Are you required to file a report on a foreign bank or financial account? Before you answer that question, you might want to consider recent pronouncements from the Internal Revenue Service. Failure to file the appropriate reports with the Department of Treasury will subject you to both civil and criminal penalties. This article is designed to help you determine if you are subject to reporting.
First of all, what are the requirements to which you might be subjected? In general, if a U.S. person has a financial interest in or a signatory authority over financial accounts in a foreign country (with a total value exceeding $10,000 at any time during the year), they must file Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, also referred to as FBAR. The form is due by June 30 of every year for the prior year's transactions. For example, information with respect to the year ending Dec. 31, 2008, was required to be filed with the IRS by June 30, 2009.
Until recently, many taxpayers failed to file the FBAR. In some cases, they were unaware of the requirement. Others purposely failed to file the FBAR to avoid paying taxes, because they were trying to hide assets or both. Whatever the reason, prior to the IRS being given the authority to enforce FBAR filings in 2003, enforcement was lax and failure to file was less likely to bring substantial penalties.
Since 2003, however, the IRS has stepped up enforcement to the point where failure to file an FBAR can be very costly. Civil penalties include the greater of either $25,000 or the balance in an unreported account at the time of the occurrence - up to $100,000 per violation. This penalty can be assessed along with criminal penalties. Criminal violations can result in fines of not more than $250,000, five years in prison or both. If it can be shown that failure to file is part of a pattern of illegal activity, the penalties double.
Recognizing the difficulty of enforcement, the IRS launched the Offshore Voluntary Compliance Initiative (OVCI) in January 2003 to encourage individuals to report voluntarily in exchange for not facing criminal and certain civil penalties. While there have been various due dates for such initiatives, the IRS announced a new voluntary compliance deadline in March 2009.
In general, affected taxpayers can avoid criminal charges and the 75 percent fraud penalty if they:
As an example, the IRS used the following hypothetical case in its announcement:
Assume George, who pays taxes in the 35 percent bracket, deposited $1 million in an unreported offshore account on Jan. 1, 2003. The balance is $1.3 million at the end of 2008. George would pay a total of $386,000 in connection with the Voluntary Compliance Initiative, computed as follows:
|Tax on unreported income at 35 percent||$105,000|
|Accuracy related penalty of 20 percent of $105,000||21,000|
|20 percent penalty on $1.3 million||260,000|
Failure to voluntarily come forward would subject the taxpayer to as much as $2.3 million in taxes and penalties. Taxpayers had until Sept. 23, 2009, to comply with the voluntary reporting requirements. Recently, the IRS extended that deadline to Oct. 15, 2009.
Additionally, the IRS issued a new definition of who is required to file an FBAR in October 2008. The old definition of a U.S. person included a U.S. citizen or resident or a domestic corporation, partnership, trust or estate; however, the new definition includes "a person in and doing business in the United States." Such a significant expansion in who can be subject to the filing requirements created a great deal of confusion and left many taxpayers wondering if they might be subject to filing an FBAR. Because of the confusion, the IRS announced that it would go back to the old definition for now.
Finally, with the proliferation of foreign hedge funds, more taxpayers might fall under the FBAR filing requirements. The definition of an account includes one with a bank or financial institution, and also an account holding securities, derivatives or other financial instruments. This means that any U.S. investor with an interest in a foreign hedge fund or private equity fund might also be required to report. Additionally, a taxpayer might have signatory authority over a foreign account but no real financial interest. For example, someone with signatory authority over his or her parent's foreign account would not have a financial interest in that account.
This new twist has taken many taxpayers and tax professionals by surprise and created concerns on the part of innocent investors. Since such situations present unique issues, the IRS has extended the time for filing an FBAR related to 2008 or previous years to June 30, 2010.
The advent of a truly global economy subjects more individuals and entities to FBAR requirements. Foreign banking laws have hindered U.S. efforts to crack down on nonfilers; however, the IRS has now successfully forced Swiss banking giant UBS to disclose accounts of U.S. taxpayers. This new development makes it critical for you to know whether you are among those required to file an FBAR and, if so, that you avail yourself of the IRS's voluntary compliance initiatives. But hurry - in some cases you only have until Oct. 15.
Have a great fall season.