FBAR

Congress enacted the Bank Secrecy Act (the “BSA”) in 1970. Codified in Title 31 of the United States Code, the BSA was enacted “to require certain reports or records where such reports or records have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.” Among other requirements, the BSA mandated new reporting obligations for United States persons who had relationships with foreign financial institutions.

After passage of the BSA, the Secretary of the Treasury (“Treasury”) was authorized to promulgate regulations for the implementation and enforcement of the new BSA reporting requirements. Pursuant to this authority, in 1972 Treasury began requiring individuals to file information reports with the United States government.  Significantly, however, at this time, Congress did not authorize Treasury to impose civil penalties against individual taxpayers for failure to file required information returns—rather, only “domestic financial institutions” and their agents were subject to civil monetary penalties.

There are various instances in which a U.S. person is deemed to have a financial interest in a foreign financial account. These include: (i) the U.S. person is the owner of record or holder of legal title, regardless of whether the account is maintained for the benefit of the U.S. person or another person; (ii) the owner of record or holder of legal title is a person acting as an agent, nominee, attorney, or a person acting on behalf of the U.S. person with respect to the account; (iii) the owner of record or holder of legal title is a corporation in which a U.S. person owns directly or indirectly more than 50% of the total value of shares of the stock or more than 50% of the voting power of all shares of stock; (iv) the owner of record or holder of legal title is a partnership in which the U.S. person owns directly or indirectly an interest in more than 50% of the partnership’s profits (distributive share of partnership income taking into account any special allocation agreement) or more than 50% of the partnership capital; (v) the owner of record or holder of legal title is a trust in which the U.S. person is the trust grantor and has an ownership interest in the trust for U.S. federal tax purposes; (vi) the owner of record or holder of legal title is a trust in which the U.S. person has a present beneficial interest, either directly or indirectly, in more than 50% of the assets of the trust or from which such person receives more than 50% of the trust’s current income for the calendar year; or (vii) the owner of record or holder of legal title is any other entity in which the U.S. person owns directly or indirectly more than 50% of the voting power, total value of equity interest or assets, or interest in profits.

A U.S. person has signature or other authority if the individual (either alone or in conjunction with someone else) has the authority to control the disposition of assets held in a foreign financial account through direct communication (written or oral) to the bank or other financial institution that maintains the account.

A financial account generally includes the following types of accounts:

• Bank accounts such as savings accounts, checking accounts, and time deposits,
• Securities accounts such as brokerage accounts and securities derivatives or other financial instruments accounts,
• Commodity futures or options accounts,
• Insurance policies with a cash value (such as a whole life insurance policy), Mutual funds or similar pooled funds (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions),

Any other accounts maintained in a foreign financial institution or with a person performing the services of a financial institution.

A foreign country includes all geographical areas located outside of the United States as defined in 31 CFR 1010.100(hhh). An account is “foreign” for FBAR purposes if it is located outside:

• the States of the United States.
• The District of Columbia.
• The Indian lands (as defined in the Indian Gaming Regulatory Act).
• The territories and insular possessions of the United States. See IRM 4.26.16.3.1(4) above.

It is the location of an account, not the nationality of the financial institution, that determines whether an account is “foreign” for FBAR purposes. Accounts of foreign financial institutions located in the U.S. are not considered foreign accounts for FBAR; conversely, accounts of U.S. financial institutions located outside the U.S. are considered foreign accounts. Examples are:

• An account with a Hong Kong branch of a U.S.-based bank is a foreign financial account for FBAR purposes.

An account with a New York City branch of a foreign-based bank is not a foreign financial account for FBAR purposes.

If the FBAR is required, certain records must be retained by the filer. 31 CFR 1010.420. Each person having a financial interest in or signature or other authority over any such account must keep the following records:

• Name in which the account is maintained.
• Number or other designation identifying the account.
• Name and address of the foreign financial institution or other person with whom the account is maintained.
• Type of account.
• Maximum value of each account during the reporting period.

The records must be kept for five years from the June 30 due date for filing the FBAR for that calendar year and be available at all times for inspection as provided by law.

Note that persons are not required to keep copies of FBARs filed, only the records that underlie the filing.

An officer or employee who files an FBAR to report signature authority over an employer’s foreign financial account is not required to personally retain records regarding that account.

The penalty for a non-willful violation is $10,000 (adjusted for inflation). The penalty for a “willful” violation is more significant: generally the greater of $100,000 or half of the balance of the account at the time of the violation.

In April, 2003, the Financial Crimes and Enforcement Network (FinCEN) delegated enforcement authority regarding the FBAR to the Internal Revenue Service (IRS). The IRS is now responsible for:

• Investigating possible civil violations;
• Assessing and collecting civil penalties; and
• Issuing administrative rulings.

The Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file FinCEN Form 114 (Report of Foreign Bank and Financial Accounts). Unlike Form 8938, the FBAR (FinCEN Form 114) is not filed with the IRS. It must be filed directly with the office of Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, separate from the IRS.

Individuals and domestic entities must check the requirements and relevant reporting thresholds of each form and determine if they should file Form 8938 or FinCEN Form 114, or both.

The following persons are required to file a Form 8938:

Specified individuals and specified domestic entities that have an interest in specified foreign financial assets and meet the reporting threshold

• Specified individuals include U.S citizens, resident aliens, and certain non-resident aliens
• Specified domestic entities include certain domestic corporations, partnerships, and trusts

The following, on the other hand, are required to file an FBAR:  U.S. persons, which include U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold

Entities that are United States persons and are disregarded for tax purposes may be required to file an FBAR. The federal tax treatment of an entity does not affect the entity’s requirement to file an FBAR. FBARs are required under a Bank Secrecy Act provision of Title 31 and not under any provisions of the Internal Revenue Code.