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By Marianne R. Kayan, Esq. Buchanan Ingersoll & Rooney PC, Washington, DC
U.S. persons who have an interest in or signatory authority over a foreign account with a value over $10,000 are required to file a Foreign Bank Account Report (“FBAR”). Since the 1970s, FBARs have been required, but due to poor enforcement many people and tax advisors remain unaware or turn a blind eye to their FBAR obligation. The unfamiliarity is surprising because the individual income tax return, Form 1040, highlights the duty of taxpayers to file the FBAR on Schedule B, Interest and Ordinary Dividends, line 7a.
The Service is now actively calling for FBAR compliance. Significant civil and criminal penalties await those who fail to file FBARs. The Service recently provided more guidance on those who are required to file FBARs, and how those who failed previously to file FBARs may reach compliance, avoiding civil and criminal penalties.
Service Announces Return to Old Rules for Those Required to File
The previous instructions, revised July 2000, to Form TD F 90.22-1 (commonly referred to as the FBAR) require “United States persons” to file a FBAR. A United States person is defined, under the previous form, as a “citizen or resident of the United States, a domestic partnership, a domestic corporation or a domestic estate or trust.” Controversy developed over the new Form TD F 90.22-1, revised October 2008 (the “new form”). The new form provides that “United States persons” have an obligation to file. United States persons are defined as “citizens or residents of the United States, or a person in and doing business in the United States.” The requirement that “a person in or doing business in the United States” is required to file, substantially expands the base of those who are required to file.
Many questions arose over the expanded reporting in the new form. The Service retreated from their definition of who must file on the new form in Announcement 2009-51, issued June 5, 2009, allowing taxpayers to utilize the previous form's instructions, utilize the old rules, regarding the definition of who is obligated to file. The Service now instructs that only US persons must file a FBAR, and that those whose only obligation to file is because of being “a person in and doing business in the United States” are not required to file. While this matter of who has the obligation to file is settled for year 2008 FBARs (due June 30, 2009), the Service could enlarge the scope again and revert to the new form's instructions.
Is the Voluntary Compliance Program for My Tax Compliant Client Who Failed to File FBARs?
The formal FBAR voluntary disclosure program announced by the Service on March 23, 2009, has received a lot of attention. Under this program, the Service limits the penalties for those that voluntarily disclose their failure to file the FBAR and the unreported taxable income attributable to the foreign account. At the commencement of the FBAR voluntary disclosure program confusion existed over whether a tax compliant person (i.e., a person who had reported all income attributable to the foreign account) would need to come into FBAR compliance through the voluntary disclosure program. Fortunately, the Service has issued additional guidance on FBAR reporting. On March 13, 2009, before the implementation of the formal FBAR voluntary disclosure program, the Service provided a list of general FBAR frequently asked questions (“General FAQs”).1 Then, on May 6, 2009, after the implementation of the formal FBAR voluntary disclosure program, the Service released 30 additional FAQs on the formal FBAR voluntary disclosure program and subsequently added twenty more FAQs on June 24, 2009 (“Voluntary Disclosure FAQs”).2
Voluntary Disclosure FAQ #9 addresses the question of whether a person who reported income of the foreign account, but did not file a FBAR, should utilize the FBAR voluntary disclosure program. The Service explains that a tax compliant person should not use the voluntary disclosure program. The FBAR voluntary disclosure program applies to persons that failed to report income attributable to these foreign accounts (i.e., persons who are not tax compliant). A recent conference call with the Service 3 highlights that the Service anticipates only persons with income tax understatements to utilize the formal voluntary disclosure program. For a person who is tax compliant, utilizing the FBAR voluntary disclosure program will subject the taxpayer to a 20% penalty on the highest account balance in the past six years on the account (“the FBAR failure to file penalty”). Although, it is possible that the FBAR failure to file penalty will be reduced to 5% where the taxpayer did not create the account, the account had no activity and all taxes were paid. Regardless of whether the 20% or 5% FBAR failure to file penalty will be applied, a tax compliant person whose failure to file was due to reasonable cause should not participate in the formal FBAR voluntary disclosure program because of the penalties that automatically applied.
Those who reported all income, but did not file an FBAR, must still come into compliance through a mechanism other than the formal voluntary disclosure program. The civil and criminal penalties for the failure to file an FBAR are too significant to ignore the filing obligation.4 The Service explains in Voluntary Disclosure FAQ #9 that to achieve compliance a person who failed to file a FBAR should file six years of back FBARs, the supporting tax returns and a statement as to why the reports are filed late. The Service notes in Voluntary Disclosure FAQ #9 that the IRS will not impose an FBAR failure to file penalty for those who reported all income attributable to these accounts. Both the General FAQs and the Voluntary Disclosure FAQ #9 discuss providing a statement with the delinquent FBAR filings. The General FAQs request a reasonable cause statement and the Voluntary Disclosure FAQ #9 requests a statement as to why the FBAR is late. Consequently, it seems a reasonable cause statement is likely an essential component of a late FBAR filing, although the Voluntary Disclosure FAQ #9 does not explicitly require reasonable cause.
To established reasonable cause a person may assert a cause, such as their level of education or reliance on tax advisors. The Service acknowledges that some tax preparation software does not properly alert individuals to their duty to file the FBAR.5 Those with FBAR obligations should work with their advisors to carefully prepare the reasonable cause statement. If a reasonable cause standard is not met, the Service could enforce penalties. In a situation where meeting the reasonable cause threshold is questionable because it appears that the failure to file was willful, the person may consider utilizing the voluntary disclosure program. The choice to utilize the voluntary disclosure program will subject the person to the FBAR failure to file penalty. As such, in all but the most willful cases of the failure to file FBARs, attaching the reasonable cause statement should be sufficient, and the person should not utilize the voluntary disclosure program.
For back FBAR filings Voluntary Disclosure FAQ#26 instructs the taxpayer to use the new FBAR form, but the taxpayer can use the rules that applied to the previous form for the year the filing was due. Also, the Service has clarified that taxpayers who have failed to properly complete the individual tax return, Form 1040, by checking the box on line 7a indicating their foreign account, do not need to amend the underlying tax return to mark line 7a appropriately; the filing of the FBAR is sufficient notification to the Service of the foreign account.6
My Tax Compliant Client Missed the Deadline for a 2008 Timely Filed FBAR; How Should the Client Comply?
FBARs for year 2008 are timely filed when received by the Service on June 30, 2009. In Voluntary Disclosure FAQ #43, issued six days before the filing deadline, the Service provides guidance that a person who only recently learned of their FBAR obligation and had insufficient time to complete the FBAR should file the FBAR late. The FBAR, 2008 tax return and a statement explaining why the FBAR is late, should be filed by September 23, 2009. Again, it is advisable that the person work with his or her advisors regarding the statement of why the FBAR is filed late. Care should be taken to highlight the individual's reasonable cause for the failure to timely file. The Service will not impose penalties on late FBARs filed by September 23, 2009, where the individual did not know of the obligation and did not have sufficient time to file the FBAR timely.
For those who have not complied with their FBAR obligation, they should immediately take steps to achieve compliance. Advisors should consider bringing unresolved FBAR issues to the Service, so that the Service can resolve unanswered questions in their forthcoming FBAR guidance.7
For more information, in the Tax Management Portfolios, see Blum, Canale, Hester and O'Connor, 947 T.M., Reporting Requirements Under the Code for International Transactions.
1 FAQs Regarding Report of Foreign Bank and Financial Accounts (FBAR) (March 13, 2009)., http://www.irs.gov/businesses/small/article/0,,id=148845,00.
2 Voluntary Disclosure: Questions and Answers (Q&A 1-30 posted Mary 6, 2009; revision June 24, 2009 modified A. 26 and added Q&A 31 to 51.) http://www.irs.gov/pub/irs-news/faqs.pdf .
3 Lundquist, Rod, IRS SBSE BSA Policy Liaison to FinCEN, and John C. McDougal, IRS Counsel SBSE, Foreign Bank Account Reports: Getting it Straight before the June 30 Deadline!, ABA Section of International Law conf. call (6/15/ 2009).
4 For a summary of penalties, See Workbook on the Report of Foreign Bank and Financial Accounts (FBAR) (Feb. 19, 2009), http://www.irs.gov/businesses/small/article/0,,id=159757,00.html.
5 Lundquist, et al., above.
7 See IRS Ann. 2009-51 for instruction on how to submit FBAR comments to the Service by August 31, 2009.
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