Report of Foreign Bank and Financial Accounts (FBAR) (Portfolio 6085)

Tax Management Portfolio, Report of Foreign Bank and Financial Accounts (FBAR), No. 6085, discusses the history of the FBAR, FBAR reporting requirements, and enforcement relating thereto. To view this Portfolio, visit Bloomberg Tax for a free trial.

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Description

Tax Management Portfolio, Report of Foreign Bank and Financial Accounts (FBAR), No. 6085, discusses the history of the FBAR, FBAR reporting requirements, and enforcement relating thereto. The requirement to file an FBAR was first enacted in 1970 as part of the Bank Secrecy Act (BSA). The BSA created a network of required financial reporting that was designed to identify transactions that may evince money laundering, tax evasion, and other criminal activities. Among its provisions, the BSA requires U.S. persons with foreign bank accounts to report such relationships on timely filed FBARs. Initially intended to be a useful tool in investigating criminal and terrorist activities, the FBAR filing requirement has become a very valuable instrument of prosecutorial leverage, especially with respect to tax evasion cases. FinCEN, generally charged with enforcing the BSA, has delegated the enforcement of FBAR compliance to the IRS.

An FBAR must be filed by a U.S. person who has a financial interest in or signature authority over one or more foreign financial accounts with an aggregate value greater than $10,000 at any time during the calendar year. A counterpart to the FBAR filing requirement is the requirement to maintain the records relating to the foreign accounts for five years. This Portfolio explores each element of these requirements and provides a detailed discussion of the filing and recordkeeping obligations.

Failure to file the FBAR or maintain the required records carries steep statutory penalties, especially if the government determines that the violation was willful. This Portfolio discusses the rules and regulations relating to the FBAR penalties, recent developments relating to the definition of “willfulness” in the FBAR context, trends in penalty enforcement (e.g., prosecution, litigation, and voluntary disclosure programs), and possible penalty defenses.

Because the FBAR penalty is a Title 31 penalty, it is not subject to the deficiency and collection procedures of Title 26. This Portfolio analyzes the available administrative and judicial avenues to challenge the FBAR penalties as well the government's ability and procedures to collect them.

This Portfolio may be cited as Ziering, Elber, and Matthews, 6085 T.M., Report of Foreign Bank and Financial Accounts (FBAR).


Authors

Zhanna A. Ziering, Esq.

Zhanna A. Ziering, J.D. (magna cum laude), New York Law School; LL.M., New York University School of Law. Ms. Ziering is a Senior Associate in Caplin & Drysdale's New York office. Ms. Ziering represents individual and corporate clients in tax controversy and litigation with the Internal Revenue Service and state tax authorities in connection with offshore compliance matters, including FBAR compliance, U.S. reporting requirements of offshore assets, and domestic tax issues. She has extensive experience representing clients in voluntary disclosures, FBAR exams, and civil investigations relating to undisclosed offshore assets. She has authored and coauthored several articles, including: “U.S. Offshore Account Enforcement Issues” in CCH's Journal of Tax Practice & Procedure; “IRS Modifies Offshore Voluntary Disclosure Program and Streamlined Filing Compliance Procedures;” and “New Law Changes FBAR Filing Deadline,” Caplin & Drysdale client alerts. Ms. Ziering regularly lectures on topics in her field, including: Navigating U.S. Tax Requirements and Strategic Methods of Coming into Compliance; Offshore Account Disclosure Case Update; and 2014 OVDP and Streamlined Procedures – An Update. Ms. Ziering is a member of the New York, New Jersey, and District of Columbia bars. Ms. Ziering is the recipient of several awards, including The American Lawyer's Global Legal Award, the American Bar Association (ABA)’s Nolan Fellowship, and a Super Lawyers “Rising Star.”

Niles A. Elber, Esq.

Niles A. Elber, J.D. (cum laude), Tulane University Law School; LL.M., New York University School of Law. As a Member of Caplin & Drysdale's Tax Controversies practice group, Mr. Elber helps U.S. taxpayers (residing in the U.S. and abroad) resolve or minimize their civil and criminal tax problems, as well as assists clients who need to come into compliance with their U.S. tax obligations. With considerable experience handling offshore compliance matters, Mr. Elber has represented hundreds of clients in voluntary disclosures, FBAR penalty exams, and civil and criminal tax investigations related to unreported foreign bank accounts. Mr. Elber also speaks regularly at ABA conferences and webinars on a variety of offshore enforcment topics. Mr. Elber is recognized by his peers with a Martindale-Hubbell® AV® Preeminent™ rating and was an ABA Nolan Fellowship award recipient. He serves as Vice Chair for the ABA Tax Section Committee on Civil and Criminal Tax Penalties and is a fellow of the American College of Tax Counsel.

Mark E. Matthews, Esq.

Mark E. Matthews, J.D., New York University School of Law; M.P.A., Princeton University. Mr. Matthews is a Member in Caplin & Drysdale's Tax Controversies, Tax Litigation, and Exempt Organizations practice groups. He has served in tax administration positions as IRS Deputy Commissioner for Services and Enforcement, IRS Chief of Criminal Investigations, and Deputy Assistant Attorney General in the Tax Division of the Department of Justice. Mr. Matthews has coauthored several articles, including: “The Justice Department and Swiss Banks: Understanding the Special Disclosure Program” in Bloomberg BNA's Banking Report; “FATCA—Enforcement Win or Expatriate Generator?” in IFC Review; and “New Law Changes FBAR Filing Deadline” and “Switzerland Narrows Advance Notice to Account Holders of Treaty Requests: Americans with Unreported Accounts Impacted,” Caplin & Drysdale client alerts. In addition to his recent publications, Mr. Matthews is a frequent presenter at ABA, American Law Institute (ALI), and international tax conferences. Mr. Matthews focuses his practice on criminal tax enforcement, broad-based civil tax compliance, white collar matters, and has represented hundreds of clients in voluntary disclosures and grand jury investigations. A recipient of several awards and honors, he is listed in Chambers, Best Lawyers in America, The Legal 500, and Super Lawyers, Washington, D.C.

Table of Contents

Detailed Analysis
I. Legislative History of the Report of Foreign Bank and Financial Accounts (FBAR)
Introductory Material
A. Bank Secrecy Act
B. Disclosure of FBAR Reports
C. Compliance and Enforcement History Before 2008
D. Changes to FBAR in Light of the Events of 9/11
II. FBAR Filing Requirements
A. Introduction
B. U.S. Person
1. Citizen of the United States
2. Resident of the United States
a. Green Card Test
b. Substantial Presence Test
c. Election to Be Treated as a U.S. Resident Alien
d. A Person Doing Business in the United States
3. What Is a Person?
C. Financial Interest
1. Owner of Record of the Account or Holder of the Account's Legal Title
2. Agent, Nominee, or Acting in Some Other Capacity on Behalf of a U.S. Person
3. Corporation in Which a U.S. Person Owns Shares or Voting Power
a. Indirect Ownership
b. Attribution Rules
4. Partnership in Which a U.S. Person Owns Interest in More than 50% of the Profits or Capital
5. Other Entity
6. Grantor Trust
7. Interest in a Trust Other than a Grantor Trust
8. Anti-Avoidance Rule
D. Signature or Other Authority
1. Signature Authority
2. Other Authority
E. Foreign Financial Account
1. Foreign Country
2. Financial Account
a. Bank Account
b. Securities Account
c. Insurance or Annuity Policy with Cash Value
d. Commodities Futures or Options Account
e. Mutual Funds or Similarly Pooled Funds
f. Other Accounts Maintained in a Foreign Financial Institution
g. Accounts Holding Non-Cash Assets such as Gold Bullion, Other Personal Property, and Real Property
h. Foreign Pension Funds and Retirement Funds
F. Exemptions from FBAR Filing
1. Accounts Exempt from FBAR Reporting
a. U.S. Government Entity Accounts
b. International Financial Institution Accounts
c. U.S. Military Banking Facility
d. Correspondent or Nostro Accounts
e. Certain Custodial or Omnibus Accounts
2. Persons Exempt from FBAR Reporting
a. IRA Owners and Beneficiaries
b. Participants in and Beneficiaries of Tax-Qualified Retirement Plans
c. Certain Trust Beneficiaries
d. U.S. Entities Included in a Consolidated FBAR
3. Exempt Signatories
a. Officers or Employees of a Bank in Certain Circumstances
b. Officers or Employees of Certain Financial Institutions
c. Certain Investment Advisors
d. Officers or Employees of Certain Publicly Traded Corporations
e. Officers or Employees of Certain Domestic Subsidiaries of Publicly Traded Corporations
f. Officers or Employees of Certain U.S. Registered Corporations
g. Currently Deferred Reporting
h. Proposed Regulations for Exempt Signatories
G. Truncated Filing
1. Financial Interest in 25 or More Foreign Financial Accounts
2. Signature or Other Authority Over 25 or More Foreign Financial Accounts
3. Reports of U.S. Persons Employed and Residing Outside of the United States
4. Signatory Authority of Former Employees
H. Account Value
1. Foreign Currency Conversion
2. Value of Stock and Other Securities
I. Joint Accounts
J. Child's FBAR
K. When, Where, and How to File the FBAR
L. Amending a Filed FBAR
M. Schedule B to Form 1040, U.S. Individual Income Tax Return
III. Recordkeeping Requirement
Introductory Material
A. General Recordkeeping Requirement
B. Relief from Recordkeeping Requirements for Current and Former Officers and Employees
IV. FBAR Enforcement
A. Enforcement Delegation to the IRS
B. IRS's Efforts to Increase Compliance
C. Offshore Voluntary Disclosure Initiatives/Programs
1. 2003 OVCI
2. 2009 OVDP
3. 2011 OVDI
a. Program Details
b. Opt-Out Process
4. 2012 OVDP
5. 2014 OVDP
6. Streamlined Filing Procedures
7. Delinquent FBAR and International Information Return Submission Procedures
8. Voluntary Disclosure Statistics
D. DOJ Program for Swiss Banks
1. Program Overview
2. Information Divulged by the Swiss Banks Participating in the Program
3. Other DOJ Goals for the Program
E. Criminal Investigation of Swiss and Other Banks
1. Bank Leumi
2. HSBC India Prosecutions
3. Credit Suisse
4. Wegelin Bank
5. Zürcher Kantonalbank (ZKB)
6. Liechtensteinische Landesbank (LLB)
7. Bank Julius Baer & Co. Ltd.
V. Penalties
Introductory Material
A. Negligence Penalty
1. Evidence of Negligence
2. Reasonable Cause Defense
B. Violations Before October 23, 2004
C. Violations After October 22, 2004
1. Nonwillful Penalty
2. Willful Penalty
a. Willful Standard
(1) Burden of Establishing Willfulness Is on the Government
(2) Reasonable Cause
b. Case Law
(1) United States v. Williams
(2) United States v. McBride
(3) United States v. Simon
(4) United States v. Zwerner
(5) Bedrosian v. United States
3. Penalty Mitigation
4. Penalties Imposed Per Account Not Per FBAR
5. Criminal Penalties
a. General
b. Sentencing
6. Statute of Limitations to Assess Penalties
7. Statutory Interest on FBAR Penalty
VI. FBAR Audits
Introductory Material
A. Section 6103 Privacy Issues
B. The FBAR Examination
C. Closing the FBAR Examination with Penalties
D. FBAR Appeals
VII. Fifth Amendment and the Act of Production Doctrine
Introductory Material
A. “Forgone Conclusion” Exception
B. Grant of Immunity
C. Entity Records
D. Required Records Doctrine
VIII. FBAR Litigation
Introductory Material
A. Forum for FBAR Litigation
B. Litigation Brought by the Government
1. Statute of Limitations
2. Burden of Proof
3. Key Cases
a. United States v. Williams
(1) Williams I — District Court
(2) Williams II — the Fourth Circuit
b. United States v. McBride
c. United States v. Zwerner
d. United States v. Bussell
e. Other Cases
C. Suits to Challenge FBAR Penalties Under the Administrative Procedure Act: Moore v. United States
1. Background of Moore v. United States
2. Moore I
3. Moore II
a. IRS Produces Contemporaneous Documentation Disclosing Grounds for Its Penalty Assessment
b. IRS Fails to Produce Contemporaneous Documentation Disclosing Grounds for Its Penalty Assessment
4. Conclusion
D. Litigation Brought by Taxpayer
1. Litigation in the U.S. Court of Federal Claims
2. Litigation in a U.S. District Court
3. Right to a Jury Trial
4. Statute of Limitations
5. Full Payment of Penalty Not Required
E. Dischargeability of FBAR Penalty in Bankruptcy
F. Criminal Litigation
IX. Collection of FBAR Penalty
A. Authority to Collect
B. Statute of Limitations
C. Federal Debt Collection
D. Bureau of the Fiscal Service
E. Federal Penalty Collection Options
1. Administrative Offset
a. Exceptions
b. Notice Requirement
2. Tax Refund Offset
3. Federal Salary Offset
4. Nonfederal Employee Wage Garnishment
5. Debt Referral to Private Collection Contractors
6. Reporting of Delinquencies to Credit Reporting Bureaus
7. Litigation or Foreclosure
8. Bankruptcy Procedures
F. Federal Debt Collection Procedures Act
1. Civil Judgment Enforcement
a. Execution
(1) Sale of Property
(2) Judgments and Judgment Liens
b. Garnishment
(1) Limitations
(2) Failure to Comply
c. Installment Payment Orders
d. Receivership
e. Other Writs Under 28 U.S.C. §1651
2. Notice Requirement
G. Enforcement of FBAR Judgments in Foreign Jurisdictions
H. Other Collection Tools
1. Sale of Stocks, Bonds, Notes, and Securities
2. Court Orders and Contempt
3. Writ of Ne Exeat Republica
X. Comparison of Form 8938 and FBAR Requirements

Working Papers

Table of Worksheets
Worksheet 1 Amendment to the Bank Secrecy Act Regulations — Reports of Foreign Financial Accounts, 75 Fed. Reg. 8844 (proposed Feb. 26, 2010)
Worksheet 2 Amendment to the Bank Secrecy Act Regulations — Reports of Foreign Financial Accounts, 76 Fed. Reg. 10,234 (Feb. 24, 2011)
Worksheet 3 Form 4683: U.S. Information Return on Foreign Bank, Securities, and Other Financial Accounts (Revised Dec. 1970)
Worksheet 4 Form 4683: U.S. Information Return on Foreign Bank, Securities, and Other Financial Accounts (Revised Nov. 1971)
Worksheet 5 Form 4683: U.S. Information Return on Foreign Bank, Securities, and Other Financial Accounts (Revised Sept. 1973)
Worksheet 6 Form 4683: U.S. Information Return on Foreign Bank, Securities, and Other Financial Accounts (Revised Sept. 1975)
Worksheet 7 Form 4683: U.S. Information Return on Foreign Bank, Securities, and Other Financial Accounts, and Foreign Trusts (Revised Nov. 1976)
Worksheet 8 Form 90-22.1: Report of Foreign Bank, Securities, and Other Financial Accounts (Revised Oct. 1977)
Worksheet 9 Form 90-22.1: Report of Foreign Bank and Financial Accounts (Revised Sept. 1978)
Worksheet 10 TD F 90-22.1: Report of Foreign Bank and Financial Accounts (Revised Sept. 1983)
Worksheet 11 TD F 90-22.1: Report of Foreign Bank and Financial Accounts (Revised Sept. 1986)
Worksheet 12 TD F 90-22.1: Report of Foreign Bank and Financial Accounts (Revised Apr. 1990)
Worksheet 13 TD F 90-22.1: Report of Foreign Bank and Financial Accounts (Revised Oct. 1992)
Worksheet 14 TD F 90-22.1: Report of Foreign Bank and Financial Accounts (Revised Dec. 1997)
Worksheet 15 TD F 90-22.1: Report of Foreign Bank and Financial Accounts (Revised July 2000)
Worksheet 16 TD F 90-22.1: Report of Foreign Bank and Financial Accounts (Revised Oct. 2008)
Worksheet 17 TD F 90-22.1: Report of Foreign Bank and Financial Accounts (Revised Mar. 2011)
Worksheet 18 TD F 90-22.1: Report of Foreign Bank and Financial Accounts (Revised Nov. 2011)
Worksheet 19 TD F 90-22.1: Report of Foreign Bank and Financial Accounts (Revised Jan. 2012)
Worksheet 20 Electronic TD F 90-22.1: Report of Foreign Bank and Financial Accounts (Revised Mar. 2011)
Worksheet 21 FinCEN Form 114: Report of Foreign Bank and Financial Accounts (Revised Oct. 2013)
Worksheet 22 Article 26 of Convention Between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation With Respect to Taxes on Income, Signed at Washington, October 2, 1996
Worksheet 23 Protocol Amending the Convention Between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation With Respect to Taxes on Income, Signed at Washington, October 2, 1996
Worksheet 24 List of Banks Entered Into Non-Prosecution Agreements Executed Under the Swiss Bank Program, (as of Jan. 27, 2016)
Worksheet 25 FBAR Cases Filed Between 2013 and 2015
Worksheet 26 Letter 3800, FBAR Warning Letter
Worksheet 27 Letter 3709, FBAR 30-Day Letter
Worksheet 28 Form 13449, FBAR Agreement to Assessment and Collection of Penalties Under 31 USC 5321(a)(5) and 5321(a)(6)
Worksheet 29 IRS Letter 3708, Notice and Demand for Payment of FBAR Penalty
Worksheet 30 Form 13535, FBAR Related Statute Memorandum