Reporting Interests in Foreign Bank and Financial Accounts

In light of the current emphasis on counter-terrorism and homeland security, the IRS has increased its focus on the reporting requirements of U.S. persons who own interests in foreign bank accounts. As a result, in recent months it has been paying increased attention to Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR form); some taxpayers are receiving notices (including penalties) for not filing properly.

Background

Section 5314 of the Bank Secrecy Act (Act) authorizes Treasury to require U.S. persons to record and report transactions with foreign financial institutions. The Act was amended in 1992 to add anti-money-laundering provisions and, more recently, by the October 2001 enactment of the Uniting and Strengthening America By Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act). As Treasury explained in its Report to Congress in Accordance with Sec. 361(b) of The USA Patriot Act of 2001 (4/26/02), p. 3, [t]his provision reflected congressional concern that foreign financial institutions located in jurisdictions with strict bank secrecy laws were being used to violate or evade domestic criminal, tax, and regulatory requirements.

The FBAR form provides that the principal purpose for collecting the information is to assure maintenance of reports where such reports or records have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings. The form mandates disclosure of financial account information, along with the taxpayers tax identification number. Failure to file the form or to supply required information, and filing a false or fraudulent report, may result in civil and criminal penalties under 31 USC Sections 5321 and 5322, including a fine of up to $500,000 and imprisonment of up to 10 years. The FBAR form is not a tax return and, thus, is not subject to the confidentiality and disclosure restrictions applicable to returns under the Code. The form may be shared with other Federal government agencies, state, local and foreign law enforcement and regulatory personnel in the performance of their official duties.

Treasury originally delegated the authority to administer the FBAR filing requirement to the director of the Financial Crimes Enforcement Network (FinCEN). Recently, FinCEN delegated its enforcement authority for the form to the IRS, to increase enforcement efforts; see 68 Fed. Reg. 26489 (5/16/03).

In January 2003, Rev. Proc. 2003-11 implemented a voluntary compliance program for U.S. persons with unreported foreign bank accounts, which required taxpayer action by April 15, 2003. (For details, see Rosenberg and Frishman, Tax Practice and Procedures, Amnesty for Offshore Tax Evaders, TTA, April 2003, and Godfrey, Tax Practice and Procedures, Amnesty Participation Requirements, TTA, April 2003). The IRS is currently issuing notices to taxpayers identified as holders of offshore credit cards, owners of offshore bank accounts and participants in offshore financial arrangements. These notices offer taxpayers a final opportunity to minimize penalties by providing information to the IRS.

Who Must File

Treasury regulations (31 CFR 103.24) provide that:

each person subject to the jurisdiction of the United States (except a foreign subsidiary of a U.S. person) having a financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists, and shall provide such information as shall be specified in a reporting form prescribed by the Secretary to be filed by such persons.

The regulations do not contain the substantive requirements for filing; they are in the form instructions.

Form 1040 filers with over $1,500 in taxable interest or dividends or with an interest in a financial account or trust in foreign country are required to check a box on Schedule B, Part III. For purposes of this checkbox, the Schedule B instructions provide that a taxpayer must check yes if:

1. He or she owns more than 50% of the stock of any corporation that owns one or more foreign bank accounts; or

2. At any time during the year, he or she had an interest in or signature or other authority over a financial account in a foreign country (such as a bank, securities or other financial account).

However, if the combined value of the accounts was $10,000 or less during the entire year, the box may be checked no. 

If the box on Schedule B, Part III, is checked yes, the taxpayer is then referred to Form TD F 90-22.1. The FBAR form must be filed by a U.S. person who has a financial interest in or signature or other authority over any financial account in a foreign country, if the aggregate value of all such accounts exceeds $10,000 at any point during the calendar year.

The FBAR form must be filed by the June 30 following the calendar year in which the interest in the foreign account is held. The deadline cannot be extended, regardless of whether the taxpayers income tax return filing is extended.

Taxpayers must submit an FBAR form to: Department of the Treasury, P.O. Box 32621, Detroit, MI, 48232-0621. The form may also be hand-delivered to any local IRS office for forwarding to Treasury. The FBAR form is not to be attached to a tax return.

Definitions

According to the FBAR form instructions, U.S. person is defined as a U.S. citizen or  resident, or a U.S. domestic partnership, corporation, estate or trust.

A financial interest is defined as an account in which a U.S. person is the owner of record or has legal title, regardless of whether the account is maintained for that persons benefit or for the benefit of others (including non-U.S. persons). If an account is maintained in the names of two persons jointly, or if several persons each own a partial interest in an account, each U.S. person has a financial interest in the account.

A financial interest also includes an account for which the owner of record or legal title holder is (1) acting as an agent, nominee, attorney or in some other capacity on behalf of a U.S. person; (2) a corporation in which a U.S. person owns (directly or indirectly) more than 50% of the total value of stock; (3) a partnership in which a U.S. person owns a more-than-50% profits interest (distributive share of income); or (4) a trust in which a U.S. person either has a present beneficial interest in more than 50% of the assets, or from which such person receives more than 50% of the current income.

A person has signature authority over a financial account if such person can control the disposition of money or other property in it, by delivery of a document containing that persons signature (or that signature and that of one or more other persons) to the bank or other person with whom the account is maintained.

A financial account includes any account maintained with a financial institution, or with any person engaged in the business of a financial institution, including savings, demand, checking, deposit, time deposit, bank, securities, securities derivatives or other financial instrument account, as well as any account in which assets are held in a commingled fund and in which the account owner holds an equity interest in the fund.

All geographic areas located outside the U.S., Guam, Puerto Rico and the Virgin Islands are foreign countries. Accounts maintained at an affiliate of a U.S. bank or other U.S. financial institution located in a foreign country must be reported. However, accounts maintained with a branch, agency or other office of a foreign bank or other financial institution located in the U.S., Guam, Puerto Rico or the Virgin Islands need not be reported.

The FBAR form need not be filed by officers or employees of certain banks with signature or other authority over foreign financial accounts the bank maintains, if the officer or employee has no personal financial interest in such account; or by officers or employees of domestic corporations whose equity securities are listed on a national exchange or which have assets exceeding $10 million and 500 or more shareholders of record, if the officer or employee has no personal financial interest in the account, and has been advised in writing by the corporations chief financial officer that the corporation has filed a current report that includes such account.

From Karen Canavan Brodsky, J.D., LL.M., CPA, Thomas D. Fuller, J.D., and Deborah Walker, CPA, Washington, DC, Ruth Flynn Raftery, J.D., CPA, New York, NY, and Richard Gimbert, CPA, Atlanta, GA