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Reporting Foreign Financial Accounts: Are You Up To Speed With The Latest Rules?

17 May 2011

Recently the IRS and the Justice Department have been enforcing the reporting obligations on foreign financial accounts (FFAs) for U.S. individuals and entities. The report, mandated by the Department of the Treasury, is commonly referred to as an FBAR (Foreign Bank and Financial Accounts Report) and is a seemingly straightforward information form. Taxand US looks at the recent changes in the FBAR.

Considering that a failure to file the report is accompanied by harsh civil and criminal penalties, it is important to pay close attention to the latest developments regarding FBAR reporting. The deadline for filing the FBAR is June 30 of the year following the calendar year being reported.

Once it has been determined that a taxpayer has an FBAR reporting requirement, preparing the form is a rather straightforward task. However confusion may exist since over the past few years, the IRS and the Department of the Treasury have made numerous changes to the FBAR reporting requirements, including the definition of a U.S. person, the types of FFAs to be included, and what constitutes signature authority for purposes of these rules. Since 2008, these definitions have been modified, suspended and re-modified. Finally, in February 2011, a set of final regulations was released to clarify a number of unresolved issues.

The following changes are analysed in detail:

  • Clarification of who is subject to the FBAR reporting requirements
  • Clarification on what constitutes a foreign financial account and types of accounts included
  • Clarification on when an individual has signature or other authority
  • Clarification of obligations of officers and employees
  • Consolidated filing option for non-corporate taxpayers

Severe penalties are in place to those who fail to comply. If a person has an FBAR obligation and fails to properly file the FBAR, then such person may be subject to civil penalties not to exceed $10,000. On the other hand, a person who willfully fails to file the FBAR may be subject to a civil penalty as high as the greater of $100,000 or 50% of the FFA balance. If the failure persists over multiple years, the actual penalties may exceed the maximum FFA balance. On top of that, additional criminal penalties can be tacked on to willful violations of FBAR reporting.

On 8 February 2011, the IRS announced a new voluntary disclosure initiative aimed at achieving similar objectives to a previous amnesty programme that was undertaken in 2009. The programme, called the 2011 Offshore Voluntary Disclosure Initiative (OVDI), expires on 31 August 2011 and contains some similar features to the 2009 program.

Taxand's Take

As the June 30 deadline quickly approaches, you should evaluate how the new regulations may affect your FBAR reporting requirements. The final rules bring a sigh of relief for foreign hedge fund and private equity fund holders who may not currently have any FBAR obligations. U.S. taxpayers should carefully review their FFAs to evaluate whether any person, including corporate officers and other employees, may be potentially liable for FBAR filings. The tax director of such companies should ensure that the company notifies its officers and employees of the changed FBAR regulations and should inform them that they may now have a filing obligation, where applicable.

U.S. taxpayers who become aware that the prior years' filings were not filed or were not properly filed may wish to consider taking advantage of the OVDI. While the penalties associated with doing so may seem high, this could be the last opportunity provided by the IRS to taxpayers to qualify for the lower civil penalties and avoid criminal charges related to the FBAR reporting. Keep in mind that in the event the IRS uncovers a reportable FFA after the OVDI expires, a taxpayer will be hard pressed to make an argument that the omission was due to reasonable cause.

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Juan Carlos Ferrucho
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