustee or to replace, or recommend the replacement of, the trustee. Signature or other authority exists if a person “can control the disposition of money or other property in it by delivery of a document containing his or her signature (or his or her signature and that of one or more other persons) to the bank or other person with whom the account is maintained. Other authority exists in a person who can exercise comparable power over an account by communication with the bank or other person with whom the account is maintained, either directly or through an agent, nominee, attorney, or in some other capacity on behalf of the US person, either orally or by some other means.” According to the Q&A, if a trust has a financial interest in a foreign account, the beneficiary of the trust should file an FBAR if the beneficiary is a US person and either has a present beneficial interest in more than 50% of the assets of the trust or receives more than 50% of the current income of the trust. Also note that a US person who owns a Canadian RSP or RRSP must file an FBAR. Penalties for Non-Compliance TheAmericanJobsCreationActof2004enactedanewcivilpenalty for non-willful violations of the FBAR reporting requirements. The Act also increased the penalty for willful violations. The new civil penalty for non-willful violations is $10,000 maximum. The previously existing penalty for willful violations was increased to an amount up to the greater of: (a) $100,000 or (b) 50% of the amount of the transaction or the balance in the account at the time of the violation. The Act made no changes 31 CFR 103.11(z): Person. 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 defined in the Indian Gaming Regulatory Act), and all entities cognizable as legal personalities. 31 CFR 103.11(nn): United States. The States of the United States, the District of Columbia, the Indian lands (as that term is defined in the Indian Gaming Regulatory Act), and the Territories and Insular Possessions of the United States. 31 CFR 103.11(tt): Territories and Insular Possessions. The Commonwealth of Puerto Rico, the United States Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands, and all other territories and possessions of the United States other than the Indian lands and the District of Columbia. The FBAR is completed on a calendar year basis. The filing deadline is June 30 of the following year and cannot be extended. Tax preparers know tax returns are considered filed timely if postmarked by the due date. As noted above, the FBAR is not a tax return. According to the FBAR Q&A (the Q&A) published by IRS in 2007 after a National Phone Forum, FBARs are considered filed on the day they are received and not the date postmarked. Although this appears to be in conflict with the “postmark rule” of IRC 7502, the practice followed by many tax preparers of preparing and giving a client their FBAR at the same time as the extended tax return (around the extended deadline, usually after June 30) should be abandoned immediately. The FBAR does require a signature, but a penalty of perjury statement is not included. The Q&A noted that a faxed signature is not acceptable. If the filer cannot otherwise meet the June 30 deadline, the Q&A suggested an FBAR with a faxed signature be filed, followed by an amended FBAR with an explanation of why the signature was obtained late attached. A US person has an FBAR reporting requirement if the aggregate value of the financial accounts exceeds $10,000 at any time during the calendar year. The Q&A clarified that the largest balance must be computed for each separate account, and that the largest amount appearing on the bank statement is used in this computation. Example: US person has financial interest in (or signatory authority over) one foreign bank account as of January 1, 2008. On June 15, 2008, the bank account has its maximum balance for 2008 of $5,100. On June 16, 2008, US person transfers $5,000 of the first bank account to a second bank account.The maximum balance in the second account during 2008 is $5,000. During calendar year 2008, the maximum balance of the first bank account was $5,100 and the maximum balance in the second bank account was $5,000. Since the combined maximum balance of the two accounts during 2008 was $10,100, US person must file an FBAR by June 30, 2009. Spouses must file separate FBARs if they are joint owners of a foreign account or have signature authority over the account. If a spouse has ownership of a foreign account merely through community property law, however, no FBAR is required. The Q&A considers a foreign branch of a US bank to be a foreign account under the FBAR rules. An account at a US military banking facility that services US Government installations overseas is not subject to FBAR reporting, even if located in a foreign country. The instructions to Form TD F 90-22.1 define “financial account” as “any bank, securities, securities derivatives, or other financial instruments accounts. Such accounts generally also encompass any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund (including mutual funds). The term also means any savings, demand, checking, deposit, time deposit, or any other account (including debit card and prepaid credit card accounts) maintained with a financial institution or other person engaged in the business of a financial institution. Individual bonds, notes, or stock certificates held by the filer are not a financial account nor is an unsecured loan to a foreign trade or business that is not a financial institution.” The instructions state that a US person has a financial interest in each bank, securities or other financial account in a foreign country for which: 1. Such person is the owner of record or has legal title, whether the account is maintained for his or her own benefit or for the benefit of others including non–United States persons. 2. The owner of record or holder of legal title is: (a) a person acting as an agent, nominee, attorney, or in some other capacity on behalf of the US person; (b) a corporation in which the United States person owns directly or indirectly more than 50 percent of the total value of shares of stock or more than 50 percent of the to the criminal penalties. A fine of not more than $250,000 or 5 years in prison—or both—can be imposed for criminal violations. If the failure to file the FBAR is part of a pattern of illegal activity, criminal penalties can include a maximum of $500,000 and imprisonment of up to 10 years. The statute allows for the imposition of a civil penalty and a criminal penalty for the same violation. The statute of limitations is 6 years for a civil penalty, and 5 years for a criminal penalty. Tax Preparer Beware A practitioner must exercise due diligence in preparing or assisting in the preparation or, approving and filing of tax returns, documents or other papers relating to IRS matters under Circular 230. Under the Q&A, if (1) the preparer asks if the taxpayer had a foreign account and the answer is “no,” and (2) if the preparer has no reason to believe that the taxpayer has a foreign investment account, that should be sufficient to demonstrate due diligence on the part of the tax preparer. In many cases, tax preparers do not ask the question, but they should—even if the taxpayer does not have any interest income to report. Preparers who have set a default in their tax preparation software to “no” for the questions at the bottom of Schedule B of Form 1040 should change this immediately, especially in light of other recent IRS developments focusing on preparers and preparer penalties. Additional Information and Resources The IRS has updated and increased the information available on its website on foreign bank account reporting. To access this information, go to www.irs.gov and type “FBAR” in the search box. The AICPA has additional resources available for Tax Section members at tinyurl.com/b4vp5o. Conclusion In conclusion, 2009 is the year for tax preparers and their clients to take the foreign bank account reporting requirements seriously—especially if they haven’t in the past. The consequences of not doing so—to both the preparer and the client—are just too great. 57INTERIM REPORT 2nd Edition 200956 INTERIM REPORT 2nd Edition 2009