Frequently Asked Questions Regarding Tax Law
Do I have to file an FBAR Report?
The Report of Foreign Bank and Financial Accounts, TD F 90–22.1, (FBAR), is required when a U.S. Person has a financial interest in or signature authority over one or more foreign financial accounts with an aggregate value greater than $10,000. If a report is required, certain records must also be kept.
Why do I have to file an FBAR report?
Statutory and regulatory authority for the FBAR are 31 U.S.C. § 5314, 31 C.F.R. §§ 103.24 and 103.27 require filing an FBAR if you meet all of the filing requirements.
What is the filing criterion?
In order to determine whether or not the FBAR is required, all of the following must apply:
- The filer is a U.S. person;
- The U.S. person has a financial account(s);
- The financial account is in a foreign country;
- The U.S. person has a financial interest in the account or signature or other authority over the foreign financial account; and,
- The aggregate amount(s) in the account(s) valued in dollars exceed $10,000 at any time during the calendar year.
Who is considered a U.S. person?
- A U.S. Person is defined by reference to three sources. 31 U.S.C. 5314 and 31 C.F.R. 103.24 identify persons who may be subject to the FBAR reporting requirement. The FBAR instructions identify a smaller group of persons who must file FBARs than could have been required, under the statute and regulations, to file.
- A citizen of the United States has a U.S. birth certificate or naturalization papers
- A “resident” of the United States is a permanent resident. “Permanent resident” is not defined in the FBAR instructions, regulations, or statute. The definition of “resident alien” found in IRC § 7701(b) is not applicable for FBAR purposes. The plain meaning of the term “resident” (in this context, someone who is living in the U.S. and not planning to permanently leave the U.S.) should be used for FBAR examination purposes. Although IRC § 7701(b) is not applicable, an individual can establish that he is not a resident for FBAR purposes if he can show that none of the following three criteria apply:
- For FBAR purposes, the definition of “person” also includes a corporation, trust, or partnership.
a. A corporation that owns directly or indirectly more than a 50 percent interest in one or more other entities is permitted to file a consolidated FBAR, on behalf of itself and the other entities. The consolidated report must include a list of the entities. An authorized official of the parent corporation should sign the consolidated report.
What is a Financial Account?
A financial account includes a:
- Bank account, such as a savings, demand, checking, deposit, time deposit, or any other account maintained with a financial institution or other person engaged in the business of a financial institution. A bank account set up to secure a credit card account is an example of a financial account. An insurance policy having a cash surrender value is an example of a financial account.
- Securities, securities derivatives, or other financial instruments account.
- Other financial accounts generally encompass any accounts in which the assets are held in a commingled fund and the account owner holds an equity interest in the fund. A mutual fund account is an example of such an account.
- Individual bonds, notes, or stock certificates held by the filer are not a financial account.
How do I determine whether an account is a Foreign Financial Account?
- The location of an account, not the nationality of the financial institution with which the account is held, determines whether the account is in a foreign country. Any financial account (except accounts maintained with a U.S. military banking facility) that is located in a foreign country should be reported, even if the account is held with a branch of a United States financial institution located abroad.
- Generally, an account in a foreign country includes all geographical areas located outside the United States.
How do I determine if I have a financial interest in a Foreign Financial Account?
- A United States person has a financial interest in each account for which such person is the owner of record or has legal title, whether the account is maintained for his own benefit or for the benefit of others including non-United States persons
- A United States person also has a financial interest in each bank, securities, or other financial account in a foreign country for which the owner of record or holder of legal title is: a person acting as an agent, nominee, attorney, or in some other capacity on behalf of the U.S. person; or
- a corporation, whether foreign or domestic, in which the United States person owns directly or indirectly more than 50 percent of the total value of shares of stock; or
- a partnership, whether foreign or domestic, in which the United States person owns an interest in more than 50 percent of the profits (distributive share of income); or,
- a trust, whether foreign or domestic, in which the United States person either has a present beneficial interest in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income. :
- A bank is not required to file the FBAR to report a financial interest in an international interbank transfer
If I am only a signor on the account, but do not have a financial interest in an account, do I still have to file an FBAR report?
- A person having signature or other authority over a foreign financial account must file the FBAR even if the person has no financial interest in the account.
How do I determine if I have signatory authority over a Foreign Financial Account?
- A person has signature authority over an account if that person can control the disposition of money or other property in it by delivery of a document containing his signature (or his signature and that of one or more other persons) to the financial institution where the account is maintained.
How do I convert foreign currency to U.S. Currency?
- Convert foreign currency by using the official exchange rate in effect at the end of the year in question for converting the foreign currency into U. S. dollars. In valuing currency of a country that uses multiple exchange rates, use the rate that would apply if the currency in the account were converted into U. S. dollars at the close of the calendar year. The official Treasury Reporting Rates of Exchange for the previous quarter year can be obtained at http://fms.treas.gov/intn.html#rates
What is the filing deadline for filing an FBAR??
- The FBAR must be filed on or before June 30 each calendar year.
- The FBAR is considered filed when it is received in Detroit, not when it is postmarked
- .Extensions of time to file federal income tax returns do not extend the time for filing FBARs. There is no statutory or regulatory provision specifically granting an extension of time for filing FBARs.
- Effective July 1, 2013, all FBAR reports must be filed electronically.
Why should I make a voluntary disclosure?
- Taxpayers with undisclosed foreign accounts or entities should make a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution. Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues. Taxpayers who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution.
What is the IRS’s Voluntary Disclosure Practice?
- The Voluntary Disclosure Practice is a longstanding practice of IRS Criminal Investigation of taking timely, accurate, and complete voluntary disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted. It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution. When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.
I’m currently under examination. Can I come in under voluntary disclosure?
- No. If the IRS has initiated a civil examination, regardless of whether it relates to undisclosed foreign accounts or undisclosed foreign entities, the taxpayer will not be eligible to come in under the IRS’s Voluntary Disclosure Practice.
I have properly reported all my taxable income but I only recently learned that I should have been filing FBARs in prior years to report my personal foreign bank account or to report the fact that I have signature authority over bank accounts owned by my employer. May I come forward under the voluntary disclosure practice to correct this?
- The purpose for the voluntary disclosure practice is to provide a way for taxpayers who did not report taxable income in the past to voluntarily come forward and resolve their tax matters. Thus, If you reported and paid tax on all taxable income but did not file FBARs, do not use the voluntary disclosure process.
What are some of the criminal charges I might face if I don’t come in under voluntary disclosure and the IRS finds me?
- Possible criminal charges related to tax returns include tax evasion (26 U.S.C. § 7201), filing a false return (26 U.S.C. § 7206(1)) and failure to file an income tax return (26 U.S.C. § 7203). The failure to file an FBAR and the filing of a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.
What should I do if I am having difficulty obtaining my records from overseas?
- If you are having difficulty, speak with your agent or if your case is not yet assigned, contact the IRS OVDP Hotline at (267) 941-0020. Our experience with offshore cases in recent years has shown that taxpayers are ultimately successful in retrieving copies of statements and other records from foreign banks.
What are the requirements of the Offshore Voluntary Disclosure Program?
Under the terms of the Offshore Voluntary Disclosure Program, taxpayers must:
- Provide copies of previously filed original (and, if applicable, previously filed amended) federal income tax returns for tax years covered by the voluntary disclosure;
- Provide complete and accurate amended federal income tax returns (for individuals, Form 1040X, or original Form 1040 if delinquent) for all tax years covered by the voluntary disclosure, with applicable schedules detailing the amount and type of previously unreported income from the account or entity (e.g., Schedule B for interest and dividends, Schedule D for capital gains and losses, Schedule E for income from partnerships, S corporations, estates or trusts and, for years after 2010, Form 8938, Statement of Specified Foreign Financial Assets).
- File complete and accurate original or amended offshore-related information returns and Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”) for tax years covered by the voluntary disclosure;
- Cooperate in the voluntary disclosure process, including providing information on offshore financial accounts, institutions and facilitators, and signing agreements to extend the period of time for assessing Title 26 liabilities and FBAR penalties;
- Pay 20% accuracy-related penalties under IRC § 6662(a) on the full amount of your offshore-related underpayments of tax for all years;
- Pay failure to file penalties under IRC § 6651(a)(1), if applicable;
- Pay failure to pay penalties under IRC § 6651(a)(2), if applicable;
- Pay, in lieu of all other penalties that may apply to your undisclosed foreign assets and entities, including FBAR and offshore-related information return penalties and tax liabilities for years prior to the voluntary disclosure period, a miscellaneous Title 26 offshore penalty, equal to 27.5% (or in limited cases 12.5% or 5%) of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure;
- Submit full payment of any Title 26 tax liabilities for years included in the offshore disclosure period and all tax, interest, accuracy-related penalties for underpayments related to offshore accounts and entities, and, if applicable, the failure to file and failure to pay penalties with the required submissions or make good faith arrangements with the IRS to pay in full, the tax, interest, and these penalties (the suspension of interest provisions of IRC § 6404(g) do not apply to interest due in this program); and
- Execute a Closing Agreement on Final Determination Covering Specific Matters, Form 906.
- Agree to cooperate with IRS offshore enforcement efforts by providing information about offshore financial institutions, offshore service providers, and other facilitators, if requested.
Some taxpayers have made quiet disclosures by filing amended returns. Will the IRS audit these taxpayers? If so, will they be eligible for the 27.5 percent offshore penalty? Is the IRS really going to prosecute someone who filed an amended return and correctly reported all their income?
- The IRS is reviewing amended returns and could select any amended return for examination. The IRS has identified, and will continue to identify, amended tax returns reporting increases in income. The IRS will closely review these returns to determine whether enforcement action is appropriate. If a return is selected for examination, the 27.5 percent offshore penalty would not be available. When criminal behavior is evident and the disclosure does not meet the requirements of a voluntary disclosure under IRM 9.5.11.9, the IRS may recommend criminal prosecution to the Department of Justice.
If, after making a voluntary disclosure, a taxpayer disagrees with the application of the offshore penalty, what can the taxpayer do?
- If the offshore penalty is unacceptable to a taxpayer, that taxpayer must indicate in writing the decision to withdraw from or opt out of the program. Once made, this election is irrevocable. An opt out is an election made by a taxpayer to have his or her case handled under the standard audit process. It should be recognized that in a given case, the opt out option may reflect a preferred approach. That is, there may be instances in which the results under the applicable voluntary disclosure program appear too severe given the facts of the case.
Do not hesitate to contact us if you have any additional questions.
