Clarification Continues on Foreign Bank Account Reporting
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.
Additional Guidance
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.
6
Id.
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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