FOREIGN FINANCIAL ACCOUNTS FBAR AND INCOME TAX FILING REQUIREMENTS

U.S. citizens living at home or abroad with unreported foreign financial accounts and/or unreported foreign income have much to be concerned about. There have been Department of Justice victories in U.S. District Courts, FATCA (The Foreign Account Tax Compliance Act) legislation with staged in regulations, as well as the transfer of most foreign tax compliance responsibilities from the United States Treasury Department to the Internal Revenue Service. This includes the requirements of Form 8938 as an attachment to individual income tax return Form 1040 as to foreign account disclosures.

The government has taken significant steps to identify and penalize taxpayer failures to report foreign accounts and pay tax on worldwide income. Developments include:

  • Obligating foreign financial institutions to provide foreign account information concerning U.S. citizens and resident aliens. A recent 2017 Treasury Regulation states that U.S. citizens and alien residents who are employees or business owners must report foreign assets even if they only have foreign account writing responsibilities on the foreign account. Account ownership is not required for account disclosure.
  • Obligating many foreign governments to enforce international disclosures. Seventy-two (72) foreign countries are at various stages of implementing FATCA international tax compliance agreements with the United States:

-Agreements in place: 30 countries including Canada, France, Germany,
Ireland, Isle of Man, Spain, Switzerland, and the United Kingdom.

-Agreements in principal: 25 countries including the Bahamas, Hong Kong,
India, Singapore, British Virgin Islands, and Israel.

-Agreements in negotiation: 17 countries.

  • Identifying foreign financial institutions failing to comply with FATCA treaties mandated by their respective countries.
  • Foreign institutions can even enter into non treaty agreements with the U.S. to allow financial activity of U.S. citizens and residents
  • Taxpayer reporting requirements go beyond filing Foreign Bank and Financial Reports (FBAR reports now referred to as FinCEN reports). In addition to FBAR requirements Form 8938 foreign account disclosures may be required to be disclosed with an annual attachment to individual income tax returns (Forms..1040). Schedule B “check the..box” language also reflects.. clarified wording on foreign accounts totaling $10,000 or more.
  • Encouraging taxpayers to participate in the IRS Offshore Voluntary Disclosure Program (OVDP) to provide information about international tax avoidance schemes promoted by advisors and foreign institutions. Such disclosures are usually a tradeoff for reduced taxpayer penalties and sanctions.
  • Continuing federal criminal prosecution of FBAR offenders. Paul Manafort, a former political consultant and administration aide, was indicted on 10/30/17 for failing to report foreign financial accounts and tax evasion.
  • Successful U.S. District Court civil litigation to collect FBAR civil penalties from noncompliant taxpayers. These taxpayers have usually been taxpayers also subject to criminal sanctions such as tax evasion for not reporting foreign taxable income on their U.S. tax returns.
  • Many foreign financial institutions are no longer accepting new accounts from U.S. residents whether the account be a business account or a passive personal or an investment account. Ever increasing institutional obligations are such that many foreign banks are currently closing the accounts of U.S. citizens.
  • Continuing U.S. Treasury amnesty initiatives through a long standing Offshore Voluntary Disclosure Program (OVDP) allowing taxpayers to avoid criminal prosecution by voluntary disclosure of..foreign accounts..and foreign taxable income. A..nuts and bolts..“question and answer” document on the Offshore Voluntary Disclosure Program (OVDP) is available from the IRS at their website concerning Voluntary Disclosure Programs.
  • Alternative non-criminal “Streamlined” Offshore Voluntary Disclosure procedures allow U.S. citizens domiciled both at home and abroad to enter the “Streamlined” program with penalties either abated or significantly reduced. Good faith reasonable cause is the threshold requirement for streamlined program acceptance.
  • U.S. citizens living at home or abroad with unreported foreign financial accounts and/or unreported foreign income on Forms 1040 have much to be concerned about. So do resident aliens..in..the..U.S. with..“back home” accounts. The reach of foreign account issues also includes U.S. citizens and resident aliens who have, as employees or business owners, foreign account
    check writing responsibilities.
  • There have been Department of Justice victories in U.S. District Courts, FATCA (The Foreign Account Tax Compliance Act) legislation and regulations, as well as the transfer of collection authority on foreign compliance matters from the Department of the Treasury to the Internal Revenue Service, including the requirement of filing Form 8938 as an attachment to Form 1040
  • While government changes are generally directed toward criminal/fraudulent taxpayer noncompliance, the rules have a substantial ancillary impact on non-willful and inadvertent compliance failures of a large group of taxpayers. We assist U.S. domiciled taxpayers as well as U.S. citizens living aboard with little understanding of foreign account compliance problems.
  • Transferring much of the compliance and collection authority from the Department of Treasury to the Internal Revenue Service. This allows the Internal Revenue Service, in civil and criminal cases, to issue summonses, assess penalties and collect income tax and penalties without the prior approval of federal courts. Court approval, however, is required for government collection actions in FBAR penalty cases.
  • Occasional use of Circular 230 sanctions against tax professionals who assist taxpayers in noncompliant tax positons.
  • Taxpayer passports are now subject to revocation or travel denial if tax obligations have not been addressed through agreement or payment.

 

WHAT ARE THE BASIC ACCOUNT AND INCOME DISCLOSURE RULES?

 

Highlights of the rules are as follows:

WHO MUST FILE AN FBAR? U.S. persons, including U.S. citizens, resident aliens, trusts and domestic entities that have an “interest” in foreign financial accounts that meet the reporting threshold of $10,000. This refers to total account values – not separate account values. An “interest” includes an individual taxpayer who has signature authority or other financial authority over a foreign account. Ownership is not a necessary requirement. A “U.S. person” for FBAR purposes includes corporations, partnerships, trusts and limited liability companies – but not decedent’s estates. Business owners, officers and employees are requested to file FinCEN reports if they have signature authority on business accounts.

WHAT ARE FOREIGN FINANCIAL ACCOUNTS? Covered assets include foreign bank and brokerage accounts, offshore mutual funds, foreign trusts, foreign cash value life insurance and annuity policies as well as retirement plans with an overseas situs. Excluded are foreign government sponsored Social Security-like accounts and personally held off-shore real estate.

WHAT ARE THE PENALTIES? Willful failure to file an FBAR can mean a civil penalty of 50% of the total balance of foreign accounts in a given year. 31 U.S.C. § 5321(a)(5). You are referred to the schedule of possible lesser FBAR civil penalties through voluntary disclosure discussed later on this website.

WHAT ABOUT INDIVIDUAL INCOME TAXES? U.S. citizens, both resident and abroad, as well as U.S. resident aliens are responsible for reporting worldwide income on their U.S. income tax returns. Taxpayer penalty exposure on unfiled Forms 1040/8938 is doubled in the case of unreported foreign income – from 20% to a 40% penalty in non-voluntary disclosure cases. U.S. business and trust entities have the same foreign income reporting obligations.

There are possible criminal charges related to unreported foreign taxable income on individual income tax return filings (Forms 1040). The government has used the income tax evasion statute (IRC § 7201); the false income tax return statute (IRC § 7206 (1)) and the failure to file income tax return statute (IRC § 7203) to prosecute taxpayers who have ignored the requirement to report worldwide income.

WHAT IS A FOREIGN COUNTRY? A foreign country includes all geographical areas outside the United States, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, and U.S. territories such as Guam, American Samoa and the United States Virgin Islands.

WHEN IS THE FBAR DUE? The FBAR is due 4/15/XX; however, the IRS now provides for an automatic extension to 10/15/XX for the years 2017 and beyond. No extension request paperwork is required. If a filer does not have available information to file a correct FBAR by October 15th, the taxpayer should file as complete an FBAR as possible and amend the filing when additional information becomes available.

WHAT HAPPENS IF A TAXPAYER IS REQUIRED TO FILE AN FBAR OR FORM 8938 AND FAILS TO DO SO? Failure to file the information return when required may result in civil penalties. If you discover you are required to file FBARs and/or Form 8938 with your Form 1040, you should consider immediately filing delinquent FBARs (e-filing only) as well as amended returns (Form 1040X) attaching Forms 8938 before being contacted by the IRS. Penalties are not usually assessed for late FBAR filings if the filings are made before IRS contact with the taxpayer. It is now very important to file amended returns (Forms 1040X) for taxpayers who failed to include the required Form 8938 attachment for a given year –..even if there is no foreign taxable income for the specific year. There is no statute of limitations for the assessment of a tax penalty ($10,000) for failure to file Form 8938. See later section on streamlined procedures which, in most cases, is the appropriate taxpayer vehicle for catch-up tax compliance.

Can cumulative FBAR penalties exceed the amount in the taxpayer’s foreign accounts? Yes. Under the penalty provisions found in 31 U.S.C. 5314(a)(5), it is possible for the United States Treasury Department to assess civil penalties for FBAR violations for multiple years in amounts that exceed the current balance of the foreign financial account.

Does the law provide for a variety of FBAR penalties? There are few federal court decisions on FBAR penalties which address penalties less than the fifty percent FBAR penalty (Section 821 of the Jobs Act). However, in conjunction with IRS Chief Counsel guidance, the Department of Treasury has developed guidelines for taxpayers who have “reasonable cause” for the late filing of FBARs which allow for avoidance of the expensive willful violation penalty structure. Threshold requirements for avoiding the higher civil penalties are:

  • The taxpayer has no history of past FBAR penalty assessments.
  • The taxpayer’s foreign accounts were not funded with monies from illegal sources or used to further a criminal purpose.
  • The taxpayer cooperated in any examination of the facts.
  • The IRS did not assess “income tax penalties” for their failure to report foreign taxable income on the taxpayer’s individual income tax returns.
  • The inability of the IRS to meet the burden of proof of willfulness on the part of the taxpayers.

If all criteria is satisfied, the IRS guidelines generally provide that the taxpayer may receive either a “reasonable cause” pass or a lesser FBAR penalty. But IRS discretion on granting reasonable cause is elusive and requires taxpayer full disclosure.

What about the IRS Offshore Voluntary Disclosure Program (OVDP)?

There currently exists an OVDP program for taxpayers who want to sleep at night. Entering the program results in a 27.5% penalty per FBAR year based on foreign account asset values as well as a 20% penalty on all unpaid income taxes resulting from unreported foreign taxable income. Eight (8) years of amended income tax filings and foreign asset reports (FinCEN) are required. Some knowledgeable tax practitioners advise clients not to enter the basic OVDP program unless there are elements of intentional tax avoidance and evasion in the taxpayer’s filing history.

Are taxpayers eligible for (non-amnesty or “quiet”)..voluntary disclosure..protection?..There are factual situations where non-amnesty voluntary disclosure is preferable to amnesty disclosure with OVDP’s guaranteed penalties on a multi-year basis. In Frequently Asked Question 17 of the Offshore Voluntary Disclosure Initiative, Frequently Asked Questions and Answers publication, the IRS has stated that the IRS will not impose a penalty for failure to file delinquent FBARs if there are no unreported foreign income tax liabilities and the taxpayer has not previously been contacted by the IRS regarding an income tax examination or a request for delinquent FBAR tax filings.

THE STREAMLINED OFFSHORE PROGRAM

On July 1, 2014, the U.S. Treasury announced a Streamlined Voluntary Disclosure Program for taxpayers residing in the United States as well as U.S. citizens residing outside of the United States. The key to qualifying for the Streamlined Program is an affidavit statement, under penalties of perjury, that taxpayer failures were due to non-willful conduct, that is, conduct that is due to negligence, inadvertence, mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

Taxpayer Streamlined filing requirements are the filing of the three most recent years’ income tax returns (usually amended returns – Form 1040X), including Form 8938, if applicable. Also required with the Streamlined Voluntary Disclosure is the filing of FBAR’s for the most recent six years for which the FBAR due date has passed (now at October 15th for the 2017 tax year).

U.S. Citizens living abroad, if eligible under the streamlined program, are exempt from the penalties on late filed FBAR’s. Individual income tax returns reported on the newly filed or amended returns may receive the same no tax penalty treatment (caveat – high unreported foreign income on Form 1040 may invite penalties). The streamlined procedures for taxpayers residing in the U.S. are different in that provisions call for a mandatory 5% penalty – but the penalty is far less than regular OVDP program penalties. Taxpayers are required to file three years of income tax returns and six years of FBAR reporting. The 5% penalty (U.S. residents) for FBAR’s is calculated based on the highest foreign account balance reported on FBAR’s during the six year period.

Streamlined offshore disclosure applications are sent, including attachments, to specific United States Treasury and Internal Revenue Service locations. There is no guarantee that the government will not audit the filings. Having said that, it is this writer’s opinion that the United States Treasury instituted the Streamlined Program in response to the numerous “quiet disclosures” that were filed in past years. A filing through the penalty intensive regular Offshore Voluntary Disclosure Program (OVDP) is very unattractive and very expensive. Quiet disclosures then, in non-willful cases, were clearly the preferred historical option for taxpayers. The Treasury decided to create the Streamlined Program to encourage a greater audience of taxpayer compliance.

It is the writer’s belief that, unless taxpayers use the OVDP program or the streamlined program, other types of voluntary disclosures (quiet disclosures), have increasing chances of audit. The reason is the significantly more third party information is available to the IRS every year.

Exception: Foreign taxable income liabilities fully reported and paid need not use either the OVDP or the Streamlined Program. Simply file delinquent FBAR’s.

Threshold requirements for the streamlined voluntary disclosure treatment are set out below:

First: Is historical unreported taxable income on filed returns modest in scope?
Second: Do the actions of the taxpayer seem reasonable given the facts surrounding opening and general funding of the foreign account?
Third: Would an independent third party view the taxpayer’s inaction as non-willful in failing to disclose foreign accounts and foreign taxable income?
Fourth: A prior OVDP submission by the taxpayer eliminates qualification for the Streamlined Program; however, the IRS Revenue Agent assigned to an active OVDP matter may consider Streamlined Program settlement terms without the taxpayer entering the program.

 

One final note on the Streamlined Voluntary Disclosure Program. Taxpayers never receive any written confirmation of acceptance into the Streamlined Program. The IRS retains the right to audit the submission. The usual Streamlined submission result is a cashed taxpayer check and silence on the part of the IRS. That particular outcome means acceptance into the program.

FBAR PENALTIES LESS THAN 50%

Not well known to taxpayers or the tax practitioner community is that the FBAR statute does not require the assessment of the onerous fifty percent (50%) penalty on annual asset values. The following chart highlights the civil (and criminal) penalties that may be asserted under the FBAR initiative. Title 26 (Income Tax) penalties have different penalty structures and different government collection authorities.

 

FBAR Violation Civil Penalties Criminal Penalties Comments
Reasonable Cause None None Administrative Waiver
Negligent Simple
Violation in not filing FBAR’s
Up to $500 per violation N/A 31 U.S.C
§ 5321(a)(6)(A)
31 C.F.R. 103.57(h)
Non-Willful Violation in not filing FBAR’s Up to $10,000 for each violation. N/A 31 U.S.C. §
5321(a)(5)(B)
Pattern of Negligent Activity in not filing FBAR’s In addition to negligence penalty under § 5321(a)(6)(A), a $50,000 penalty limit. N/A 31 U.S.C. §
5321(a)(6)(B)
WILLFUL FAILURE
TO FILE FBAR
Up to the greater of $100,000, or 50 percent of the value in the account in the year of the violation.  Penalties can be assessed for each separate year. Up to $250,000 or 5 years or both 31 U.S.C. § 5321(a)(5)(C)
31 U.S.C. § 5322(a) for civil; and 31 C.F.R. § 103.59(b)
for criminal.
Willful failure to file FBAR while violating certain other laws (e.g. money laundering) Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation. Up to $500,000 or 10 years or both 31 U.S.C. § 5321(5)(C);
31 U.S.C. § 5322(b) and 31 C.F.R. § 103.59(c) for criminal violation.
Willfully Filing A False FBAR Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation. $10,000 or 5 year sentence  or both 18 U.S.C. § 1001
31 C.F.R. § 103.59(d) for criminal.
Civil and Criminal Penalties may be imposed together. 31 U.S.C. § 5321(d).

 

It is difficult to obtain information on reported FBAR civil penalty cases in U.S. District Courts which have been assessed in non-criminal FBAR cases. Taxpayers, to date, have enjoyed a free ride or were settled with modest penalties paid at the administrative level. U.S. District Court filing for judgments to obtain levy/garnishment authority are extremely rare on non-criminal matters. IRS appeals conferences and settlements are available typical routes in non-criminal FBAR penalty cases. It is clear in our experience that the U.S. Treasury does in fact assess many FBAR penalties for less than the 50% penalty if there are favorable factual circumstances.

An FBAR penalty is not like an IRS income tax penalty. In income tax matters (Title 26 of the United States Code), upon IRS assessment of tax and penalty and the issuance of required taxpayer delinquent payment notices, federal statutes allow the IRS to issue non-judicial bank levies, wage garnishments and file federal tax liens for the unpaid income taxes. No federal court judgment is required in income tax penalty matters. IRS administrative collection authority is built into the income tax statutes (Title 26 U.S.C.) for obvious protection of revenue.

With regard to non-income tax penalties (Title 31 matters) such as FBAR penalty collection matters, the government must look to the general statute authorizing the collection of general debt owed to the government. FBAR penalty collection matters are governed by Title 31, Subtitle III, United States Code § 3711 under general government collection administrative procedures. The statute sets out the options if a U.S. citizen or resident alien has not paid the government taxes or penalties owed for one (non-Title 26 tax matter) reason or another –..including Title 31 FBAR penalties. Passport and visa issues, however, become the norm. Tax and debt clearance certificates are becoming prerequisites.

U.S. Code § 3711 is very specific about the requirement of a court judgment to actively levy, garnish or lien debtors in collection matters “except taxes and penalties of the Internal Revenue Code of 1986” (Title 26 U.S.C. 1 et. seq.). It is Title 26 (income tax) and IRS collection practices which most individuals and businesses know and fear because of administrative powers of the IRS. Non-Title 26 government debt collection matters do not have the teeth of the broad reaching administrative collection authority given to the IRS, e.g., levy, garnishment, offset of monies due (such as refunds and Social Security payments), foreclosure, tax lien filing, all without a federal court judgment.

Even before the U.S. Treasury can disclose FBAR debt information to a consumer reporting agency, the U.S. Treasury must provide the FBAR debtor an administrative opportunity to “review the obligation of the person, including..an opportunity for reconsideration..of..the initial decision.” U.S.C. § 3711(e)(ii). This offers an administrative hearing for a taxpayer to justify taxpayer FBAR noncompliance and perhaps escape credit bureau issues.

Perhaps most important for taxpayers with foreign accounts, are their judicial rights under U.S.C. § 3711(g)(4)(C).  The government must first file a federal lawsuit in an attempt to obtain an enforceable federal court judgment against the FBAR penalty debtor.  An answer can be filed to counter the compliant filing.  There is no FBAR lien or FBAR assessment subject to levy and garnishment until the rendering of an order from a federal court.

Unclear is whether the Department of Treasury can make an income tax refund offset for a penalty under the FBAR statute before litigation and judgment. U.S.C. § 3711(g)(9) would suggest that an offset of a Form 1040 refund or social security check is possible without a court judgment.

There are any number of reported FBAR civil cases in recent years where a taxpayer has been indicted for criminal tax evasion as well as subject to civil litigation in U.S. District Court to allow for execution on judgment against the taxpayer for penalties under the FBAR statutes (U.S.C. §§ 5321 and 5322.) These cases, with rare exception, address maximum FBAR penalty assessments.

It can therefore be stated unequivocally that FBAR civil penalty collection actions do not have the teeth of Title 26 Internal Revenue Service matters relating to income tax, Social Security tax, Medicare tax, Form 8938 (foreign account penalties), gift tax, estate tax, excise tax and a variety of other miscellaneous taxes under Title 26 of the United States Code.

The curious taxpayer can read recent FBAR penalty court cases which highlight the difficult process required of the government to obtain an enforceable judgment in FBAR civil penalty matters. See Williams I, Williams II, and Williams III, (2012-5298(CA-4), 2012). In another recent case, McBride, United States District Court, Utah, 2012, AFTR2d 2012-6600, the government filed a civil lawsuit against the defendant who had not paid an assessed FBAR penalty. The suit was filed in 2009, with the government filing a motion for summary judgment on the pleadings. The judge, pursuant to a hearing on the matter, denied the government’s motion for summary judgment on the FBAR penalty. The court stated later that simple preponderance of evidence was not the appropriate judicial standard of willfulness required for the FBAR penalty to be enforced by court order authorizing active collection. The court took its time in deciding not to rubber stamp the government’s request for an FBAR judgment granting authority to execute on judgment.

It is clear that taxpayers have both administrative and judicial rights in FBAR civil penalty matters. This differs from income tax matters where taxpayers face the immediate and immense collection powers of the IRS.

FORM 8938 PENALTIES

Form 8938 (a report of foreign account asset values) is a required filing with the form attached to Form 1040 for all years since 2011 (IRC 6038D). Form 8938 penalty collection rules are far different than FBAR rules for government collection authority. As many taxpayers know, the IRS has powerful administrative authority to investigate, assess tax and collect tax, penalties and interest. Form 8938 penalties are now part of Internal Revenue Service legislative authority and Form 8938 penalties can simply be assessed administratively. With a Form 8938 assessment comes the powerful IRS collection tools of levy, garnishment and tax liens without the blessing of a federal court.

Below is a comparison of Form 8938 and FBAR filing requirements which highlight the differences of Form 8938 from the FBAR (Form TD 90-22-1; now FinCEN Form 114). The below information was obtained from official IRS notices issued to explain filing requirements. Note the difference in the penalty structure under the income tax rules versus the FBAR rules.

Newer rules indicate that FACTA legislation does not require Form 8938 to be filed if the taxpayer for a given year does not have to file a Form 1040.

 

Form 8938 Attached to Form 1040, Statement of Foreign Financial Assets Form TD F 90-22.1, FinCEN 114 Foreign Bank and Financial Accounts
Who Must File? U.S. citizens and resident aliens who meet the threshold requirements. Domestic entities in future years. U.S. person, which include U.S. citizens, resident aliens and corporations, partnerships and trusts.
Does the United States include U.S. territories? No. Yes, resident aliens of U.S. territories and U.S. territory entities are subject to FBAR reporting.
Reporting Threshold (Total Value of Assets) $50,000 on the last day of the tax year or $75,000 at any time during the tax year (married individuals filing joint returns have higher thresholds at $100,000/$150,000); $200,000/$400,000 for those living abroad. $10,000 at any time during the calendar year.
When do you have an interest in an account or asset? If any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset would be required to be reported or otherwise reflected on your income tax return.  Social Security-like assets are exempt.  Real property held individually is exempt. Financial interest: If you are the owner of record or holder or legal title to an intangible asset you then have a sufficient interest to require a FinCEN return.  Real estate held individually and Social Security like government benefits are exempt.

Signature authority: you have authority or control over the disposition of the assets in the foreign account by direct communication with the financial institution maintaining the account.  True for both individual and business accounts.

See FBAR instructions for further details.

What is Reported? Maximum value of specified foreign financial assets, which include accounts with foreign financial institutions and certain other foreign non-account investment assets. Maximum value of financial accounts maintained by a financial institution physically located in a foreign country.  Not real estate or social security like retirement plans.
How are maximum account or asset value determined and reported? Fair market value in U.S. dollars in accordance with the Form 8938 instructions for each account and asset reported.

 

Convert to U.S. dollars using the end of the taxable year exchange rate and report in U.S. dollars.

Use account statements to determine the maximum value in the account.

 

Convert to U.S. dollars using the end of the calendar year exchange rate and report in U.S. dollars.

When Due? By due date, including extension, if any, for income tax return (Form 1040) or other domestic entity. See Form 8938 comments.  Now April 15th of the succeeding year.
Where to File? File with income tax return pursuant to instructions for filing the return. E-filed only.  Form FinCEN Form 114.
Penalties Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice to taxpayer of a failure to file Form 8938, for a potential maximum penalty of $60,000; criminal penalties if willfulness present.

 

Additionally, normal 20 percent negligence penalty is increased to 40 percent for non-reported foreign taxable income on Form 1040.

If non-willful failure, non-penalty or up to  to $10,000; if willful, up to the greater of $100,000 or 50 percent of the annual account balances; criminal penalties may also apply.

 

Waived in reasonable cause cases.

Types of Foreign Assets and Whether They are Reportable
Individual financial (deposit and custodial) accounts held at foreign financial 1st institutions Yes. Yes.
U.S. domestic entity with foreign assets No.  But other forms may be required Yes; but if entity is owned by single owner; then only one FBAR required – the individual owner; yes if 50% of income is passive-exclusive of trade or business income and rental income.
Financial account held at a foreign branch of a U.S. financial institution No. Yes
Financial account held at a U.S. branch of a foreign financial institution No. No.
Foreign financial account for which you have signature authority No, unless you otherwise have a beneficial interest in the account. Yes, subject to exceptions.  Note  business owners and employees with signature authority now subject to FinCEN reporting.
Foreign stock or securities held in a financial account at a foreign financial institution The account itself is subject to reporting, but the contents of the account do not have to be separately reported. The account itself is subject to reporting, but the contents of the account do not have to be separately reported.
Foreign stock or securities not held in a financial account Yes. No.
Foreign partnership interests Yes. No.
Foreign mutual funds Yes, if held overseas. Yes.
Domestic mutual fund investing in foreign stocks and securities No. No.
Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor Yes, as to both foreign accounts and other foreign investment assets. Yes, as to foreign accounts.
Foreign-issued life insurance or annuity contract with a cash-value Yes. Yes.
Foreign hedge funds and foreign private equity funds Yes. No.
Foreign real estate held individually in the taxpayer’s name No. No.
Foreign real estate held through a foreign entity Yes but only if the foreign entity itself is a specified foreign financial asset and its value includes the value of the real estate. No.
Foreign currency held directly No. No.
Precious Metals held directly No. No.
Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles No. No.
‘Social Security’ – type program benefits provided by a foreign government No. No.
Private employee retirement accounts Yes. No.

 

MORE INFORMATION ON NON-AMNESTY DISCLOSURES

Not well-understood is that non-amnesty voluntary disclosures by taxpayers (quiet disclosures) generally do not result in criminal prosecution or onerous penalties. Over the years, this office has witnessed that taxpayer voluntary disclosures of past foreign assets and tax reporting failures did not result in criminal prosecution. Usually, an IRS administrative investigation of a voluntary disclosure does not result in an IRS criminal recommendation forwarded to the Department of Justice. Those cases that are forwarded for criminal prosecution are generally rejected as criminal matters by IRS District Counsel, the..local..United States Attorney’s Office or the Department..of Justice. A disclosure, however, is not considered voluntary if the IRS is aware of taxpayer non-compliance before the taxpayer disclosure.

Internal Revenue Manual 9.5.11.9(4) reflects general IRS voluntary taxpayer disclosure guidelines developed outside the FBAR amnesty programs. The IRS, however, can take the position that well developed voluntary disclosure relief in income tax matters will not be honored in foreign account matters. But the IRM manual does suggest similar mitigating fact patterns in foreign account disclosure matters allow for reduced penalties.

Voluntary disclosure in income tax matters have a well-developed history of IRM rules, regulations and Federal court decisions. Below are the general rules for taxpayer relief in income tax matters. It is suggested that the rules also apply to foreign account matters. Prerequisites for relief in voluntary disclosures are as follows:

  1. The IRS has not initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;
  2. The IRS has not received information from a third party e.g., an informant, a person subject to indictment, foreign treaty disclosures or settlement of a government lawsuit against a financial institution alerting the IRS to a multiple taxpayer non-compliance. A good example is Union Bank of Switzerland’s..widespread disclosure of taxpayers’..foreign accounts in the years following the court settlement agreement pursuant to U.S. District Court litigation in Florida. If the government is aware of your noncompliance, a voluntary disclosure will not avoid a civil or criminal investigation. Post the Union Bank of Switzerland settlement disclosures in 2009, most other foreign banks are disclosing U.S. related accounts due to U.S. regulatory pressures, treaties and international cooperation. After Union Bank of..Switzerland’s success, FATCA legislation and implementation has dramatically increased foreign financial institutions disclosure in the tax/FBAR areas.
  3. The IRS has acquired information directly related on the possible liability of the taxpayer from another source (e.g., search warrant, grand jury subpoena, plea bargaining, whistle blower, current criminal investigation, foreign treaty). The Internal Revenue Manual encourages that Special Agents of the IRS Criminal Investigation Division consult with IRS attorneys on all voluntary disclosure cases coming to their attention. A taxpayer must submit a voluntary disclosure before taxpayer information is received by the IRS from any source. There are dozens of financial advisors and officers of financial institutions who have been indicted/plead guilty to offshore crimes. In the usual case, the defendants have turned over taxpayer names and schemes on a regular basis.

The Internal Revenue Manual encourages that Special Agents of the IRS Criminal Investigation Division consult with IRS attorneys on all voluntary disclosure cases coming to their attention. A taxpayer must submit a voluntary disclosure before taxpayer information is received by the IRS from any source. There are dozens of financial advisors and officers of financial institutions who have been indicted/plead guilty to offshore crimes. In the usual case, the defendants have turned over taxpayer names and schemes on a regular basis.

CONCLUSION

In this complex and tightening enforcement environment, tax practitioners continue to be approached by clients seeking advice on how to clean up their offshore affairs before the government comes knocking at their door. The cases range across a broad factual spectrum from criminal matters under Title 26 and Title 31 with draconian civil penalty concerns down to taxpayers having reasonable cause enabling them to escape the higher FinCEN and income tax penalties. Historically, taxpayers faced bookend positions with a minefield of uncertainty –..a quiet disclosure versus the submission of the penalty ridden OVDP program. But, under streamlined procedures there is a level of certainty that did not exist for U.S. citizens before the summer of 2014. This is a particularly welcoming approach for U.S. citizens residing and working abroad. The obvious approach for resident aliens or U.S. citizen (living domestically or overseas) with foreign account concerns is the proactive approach. Not the simple hope and prayer that the IRS will not send you a letter or have a government representative knock on your door.

Recent FATCA treaties strongly suggest that at some point, foreign account holders will be contacted by the IRS.

A careful analysis will determine if a taxpayer has reasonable cause for his noncompliance or if he willfully hid assets in foreign jurisdictions to avoid or evade taxes. In between these bookends are penalty issues such as negligence, taxpayer cooperation, voluntary disclosures, harm to the government through unpaid income tax dollars and the government’s burden of proof in federal courts before a FBAR penalty becomes an enforceable judgment. The issues tend to be legal in nature – it is not recommended that taxpayers solely utilize CPA’s..or Enrolled Agents..in foreign account matters.