Foreign bank account reporting requirements were established in 1970 to address concerns about US persons hiding assets and evading taxes through foreign accounts. In recent years, the IRS has stepped up enforcement of these FBAR reporting requirements, including increasing penalties, expanding the definition of foreign accounts, and collaborating with foreign governments like Switzerland to obtain client names. Tax preparers must also exercise due diligence in inquiring about foreign accounts to avoid penalties for themselves.

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.
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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.
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