4. Dual Canadian - U.S citizens required to file foreign financial account FBAR disclosure returns annually or face U.S. penalties By Simon Sturm

Transcription

1 4. Dual Canadian - U.S citizens required to file foreign financial account FBAR disclosure returns annually or face U.S. penalties By Simon Sturm Under the U.S. Bank Secrecy Act a "U.S. person" with a financial interest or signature authority over one or more financial accounts maintained in a foreign country may be required to make disclosure of such account(s) to the U.S. Treasury Department. Disclosure would be mandatory where such account(s) in the aggregate have a combined value of at least $10,000 (U.S. funds) at any time during a taxable year. Such disclosure is accomplished by filing a Form 114, Report of Foreign Bank and Financial Accounts (an FBAR return. ) In addition, it many cases a separate Form 8938 is also applicable for the reporting of foreign assets and accounts which is filed annually together with a taxpayer s income tax return. (See Tag #3) While there is considerable overlap in the information provided in these two forms, each form must be filed separately, and failure to file either carries its own separate penalties. (See Tag #6) In the past the filing of the FBAR form for each calendar year was required to be done by the June 15th th of the following year (i.e. for the 2015 calendar year, filing would be required to occur by June 15,2016.) No extension period for filing is presently available. Commencing in the 2016 calendar year U.S. taxpayers living in the United States will be required to file their FBAR returns by April 15th th in each year covering the preceding calendar year (i.e., an FBAR return covering a U.S. taxpayer s financial accounts held during the 2016 calendar year would have to be filed by April 15, 2017.) Such filing would then align with the deadline for a U.S. taxpayer s annual income tax return. Under the new rules such taxpayer may also request a 6 month extension of up to October 15 th to file the FBAR return. (Previously no extension period had been allowed.) The filing deadline for the FBAR return covering accounts held abroad during the 2015 year remains June 15, A U.S. taxpayer living outside the United States still retains the right to file their FBAR return each year in the future until June 15 th. They may extend this deadline each year, but only upon request and only up to October 15 th. The FBAR return is required to be timely submitted electronically each year to the Financial Crimes Enforcement Network ( FINCEN ) of the U.S. Treasury Department. This filing is totally separate and independent of the filing of annual U.S. income tax returns and any other required international information returns. Since 2013, Form 114 has been required to be filed electronically through the BSA E-filing system web site. The number of FBAR returns filed each year has increased rapidly in recent years from approximately 280,000 in 2005 to 1,163,000 filings in 2015 covering the 2014 tax year. However, even this number is but a small fraction of the well over 7 million U.S. citizens living abroad who should be

2 filing the form along with the many U.S. citizens living within the United States who have foreign financial accounts outside the country. For purposes of the FBAR filing requirement a U.S. person includes U.S. citizens or residents, U.S. corporations, U.S. limited liability companies and partnerships, as well as trusts qualifying as U.S. domestic trusts. The FBAR return must also be filed by the estates of all U.S. citizens or green-card holders who had non-u.s. financial accounts in amounts exceeding the minimum $10,000 FBAR threshold levels described previously. Such filing is required irrespective of whether such U.S. persons at the time of death resided in the U.S. or in any country abroad. Children who meet the criteria for FBAR filing are also required to file an FBAR return through a parent or guaradian. Foreign financial accounts that are required to be reported on an FBAR return would encompass all forms of bank accounts, Canadian RRSP accounts, securities accounts, mutual funds and other pooled funds, commodities futures and option accounts, non-monetary assets such as gold, certain insurance and annuity policies having a cash value, and other financial instruments held abroad in a foreign financial institution. Individual foreign stocks and bond certificates or foreign credit card accounts are not viewed as financial accounts for purposes of FBAR, but would be subject to the reporting requirements of Form (See Tag # 3) Where U.S. person owns shares of a foreign corporation or of a foreign mutual fund that invests in foreign stocks, and such shares are held in an account of a foreign financial institution or brokerage firm in the United States, such foreign account would not be subject to FBAR disclosure requirements. Similarly, an account maintained in the branch of a foreign bank physically located in the U.S. would not be subject to FBAR disclosure. A U.S. taxpayer is held to have a financial interest in a foreign account if they are the owners of record or have legal title to the account. This would occur even in those circumstances where the foreign account may in fact be held by the taxpayer not for themselves, but for the benefit of others. Similarly an individual acting as an agent or nominee or attorney on behalf of a U.S. person with respect to an offshore account is also responsible to file an annual FBAR return. Of great importance is the fact that the FBAR filing obligation relating to foreign financial accounts applies not only to accounts held either directly or exclusively by U.S. persons and entities. It also requires disclosure reporting of foreign financial accounts of Canadian and other non-u.s. corporations and/or partnerships and/or trust in which a U.S. citizen holds more than a 50% interest, directly or indirectly. Moreover, filing of an FBAR form might even be required by a Canadian trust created by a dual Canada-U.S. citizen where the trust for U.S. tax purposes would be treated as a "grantor trust." (See Tag #20) The filing obligation may similarly apply to beneficiaries of a Canadian trust who (i) are deemed to be U.S. persons or (ii) either (A) have a present beneficial interest of more than 50% in a foreign trust or (B) receive more than 50% of the foreign trust s current income. FBAR filing cuts a broad swath once a foreign financial account and a U.S. person intersect in some significant way. A U.S. taxpayer is considered to have "signature or other authority" over a foreign financial account where such person, acting either alone or together with others, has the authority to control delivery of funds or other assets held in such account. This authority is deemed to exist where the foreign institution maintaining the account would be required to respond to communications (whether

3 in writing or in some other pre-arranged manner) from the U.S. person. Such signature authority, with a variety of exceptions, would require the individual to be responsible to submit an FBAR return with respect to the foreign financial account(s). A limited filing extension to April 15,2017 has been granted by the IRS to individuals who in the 2015 calandar year had FBAR filing obligations because they have signature authority, but no financial interest, over foreign financial accounts of their employer or a closelt related entity. The penalty for failing to file a required FBAR return varies depending on how the IRS views the reason for such failure. IRS examiners having considerable discretion in determining the amount of the penalty taking into account the facts and circumstances in each case, with penalties determined separately for each account and for each person required to file. (1) For each failure to file an FBAR return due to negligence, a penalty of up $500 may be assessed against a business (does not apply to individuals.) Where a business engages in pattern of negligent failure to file FBAR returns the penalty is up $50,000 per incident. Where the IRS can prove that failure to file an FBAR return was "willful the IRS will impose a penalty for each year of such willful violation. (See discussion below.) (2) Under an internal memorandum published by the IRS in May, 2015 and distributed to IRS examiners for guidance ( May 2015 guidelines ) the IRS has directed its examiners when assessing penalties for FBAR violations to look carefully at the particular facts and circumstances of each situation, and to try to try to use a fairness standard with respect to any penalties that in fact do get imposed. Under these guidelines the burden is on the IRS to prove that an FBAR violation has occurred. Where it is determined that a U.S. taxpayer s failure to file FBAR returns was non-willful, the penalty previously imposed is not to exceed $10,000 for each unreported account for each year that an account was not disclosed. Under the May 2015 guidelines it is suggested that examiners should recommend one penalty for each year, regardless of the number of unreported financial accounts. The penalty would be limited to no more than $10,000 per year, regardless of the aggregate balance of all unreported financial accounts for a particular year) and regardless of the number of foreign financial accounts that were undisclosed. The May 2015 guidelines also allows that in some situations an examiner with the approval of their manager may assert a total penalty of $10,000 for all the unreported accounts irrespective, of the number of years involved. However, where the IRS examiner feels that charging a penalty for each year of violation is warranted, they may impose a penalty of up to $10,000 per year, for each year and for each offshore account with respect to which there was a failure to submit information. The non-wilful penalty is still based on facts and circumstances and lower or higher penalties may still be imposed. However, in no event may the penalties exceed 50% of the highest aggregate balance of unreported foreign financial accounts for the several years under examination. A non-willful penalty will not be asserted where an IRS examiner determines that that the FBAR violations occurred due to reasonable causes, and the person who had failed to file complete correct and timely FBAR forms promptly does in fact file such forms when they discover their error.

4 (3) Where there is a showing of willful violation, the IRS will recommend a penalty for each year that the FBAR violation is deemed to be willful. The U.S. person may be subject to a penalty equal to the greater of $100,000 or 50% of the aggregate foreign balances in all accounts during the year of violation for each violation. Criminal penalties may also be imposed. Under the May 2015 guidelines an IRS examiner has discretion, based on the particular facts and circumstances, to recommend a penalty that is higher or lower than these levels, but in no event can the penalty exceed 100% of the highest aggregate balance during the years being examined. In theory a foreign account of $1 million which was unreported by a U.S. taxpayer for a period of six years (the statute of limitation period for in the absence of fraud) could theoretically incur a penalty in excess of $3 million. In addition, there could be a fine of up to $250,000 or 5 years in prison, or both. However, under the May 2015 guidelines, in most cases the total penalty amount for all years under scrutiny will be 50% of the highest aggregate balance of all unreported foreign financial accounts during the years being examined. In such situations the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were found to be willful. Such allocation would be based on the ratio of the highest aggregate balance for each year to the highest aggregate balances for all accounts for all years combined, subject to the maximum penalty limitations for each year under the Code. (4) The test of "wilfulness" is based on whether there was a voluntary intentional violation of a known legal duty. The IRS would have the burden of proof to establish this. The IRS would have to show that (a) the taxpayer knew of the FBAR reporting requirement and (b) made a deliberate choice not to submit the FBAR form anyway. The IRS has suggested that it might find an element of willfulness on failing to file an FBAR form where income associated with a foreign bank account had been undeclared during the years when the FBAR was not filed. Furthermore, questions of willfulness may arise where a U.S. taxpayer in fact filed an annual Form 1040 return, but on Schedule B of the form which requires the taxpayer to answer whether they had an interest in a foreign financial account, responded YES, but did not in fact file an FBAR return disclosing such account. These are murky tax areas and would require the use of an experienced tax litigator if a U.S citizen living abroad was ever pressed on these issues by the IRS seeking to assert penalties based on willfulness. (5) No penalty would be imposed for failure to file past FBAR returns where the taxpayer voluntarily comes forward and files past and currently due returns and the IRS determines that (i) there was reasonable cause for failure to the FBAR returns and (ii) any income from the unreported account had in fact previously been included in a submitted U.S. income tax return. (See Tag # 2 and Tag #8) In making such determination the IRS has reserved for itself broad discretion as to whether it will accept a taxpayer s claim that failure to file in past years was due to reasonable cause. (See Tag # 19) (For a more detailed discussion of the level of IRS review of voluntary disclosure submissions by U.S. taxpayer s abroad and the penalties the IRS may impose, see Tags #2, Tag #6,Tag #8 and Tag #9)

5 (6) For the filing of false FBAR return willingly and knowingly, the penalty that may be imposed is the greater of $100,000 or 50% of the account balance in the year the false return was submitted. In addition, there could possibly be criminal penalties imposed of up to 5 years. Criminal prosecution, if sought, would have to be initiated by the IRS within the applicable 5 year statute of limitation period which starts to run only after an FBAR return for a particular year has been filed. (7) For an intentional and fraudulent failure to file an FBAR return a 75% fraud assessment and possible criminal prosecution can result. Where the failure to file FBAR return is part of a pattern of illegal activity a fine of $500,000 and imprisonment of up to 10 years is possible. (8) The statute of limitations for civil penalties imposed in connection with FBAR violations is 6 years from the date a that the FBAR return for a particular year was due. An identical statute of limitation applies for maintaining required records which period starts from the date the IRS first asks for the records. For those required to file FBAR returns financial account records must be kept for 5 years from the due date for filing an FBAR report in a particular year. FBAR penalties are determined on the basis of (i) each unfiled foreign financial account (not FBAR return,) (ii) for each person required to file and (iii) separately for each year of violation. As a result, multiple FBAR penalties can apply to one account where there is more than one account owner or there are several signature authorities over an account. Where a U.S. taxpayer neglects to file an FBAR return in any single year, the statute of limitation for making assessments with respect to income tax returns for such year does not start to run. Accordingly even where the U.S. taxpayer may have timely filed income tax returns for the year, the non-filing or incomplete filing of the FBAR return for such year keeps the limitation period open indefinitely not simply for the delinquent FBAR return, but on the entire income tax return for such year.(this tolling of the statute of limitation on the income tax return in any particular year also applies to a taxpayer s failure to file a Form 8938 and most other international information returns required to be filed by a U.S. taxpayer, see Tag #5.) Where a U.S. taxpayer fails to file a required U.S. information return, in effect this would keep the period of limitation open indefinitely. Failure to file an international information return extends the period of limitation applicable to any tax imposed with respect to any tax return, event or period to which such information relates. However, an exception does apply where a taxpayer can show that their failure to file particular information return was for reasonable cause rather than willful neglect. In such event the IRS may accept that the indefinite limitation period should apply only to the information return which was not filed rather than to income tax return for such year as well. Furthermore, it is only once a required international information return for a particular year is filed, that the statute of limitation period affecting the income tax return for that year, and going forward 3 years, begins to run. As suggested previously, IRS examiners have broad discretion in taking into account the facts and circumstances of each situation when deciding (i) whether penalties should be assessed and (ii) the extent of such penalties. However, once a taxpayer elects to enter the OVDP amnesty program such

6 discretion would no longer be available. (See Tag #9) Under the OVDP, IRS penalties would follow a more formal and strictly prescribed set of rules. DISCLAIMER: Any U.S. federal tax advice included in this article or in any articles on this web site is not intended to be used and may not be used by you or any other person for the purpose of avoiding penalties that may be imposed by the Internal Revenue Code or marketing or recommending to another party any tax related matter addressed in this article or on this web site. The information provided here is intended as a general guide for Canadians relied on as a basis for making decisions or taking action affecting possible U.S. tax obligations including annual U.S. income tax and/or financial disclosure returns. Canadians subject to such filings who have not complied with such filing requirements in past years are generally advised to voluntarily come forward and become U.S. tax compliant. No representation is made with regard to the correctness or timeliness of the information presented. Canadians concerned with the possibility of U.S. tax obligations should consult directly with a lawyer or international tax professional with U.S./Canada cross-border tax expertise. This article is for general information purposes only and is not intended to represent legal or tax advice