There’s an old saying that “honesty pays, but it doesn’t seem to pay enough to suit some people.” If these people are Americans with unreported offshore financial accounts, that calculation may be changing.
Last year, as its revenues declined, the Internal Revenue Service began to more aggressively pursue undisclosed accounts in international tax havens. It’s no secret that such undisclosed accounts raise concerns over illegal use of funds, including terrorism, and are a significant source of lost tax revenue. It’s been estimated that the U.S. government loses as much as $100 billion in annual revenue from these accounts.
As part of the initial salvo, the U.S. reached an agreement with the Swiss government and Swiss bank UBS AG to disclose the names of wealthy Americans suspected of evading taxes using secret bank accounts. Already, seven have been charged criminally―including a retired Boeing sales manager living in Bellevue―and two received prison time.
After the initial UBS prosecutions became known, nearly 15,000 U.S. taxpayers voluntarily reported billions of dollars in previously undisclosed offshore accounts.
However, for every person who knowingly hides an offshore account, many more unknowingly fall afoul of the U.S. government’s reporting requirements.
If you have a foreign bank account or other financial account, you’re likely subject to federal taxation and reporting requirements―just as you are for your domestic financial accounts. However, foreign financial institutions are not subject to the same reporting requirements as their domestic counterparts, so many foreign accounts go unreported.
To help identify unreported income from such accounts and also track assets that may be used for illegal purposes, the Bank Secrecy Act of 1970 created reporting requirements for certain U.S. persons and their offshore accounts: Form TD F 90-22.1 The Report of Foreign Bank and Financial Accounts, also known as FBAR.
Generally, FBAR reporting is required for foreign bank and brokerage accounts―but it also applies to other offshore financial accounts, including direct or indirect financial interests in certain comingled offshore hedge funds and mutual funds. Recently, the IRS has more aggressively pursued its enforcement.
FBAR Reporting Requirements
Under the provisions of the Bank Secrecy Act, each U.S. person is subject to the reporting requirement if the person has a financial interest in, or signature or other authority over, one or more accounts in a foreign country―and the aggregate value of all these accounts exceeds $10,000 at any point during the year. This is true even if these accounts do not produce taxable income.
In this context, you’re a U.S. person if you are a citizen or resident of the United States. Based on the specific facts and circumstances, you may also be considered a U.S. person for FBAR purposes if you’re simply located in and doing business in the United States, but generally you must be conducting this business on a regular and continuous basis.
Significantly, the FBAR definition of U.S. person is not limited to individuals―it also includes estates, trusts and all business entities.
Further, charitable organizations and other private tax-exempt entities are not exempt from FBAR reporting, and neither are their officers and employees with signature or other authority over the organization’s foreign financial accounts.
To be subject to FBAR reporting requirements, the account must be a foreign account. Although the IRS has provided additional guidance in this area, there remain uncertainties regarding the full scope of the FBAR reporting requirement―for example, with regard to certain hedge funds and mutual funds.
It is generally prudent to report all financial accounts that could possibly be interpreted to fall under the FBAR requirements.
According to the IRS, you have a financial interest in an account if you are the owner of record or have legal title, whether the account is maintained for your benefit or for the benefit of others, including non-United States persons.
Also according to the IRS, you have signature authority over an account if you can control the disposition of its assets “by delivery of a document containing your signature to the bank or other person with whom the account is maintained.” You have other authority if you can “exercise power that is comparable to signature authority over an account by direct communication, either orally or by some other means, to the bank or other person with whom the account is maintained.”
If you have power of attorney over a financial account, you are subject to FBAR reporting, regardless of whether you actually exercise the power of attorney.
The FBAR form is available online from the IRS website. If you and your spouse own a joint account subject to FBAR reporting, you can file the form jointly.
Due Date for FBAR Reporting
The FBAR form is due on June 30 of the year following the year that the sum of your foreign accounts exceeds the $10,000 threshold―and every year thereafter, as long as you continue to meet the filing requirements. You do not file the FBAR form along with your tax return.
There is generally no option to extend the FBAR filing date, although there was an extension given this year only due to unique circumstances.
You can file an amended FBAR form.
You must maintain records for the accounts subject to FBAR reporting for five years from the due date of the FBAR form. These records should include the name of the account owner(s), name or other designation of the account, type of account, the account’s maximum value during the reporting period, and the name and address of the foreign bank or other person with whom the account is maintained.
If you don’t keep adequate records, you may be subject to civil and criminal penalties.
If you violate the FBAR filing requirements, whether or not the violation was intentional, you are subject to potentially severe civil and criminal penalties. Depending on the circumstances, you may be subject to both civil and criminal penalties for the same violation.
FBAR penalties are determined for each account, not for the sum of the accounts reported on the U.S. person’s FBAR form. They apply to each person with a financial interest or signature authority over the account, and they are applied for each year the account is considered to be in violation.
Possible penalties depend on whether the violation was negligent, non-willful or willful. There are no criminal penalties for negligent or non-willful violations, although civil penalties of up to $10,000 per violation can be assessed. Willful violations―including failing to file or failing to retain proper records―can generate civil penalties up to the greater of $100,000 or 50 percent of the amount in the account when the violation occurred, per violation. Criminal penalties for willful violations reach $250,000 or five years in prison, or both.
It is important that you do not let these potential penalties deter you from filing a delinquent FBAR form. If you attach a statement to the FBAR form that explains why you are late in filing and the IRS finds your explanation to be reasonable, you may not be assessed a penalty.
For More Information
You can find general information on FBAR reporting requirements on the IRS website, including the following:
The FBAR reporting requirements are quite complex and the penalties can be severe, so it is important to discuss your potential exposure with your tax advisor at Bader Martin.