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Filing FBARs in 2011:
What are the Rules?
How to Resolve Noncompliance?
March 1, 2011
Kevin E. Packman, Esq.
Copyright © 2011 Holland & Knight LLP. All Rights Reserved
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Overview - FBAR
• Report of Foreign Bank and Financial Account
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Treasury Department Form (TD F 90-22.1)
Filing requirement since 1972
Mandated by Bank Secrecy Act (31 USC 5314)
June 30 (Detroit Service Center)
• FBAR is not a tax filing.
• IRC 6103 confidentiality and disclosure not applicable
• Financial Crimes Enforcement Network (FinCEN)
• Final Regs 2/23/11, Effective as of 3/28/11
• Proposed Regs – 2/26/10
FinCEN, IRS & FBAR
• Originally
• IRS responsible for compliance
• FinCEN responsible for civil enforcement
• Early 2003
• IRS responsible for compliance and civil enforcement.
• FinCEN retains authority over FBAR regs and rules
Overview – Bank Secrecy Act
• Enacted 1970
• Congressional concern re financial centers in tax havens used by
US taxpayers for criminal purposes or evade tax.
• A number of filings required mostly by US financial institutions
–
Suspicious Activity Reports, Currency Transaction Reports, FBARs
• Information from forms entered into BSA computer
• Any governmental agency may access (IRS, Customs, DEA, FBI,
etc)
• Designed to fight fraud, money laundering, terrorist financing, tax
evasion and other financial crimes
Overview – Filing Requirements
• US Person with a
• Financial Interest, Signature Authority or Other Authority
over
• Foreign Financial Accounts if in the aggregate
• the accounts equal or exceed $10,000 at any point within
the year
Who is a US Person?
• Individual
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Citizen
Green card holder, even if under treaty tie break deemed non US
Resident alien  IRC 7701(b) rules
“in and doing business in the US”  not relevant
• Business entities (corporations, partnerships, limited
liability companies
• tax elections are irrelevant
Who is a US Person? - Continued
• Domestic Trusts
• Formed in the US.
• US includes US territories, possessions and Indian lands
• Ignore IRC 7701(a)(30)  formation key
• Domestic Estates
• PR/executor files on behalf of estate. If non compliance by
decedent, no liability for PR/executor.
• If unable to obtain complete records, file with what you have, and
note the steps taken to gather information.
Who is Not A US Person?
• NRA unless substantially present.
• Count days of presence in the US, but focus on Visa classifications.
• Foreign entity that elects to treated as US
• NRA electing to be a US person under IRC 6013(g) or (h)
What is a Financial Interest?
• Owner of Record/Title Holder
• US beneficial owner of a bearer share entity or IBC.
• US Grantor of foreign trust with US Beneficiaries has filing
requirement even if not a beneficiary (i.e. IRC 679). Grantor is the
owner.
• Notwithstanding, no need to have a personal beneficial interest
• Constructive Ownership:
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Hold title as an Agent, Custodian, Nominee, Attorney in Fact
Owns more than 50% of the shares of a Foreign corporation
Owns more than 50% of the profits of a Foreign partnership
Has a present beneficial interest in more than 50% of the assets or
income in a Foreign trust.
Which Foreign Accounts Must Be Reported?
• 2/26/10 Proposed Regulations Approved
• The focus is on the relationship taxpayers have with the
financial institution.
• If relationship is formalized, its reportable, regardless of
length.
• Bank Account
• Securities Account
• Other Financial Accounts
Bank Accounts
• Savings deposit, demand deposit, checking or other
account maintained with person engaged in banking.
• Includes time deposits and certificates of deposit.
• Definition never really changed.
Securities Accounts
• New definition created by Proposed Regulations
• “account maintained with a person in the business of buying,
selling, holding or trading stock or other securities”
Other Financial Accounts
• Relationships covered within definition of “other financial
accounts” created by Proposed Regulations
1. Deposits – an account with a person in the business of
accepting deposits as a financial agency
2. Insurance – life insurance policies with a cash value
and/or annuities
3. Futures/Options – an account with a person who acts as
a broker/dealer for commodities/options.
4. Mutual Funds – pooled investments open to the public,
where shares have a net asset value and regular
redemptions
Hedge Funds & Private Equity Funds
• Hedge Funds, Private Equity Funds
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Excluded from FBAR reporting, but not from FATCA
FinCEN may require in the future.
Notice 2009-62 and Notice 2010-23
6/12/09 Conference call
Only Foreign Accounts Must Be Reported
• Foreign: anywhere outside of the US, its possessions and
territory
• Royal Bank of Canada in New York – no requirement
• Bank of America in Toronto – requirement
• Domestic account with foreign assets – no requirement
• US mutual fund, 401K, 403B or IRA with foreign investments
– no requirement
• Foreign mutual fund with all US investments – requirement
Exempt Accounts
• If foreign account is in a US military facility or operated by
US institution for the military.
• Correspondent or nostro accounts maintained by banks for
bank to bank transfers.
• Account with an international financial institution of which
the US is a member
• Account of a department or agency of the US, an Indian
Tribe or any political subdivision of a state
Signature Authority/Other Authority?
• “Authority of an individual (alone or in conjunction with
another) to control the disposition of money, funds, or other
assets held in a financial account by direct communication
(whether in writing or otherwise) to the person with whom
the financial account is maintained.”
• FBAR obligation only if the person has the authority to
directly deliver instructions to the financial institution.
Signature Authority - Examples
• US investment managers.
• Investment decisions do not require a filing, but moving money in
and out of accounts, may.
• US trustee of foreign trust.
• University employees – semester abroad accounts.
• POA
Signature Authority - Exceptions
• 7 exceptions for officers and employees if no personal
financial interest.
• 6 new under regulations. Pertain to employees of financial
institutions
• Officers/employees of domestic corporations
• Corp has more than $10 million in assets and more than 500
shareholders.
Other Authority - Examples
• US Person can control the disposition of funds by verbal
means (any means other than signing a paper)
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Email? Text?
Telephone call?
Fax?
Online transaction?
How are accounts valued?
$10,000 is met if
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At any time of the year
aggregate value of all foreign accounts
in excess of $10,000
Regardless of whether accounts generated income or dividends
If non liquid asset, 12/31 value.
If asset sold during year, value at date of sale.
All values must be converted for US purposes
Miscellaneous Filing Issues
• Individuals may file a simplified return if
• Financial interest in more than 25 accounts
• Signature or Other Authority over more than 25 accounts
• US Entities may file a simplified return if
• Financial interest in more than 25 accounts
• US Entities– may file consolidated returns if they own more
than 50% in an entity that is otherwise required to file an
FBAR.
Miscellaneous Filing Issues - Continued
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Records – required by regulations to be held for 5 years
Deadline – Must be received by June 30, no extensions.
Form 1040, Schedule B, Part III (check the box)
Form 1041, Question 3, Other Information (if Trust/Estate)
Form 3520 references FBAR filing obligation.
No CFC attribution rules
Enforcement - Civil Penalties
• Prior to 10/2004 – penalties only for willful violations
• Min $25,000; Max $100,000
• Non-Willful: penalty of up to $10,000
• Willful: maximum penalty is the greater of $100,000 or 50%
of the account balance at the time of the violation.
• IRS has discretion when imposing penalties. Thus, penalties may
differ based on the taxpayer's particular facts and circumstances.
• If check the box on Form 1040, incorporate foreign income on Form
1040 and otherwise forget to file FBAR, facts and circumstances
(warning, reasonable cause)
Enforcement - Civil Penalties Continued
• Because FBAR is Title 31, IRC cannot use a lien or levy to
collect on a penalty. They are limited to Title 31 collection
methods. [civil suit to collect monetary fine - 31 USC
§5321(b)(2)]
• Neither Tax Court or Bankruptcy Court have jurisdiction
over FBAR penalties.
• Risk with opting out of VDP
Enforcement - Criminal Penalties
Requires Willfulness.
• Up to $250,000 fine, imprisonment for up to 5 years, or
both.
• Up to $500,000 fine, imprisonment for up to 10 years, or
both.
• Failure to file must have been part of a criminal activity (i.e., it
occurs during the violation of another law or is part of an illegal
activity involving more than $100,000 in a 12-month period)
IRS Enforcement
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2007 – approx. 322,000 FBARs filed
2006 – 287,358 FBARs filed
2004 – 219,105 FBARs filed
2003 – 204,689 FBARs files
2001 – 177,151 FBARs filed
2000 – 174,528 FBARs filed
1991 – 116,600 FBARs filed
Treasury estimates at least 1 million people have an FBAR
obligation
• FinCEN believes only 400,000
Enforcement - Statute of Limitations
• Civil – 6 years to assess penalty; 2 years following
assessment to collect
• 31 USC 5321(b)(1) and (b)(2)
• Criminal – 5 years to assess penalty.
• 18 USC 3282(a)
• Never Filing – SOL remains open
• Fraud – SOL remains open on the underlying tax.
• Saying no on Form 1040 FBAR question can be evidence of tax
evasion.
Enforcement – Judicial
• FBARs – constitutional (US Supreme Court)?
• California Bankers Assn. v Schultz, 416 US 21 (1974)
• Failure to check the box – an affirmative act in tax evasion,
SOL remains open, continuing violation.
• US Dept of Justice Criminal Tax Manual – saying no on the Form
1040 can be the basis for a tax evasion prosecution. 12.08(6)(g)
• Concealing the existence of a foreign account is evidence of fraud.
• US v Olenicoff, (C.D. California, 3/31/08). Said no on Schedule B for
1998 - 2004 tax returns reflecting no foreign accounts, despite
transferring well over $100 million into such accounts during those
years. Avoided jail, but paid $52 million to resolve civil tax liabilities.
FBAR Assistance
• FBAR Frequently Asked Questions
http://www.irs.gov/businesses/small/article/0,,id=148845,00
.html
• IRS FBAR HOTLINE -- 800-800-2877, option 2.
• IRS FBAR EMAIL -- FBARquestions@irs.gov
• Kevin.Packman@hklaw.com (305-349-2261)
Options to Resolve Noncompliance
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2011 Offshore Voluntary Disclosure Initiative
Traditional Voluntary Disclosure
Quiet Disclosure
Q/A #17
2011 VDP
• Years  2003-2010
• Due Date  8/31/11
• Penalty Structure
• 25%
• 12.5% (Q/A # 53)
• 5% (Q/A # 52)
– Dual Citizens
– Inherited
Traditional VDP
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IRM 9.5.11.9
No guarantee re prosecution.
Not available if illegal source income.
Communication is truthful, timely, complete.
• Requires cooperation and payment in full of liability
Quiet Disclosure
• Q/A # 15 – don’t do it. Eligible for 2011 VDP
• Q/A # 16 – reviewing such returns with increased income.
Risk for examination, prosecution, penalties.
• Q/A # 47 – Circular 230
Q/A # 17
• If no omission of taxable income, but failure to file FBARs
reporting financial interest or signature authority, file
delinquent FBARS by 8/31/11, and no penalties.