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by Marianne R. Kayan, Esq.
Buchanan Ingersoll & Rooney PC
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”). The Service is actively calling for FBAR compliance. Significant civil and criminal penalties await those who fail to file FBARs. The Service recently provided additional guidance on those who are required to file FBARs, filing deadlines, and how those who failed to file FBARs may achieve compliance.
Service Announces Return to Former 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 defines “United States persons” having an obligation to file 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 required to file.
Many questions arose over the expanded reporting in the new form. The Service retreated from the new form's directions of who must file in Announcement 2009-51, issued June 5, 2009, allowing taxpayers to utilize the previous form's instructions regarding the definition of who is obligated to file. The Service now instructs that only U.S. persons must file a 2008 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, the Service could enlarge the scope of the persons required to file for future years.
My Tax-Compliant Client Missed the Deadline for a 2008 Timely Filed FBAR; How Should Client Comply?
FBARs for year 2008 are timely filed when received by the Service on June 30, 2009. In Voluntary Disclosure FAQ #43, 1 issued six days before the filing deadline, the Service provided 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 at the Detroit address, together with a statement explaining why it is being filed late. A copy of the FBAR, and the 2008 tax return should be filed by September 23, 2009, with the Philadelphia Offshore Identification Unit. Again, it is advisable that the filer work with his or her advisors regarding the statement as to 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.
1 Voluntary Disclosure: Questions and Answers (Q&A 1-30 posted May 6, 2009; revision of June 24, 2009 modified A. 26 and added Q&A 31 to 51.) http://www.irs.gov/pub/irs-news/faqs.pdf.
In addition, the client may fit into a recently announced extension for the failure to file the FBAR. Notice 2009-62, published August 31, 2009, in I.R.B. 2009-35, provides an extension of the 2008 FBAR deadline from June 30, 2009 to June 30, 2010, in two circumstances: (1) when the U.S. person has signatory authority, but no interest in the foreign financial accounts, and (2) when the U.S. person has signatory authority or an interest in a foreign commingled fund.
Service Announces Formal Voluntary Disclosure Program
The formal FBAR voluntary disclosure program 2 announced by the Service on March 23, 2009 has received much attention. 3 Under this program, the Service limits the penalties for those who voluntarily disclose their failure to file the FBAR and the unreported taxable income attributable to the foreign account. The formal voluntary disclosure program is scheduled to end September 23, 2009. In order to participate in the formal voluntary disclosure program, the taxpayer or the taxpayer's representative must contact IRS Criminal Investigation and provide the taxpayer's identifying information by September 23, 2009. The Voluntary Disclosure FAQs describe the procedure and benefit of participating. 4 Generally, making a voluntary disclosure 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”) and an accuracy or delinquency penalty on the amount of tax not reported, plus interest on the understatement of tax. 5
2 The IRS Criminal Manual has contained procedures for making a voluntary disclosure for many years. References in this article to a formal FBAR voluntary disclosure program or voluntary disclosure program refer specifically to the procedures available for FBAR voluntary disclosures from Mar. 23, 2009 though Sept. 23, 2009.
3 IRS Small Business/Self-Employment (SB/SE) Memorandum, Authorization to Apply Penalty Framework to Voluntary Disclosure Requests Regarding Unreported Offshore Accounts and Entities (Mar. 23, 2009).
Is the Voluntary Disclosure Program for My Tax-Compliant Client Who Failed to File FBARs?
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 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”). 6 Then, on May 6, 2009, after the implementation of the formal FBAR voluntary disclosure program, the Service released an additional 30 FAQs on the formal FBAR voluntary disclosure program and subsequently added twenty more FAQs on June 24, 2009 (“Voluntary Disclosure FAQs”). 7
6 FAQs Regarding Report of Foreign Bank and Financial Accounts (FBAR) (Mar. 13, 2009), http://www.irs.gov/businesses/small/article/0,,id=148845,00.
7 Voluntary Disclosure: Questions and Answers, above.
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 who failed to report income attributable to these foreign accounts (i.e., persons who are not tax-compliant). A recent conference call with the Service highlights that the Service anticipates that only persons with income tax understatements will utilize the formal voluntary disclosure program. 8 For a person who is tax-compliant, utilizing the FBAR voluntary disclosure program will subject the taxpayer to the 20% 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 will be applied.
8 Lundquist, Rod, IRS SB/SE BSA Policy Liaison to FinCEN, and John C. McDougal, IRS Counsel SB/SE, Foreign Bank Account Reports: Getting it Straight before the June 30 Deadline!, ABA Section of International Law conf. call (June 15, 2009).
Those who reported all income, but did not file a 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 a FBAR are too significant to ignore the filing obligation. 9 The Service explains in Voluntary Disclosure FAQ #9 that to achieve compliance a person who failed to file a FBAR should file the 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 a FBAR failure to file penalty for those who reported all income attributable to these accounts. While not explicitly stated in the Voluntary Disclosure FAQs, the taxpayer should follow the same requirements provided for the voluntary disclosure program and file up to six years of back FBARs. 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.
9 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.
To establish 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. 10 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.
10 Lundquist, et al., above.
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 Sch. B, 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. 11
Those who have not complied with their FBAR obligation 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 its forthcoming FBAR guidance. 12
12 See IRS Ann. 2009-51 for instruction on how to submit FBAR comments to the Service by Aug. 31, 2009.
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