The IRS and FBARs
On March 30, 2022, the IRS issued Publication 5569, Report of Foreign Bank & Financial Accounts (FBAR) Reference Guide. The 12-page publication provides helpful information to both taxpayers and tax professionals regarding FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The IRS’s issuance of Publication 5569 also shows that the IRS will continue its education campaign on FBAR compliance and filing obligations. This article summarizes the information that is located in IRS Publication 5569.
Who Must File an FBAR?
By statute and regulation, all U.S. persons must file an annual FBAR if they have a financial interest in or signature or other authority over any financial account(s) located outside the United States, provided the aggregate balance(s) of the account(s) exceed $10,000 at any time during the calendar year.
Who is a U.S. Person?
U.S. persons include: (i) U.S. citizens or residents; (ii) entities (e.g., corporations, partnerships, trusts, and limited liability companies) created, organized, or formed in the United States (including the District of Columbia) and Territories and Insular Possessions of the United States or the Indian Tribes; (iii) estates formed under the laws of the United States; and (iv) certain disregarded entities that are U.S. persons.
What is a Financial Account for FBAR Purposes?
A financial account includes: (i) a bank account such as a savings or checking account; (ii) a securities account, such as a brokerage account; (iii) a commodity futures or options account; (iv) an insurance or annuity policy if it has a cash value; (v) mutual funds or similarly pooled funds; and (vi) any other account maintained in a foreign financial institution or with a person performing the services of a financial institution.
Certain retirement and savings plans can also qualify as foreign accounts. For example, the IRS cautions taxpayers that the following may have FBAR reporting requirements: (i) Canadian Registered Retirement Savings Plans (RRSPs); (ii) Canadian Tax-Free Savings Accounts (TFSAs); (iii) Mexican individual retirement accounts (Fondos para el Retiro); and (iv) Mexican Administradores de Fondos para el Retiro (AFORE).
When is a Financial Account Located Outside the United States?
For FBAR reporting purposes, the location of the financial account—and not the nationality of the financial institution—determines whether it is located outside the United States. For example, an account maintained with a branch of a U.S. bank physically located in Germany is an account located outside the United States and is therefore reportable. Conversely, an account maintained with a branch of a French bank physically located in Texas is not an account located outside the United States and is therefore exempt from FBAR reporting.
For these purposes, “outside the United States” means any place outside: (i) the U.S. and District of Columbia; (ii) U.S. territories and possessions, such as the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, Commonwealth of Puerto Rico, the United States Virgin Islands, and the Trust Territory of the Pacific Islands; and (iii) Indian lands as defined in the Indian Gaming Regulatory Act.
What is a Financial Interest in a Financial Account?
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.
What is Signature or Other Authority in a Financial Account?
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.
What if I have a Jointly Held Foreign Account?
If two persons jointly maintain a foreign financial account—or if several persons each own a partial interest in the account—then each U.S. person is deemed to have a financial interest in that account and each U.S. person must report the entire value of the account on an FBAR. However, there is a limited exception applicable to spouses.
What are the Penalties for Failure to File a Timely and Proper FBAR?
IRS Publication 5569 summarizes applicable penalties for the failure to file a timely and accurate FBAR:
Those who must file an FBAR and fail to timely file a complete and correct FBAR may be subject to civil monetary penalties, criminal penalties, or both. When a U.S. person learns they should have filed an FBAR for an earlier year, they should electronically file the late FBAR using the BSA E-Filing System. They can enter the calendar year reported, including past years, on the online FinCEN Form 114. They ‘explain a late filing’ or select ‘Other’ to enter up to 750-characters within a text box to explain the late filing or indicate whether the filing is made in conjunction with an IRS compliance option. If they property report the foreign financial account on a late-filed FBAR, and the IRS determines the FBAR violation was due to reasonable cause, no penalty will be imposed.
With respect to civil penalties, the IRS acknowledges that “[i]t’s possible to assert civil penalties for FBAR violations in amounts that exceed the balance in the foreign financial account. Civil and criminal penalties may be imposed together.”
For more on FBAR civil penalties, see prior our posts IRS Goes After Holocaust Survivor for Willful FBAR Penalty and United States v. Hughes: FBAR Penalties and a Willfulness Roadmap, and our podcast The Freeman Law Project Season 2 – Episode 1 – FBAR PENALTIES.
IRS Publication 5569 provides some helpful guidance to taxpayers and tax professionals alike regarding the various definitional requirements for FBAR reporting. However, taxpayers should exercise caution in reading Publication 5569 in isolation and without resort to other IRS materials and programs. For example, taxpayers who are not compliance with their FBAR reporting obligations should carefully consider whether simply filing a late FBAR with an explanation is sufficient to mitigate potential civil and criminal risks (to the extent these risks are present). For taxpayers who are non-willful and have significant civil penalty exposure (including not only the FBAR, but Forms 3520, 8938, 5471, 5472, etc.), such taxpayers should consider potentially mitigating those civil penalties through filing a submission under the IRS’s Streamlined Filing Compliance Procedures. And to the extent a taxpayer has potential criminal exposure, the taxpayer should consider potentially mitigating those criminal risks through the submission of a disclosure under the IRS’s Voluntary Disclosure Program. In more simple non-compliance matters, it may very well make sense to follow the IRS’s advice to file the FBAR late with a reasonable explanation as to the reason or reasons for non-compliance.
FBAR penalty defense requires a proactive representation and a deep knowledge of the nuances of FBAR compliance and its defenses. Freeman Law represents clients with offshore tax compliance disputes involving FBAR penalties and international information return penalties. Failing to file an FBAR can give rise to significant penalties, including a non-willful penalty and willful FBAR penalty. The risks of tax and reporting non-compliance have never been more real and the threat of international penalties, particularly FBAR penalties, has never been more clear. Schedule a consultation or call (214) 984-3000 to discuss your FBAR penalty concerns or questions.