Your client has an account with a bank located in a foreign country. The client has heard that the government is imposing onerous penalties for failure to file a FBAR report by June 30. Are they in trouble? What should they do immediately to resolve the situation?
Situation: Your client has an account with a bank located in a foreign country. The client has heard that the government is imposing onerous penalties for failure to file a FBAR report by June 30. Are they in trouble? What should they do immediately to resolve the situation?
Solution: FBAR (pronounced “Fubar”) is actually Treasury Form TD F 90-22.1, or the Report of Foreign Bank and Financial Accounts. Since 1970, any U.S. person who has a financial interest, signature or other authority over foreign financial accounts (banking, securities, etc.) valued above $10,000 has been required to file the report annually, by June 30. This requirement is separate and distinct from the requirement to report any income from those foreign accounts on an income tax return (Forms 1040, 1065, 1120, etc.).
As part of the Treasury Department's increased focus on offshore tax avoidance, a revised FBAR form was developed for 2008 with new instructions. The IRS also developed a publicity campaign to remind and encourage all those required to file the FBAR form to do so. Failure to file can lead to criminal and civil penalties up to $10,000 per account. If the failure is considered willful, the penalties may be increased to $100,000 or more per account. In addition, there is no filing extension available for the FBAR form; June 30 is a “drop-dead” date.
The revised form due last month contained several major changes. First, filers were required to report the maximum value for the year (in this case 2008) for each account. Previously, filers only had to check a box for the account value's range (say, from $100,000 to $250,000).
Second, the definition of U.S. person was expanded to include “a person in or doing business in the United States.” Previously, only U.S. citizens, U.S. residents and domestic business entities were included. This new definition raised many unanswered questions and on June 5 the IRS announced that taxpayers may use the old definition of U.S. person in determining their filing requirement for 2008.
Third, the scope of accounts covered was redefined. Clarification is made that the geographic location of an account is the controlling factor. An account held at the London branch of New York-based Citigroup Inc. (a U.S. bank) is covered. An account held at the New York branch of UBS AG (headquartered in
Zurich, Switzerland) is not. The new instructions further clarified that mutual funds are considered accounts for FBAR purposes. This has raised questions regarding whether holders of shares in hedge funds need to report. As of now, the IRS has not issued guidance on this question, but on June 5 they issued a request for comments by Aug. 31 on this and related issues.
Let's focus first on the simple scenario.
Your client has some foreign bank accounts and has reported the income properly each year, but failed to file any FBAR forms. There's good news for them. On June, the IRS announced a one-time amnesty-type program for these taxpayers. Those who qualify will incur no penalties. If all foreign income has been properly reported on the taxpayer's income tax returns, they have until Sept. 23 to file any delinquent FBAR reports, including the one due for 2008.
To assure compliance, clients should use the old form for 2007 and prior, and the new one for 2008. They should attach a statement as to why they failed to file FBARs previously (“taxpayer was unaware of requirement” should be sufficient) and a copy of the relevant tax returns. If the 2008 return is on a valid extension until Oct. 15, they don't need to include it.
For clients who haven't reported their foreign income or filed FBAR forms, the IRS has a voluntary disclosure program. They can find detailed information, including a set of 51 FAQs on the IRS website (just type ‘FBAR' in the search box). The program is in effect until Sept. 23 and can result in substantial savings.
In one example posted on the IRS website, a person who deposited $1 million in a foreign account in 2003 and earned 5% interest each year would face penalties of $386,000 plus interest by participating in the voluntary disclosure program. While that sounds like a lot, if they fail to disclose and the IRS catches them, the penalties could be up to $2,306,000 plus interest plus a possible fraud penalty plus possible criminal prosecution.
As Clint Eastwood would say “Do you feel lucky today?”
Jonathan Horn, CPA, is a solo practitioner in New York specializing in tax preparation and planning for individuals and small businesses. Mr. Horn is a member of the AICPA Individual Taxation Technical Resource Panel, the NYSSCPA Committee on the Taxation of Individuals, the NYSSCPA Relations with the IRS Committee and various AICPA task forces. He has previously served on the NYSSCPA Committees on Closely Held and S Corporations and on Emerging Technologies.
