An In-Depth Look at the FBAR (and other foreign account reporting requirements)

Transcription

1 An In-Depth Look at the FBAR (and other foreign account reporting requirements) Pacific Tax Institute November 8, 2011 Bell Harbor International Conference Center Seattle, Washington Amy P. Jetel Schurig Jetel Beckett Tackett Austin, Texas Amy P. Jetel, all rights reserved.

2 FBAR History TD F , Report of Foreign Bank and Financial Accounts Nicknamed the FBAR Authorized by the Bank Secrecy Act of 1970 Resulted from concerns about U.S. people hiding behind foreign bank secrecy laws to evade U.S. tax Historically low rates of compliance and enforcement 2

3 FBAR History (cont d.) Treasury Department Bureaus responsible for the FBAR Program Financial Crimes Enforcement Network (FinCEN) Primary authority to administer and enforce the BSA Internal Revenue Service (IRS) 1992 and 2003 delegations from Treasury and FinCEN 3

4 FBAR History (cont d.) 1992 Treasury delegated to the IRS the authority to investigate FBAR violations and to identify cases to recommend for criminal prosecution or civil penalties 2003 FinCEN delegated enforcement authority to the IRS, with the ability to collect civil penalties, employ summons power, etc. 4

5 Past IRS Amnesty Efforts 2003 Offshore Voluntary Compliance Initiative (OVCI) 2003 Last Chance Compliance Initiative (LCCI) 2009 Offshore Voluntary Disclosure Program (OVDP) 2011 Offshore Voluntary Disclosure Initiative (OVDI) These programs (especially the 2009 OVDP and 2011 OVDI) don t provide much benefit to taxpayers who don t have criminal exposure Additional amnesty programs are likely 5

6 FBAR Failure-to-File Penalties Negligent failure Up to $10,000 Willful failure The greater of $100,000 or 50% of the highest balance in the account Possible criminal exposure (up to $500,000 and up to 5 years of imprisonment) in addition to civil penalties Reasonable cause exception If there is reasonable cause and the balance of the account is properly reported (presumably, on a late-file FBAR), no penalty will be imposed 6

7 FBAR Rules Regulations are now located at 31 CFR FinCEN commentary: 76 FR (February 24, 2011) The rules discussed in this presentation are effective beginning with FBARs that were due on June 30, 2011 for accounts held during 2010 and all subsequent years (unless otherwise indicated) 7

8 FBAR Due Date Must be received by June 30 No extension available Can now be e-filed* May be hand delivered to any local IRS office (or any IRS attaché in U.S. embassies and consulates) for forwarding to Treasury However, not considered filed until received by Treasury * 8

9 FBAR Filing Requirement A U.S. person with a financial interest in, or signature authority over, one or more foreign financial accounts, if aggregate value of accounts exceeds $10,000 at any time during the calendar year For example, if a taxpayer has 10 foreign accounts, each with only $1,000, they must be reported. 9

10 Filing Threshold Based on periodic statements (however they are usually received), as long as statements fairly reflect the maximum account value Use currency exchange rate on the last day of the calendar year, using the U.S. Treasury Department s Financial Management Service rate ( 10

11 U.S. Persons Required to File U.S. Citizen U.S. Resident Using the definition of resident alien under IRC 7701(b) and the Treasury Regulations Green-card holder Substantially present Elected to be treated as a U.S. resident under certain circumstances Using the definition of United States under 31 CFR (hhh), not under the Treasury Regulations United States and District of Columbia Indian lands U.S. territories and insular possessions 11

12 U.S. Persons Required to File (cont d.) Entity (corporation, partnership, LLC) or trust formed under the laws of the United States, District of Columbia, U.S. Territories and Insular Possessions, or the Indian Tribes Federal tax treatment of entity or trust is irrelevant U.S. disregarded entity must file, even when U.S. owner files U.S. trustee(s) of wholly owned grantor trust must file, even when U.S. grantor/owner files 12

13 Reportable Foreign Financial Accounts Physically located outside of the U.S. Foreign branch of U.S. bank = foreign U.S. branch of foreign bank = not foreign Accounts physically located on U.S. military installations abroad are not reportable on the FBAR 13

14 Reportable Foreign Financial Accounts (cont d.) Typical accounts (savings, checking, brokerage, time deposits, etc.) Commodity futures or options accounts 14

15 Reportable Foreign Financial Accounts (cont d.) Insurance policies with cash value No distinction between 953(d) and non-953(d) carriers FinCEN commentary: policy holder, not beneficiary, is the filer Annuity policies with cash value No distinction between 953(d) and non-953(d) carriers FinCEN commentary: silent on whether owner or beneficiary is the filer (probably both) 15

16 Reportable Foreign Financial Accounts (cont d.) Shares in mutual funds or similar pooled funds Only funds that are publicly available with regular NAV determinations and regular redemptions Currently, hedge funds and private equity funds not reportable 16

17 Reportable Financial Interests U.S. person who is owner of record or holder of legal title must report as having a financial interest interest in the account Whether account is held for the person s own benefit or for the benefit of others Multiple U.S. record owners and legal-title holders must all file 17

18 Reportable Financial Interests (cont d.) A U.S. person has a financial interest in foreign accounts held by: A nominee/agent on their behalf A corporation (or any other entity) owned >50% by the U.S. person (voting or value) A partnership owned >50% by the U.S. person (capital or distributive share of income) A trust of which the U.S. person is the owner under grantor-trust rules 18

19 Reportable Financial Interests (cont d.) A U.S. person has a financial interest in foreign accounts held by: A trust in which the U.S. person has a >50% present beneficial interest in the trust assets FinCEN commentary says that beneficiaries of a purely discretionary trust are not required to file (what if there is only one beneficiary?) Remainder beneficiaries are not required to file A trust from which the U.S. person receives 50% of the current income 19

20 Reportable Financial Interests (cont d.) A trust beneficiary is not required to file if U.S. trustee is filing FBAR for the same account(s) A beneficiary of a foreign grantor trust with a U.S. owner (i.e., an IRC 679 trust) must file, even if the U.S. owner is filing FBAR for the same account(s) 20

21 Reportable Financial Interests (cont d.) A U.S. person who causes an entity or trust to be created for purposes of evading the FBAR requirement has a reportable financial interest in an account held by the entity or trust Say what? 21

22 Absurd Examples A non-u.s.-citizen who lives full time in Puerto Rico is the sole beneficiary of a Bermuda trust created by his Hong Kong uncle that owns a whole-life policy issued by a non-953(d) insurance carrier A Delaware LLC wholly owned and managed by a German citizen and resident which owns a Swiss bank account that has no U.S.-taxable income A U.S. attorney who helps a client form an entity, not knowing that the client is forming the entity in an effort to evade the FBAR filing requirement? 22

23 Reportable Signature Authority The authority of an individual (alone or in conjunction with others) to control the disposition of the account s assets by direct communication (in writing or otherwise) to the person with whom the account is maintained. 23

24 Reportable Signature Authority (cont d.) 31 CFR (f)(2) provides exceptions to filing for officers and employees of certain types of banks, publicly traded entities, or entities regulated by the SEC These exceptions require the officer or employee to have no financial interest in the account(s) owned by entity FinCEN provided an extension of 2010 FBARs to June 30, 2012 for: Certain officers and employees of these entities with respect to accounts held by certain subsidiaries, and for officers and employees of such subsidiaries (FinCEN Notice ); and Officers and employees of certain SEC-registered investment advisors (FinCEN Notice ) 24

25 Reportable Signature Authority (cont d.) U.S. persons who had signature authority over, but no financial interest in, foreign accounts for 2009 and prior years were given until November 1, 2011 to file (IRS Notices , , and ) FinCEN Notice seems to give these same individuals an additional extension to June 30, 2012, in the very last sentence 25

26 Special Rules Financial interest in, or signature authority over, more than 25 foreign accounts Minimum information reported; detailed information upon request A U.S. entity that owns (directly or indirectly) >50% interest in one or more other entities that are required to file an FBAR May file a consolidated FBAR for itself and the other entities Foreign accounts owned by retirement plans and IRAs not reportable by the participant/owner Reportable by the trustee 26

27 Exceptions Correspondent accounts used solely for bank-to-bank transfers Accounts of international financial institution of which the U.S. government is a member Accounts of any U.S. governmental entity; governmental entity includes: College or university that is an agency or instrumentality of, or owned or operated by, a U.S. governmental entity Governmental employee retirement or welfare benefit plan 27

28 Amending FBARs Should wait 90 days to amend Attach an explanatory statement Staple a copy of the original FBAR to the amended FBAR 28

29 Late-Filed FBARS How Many Years? OVDP required 6 years OVDI required 8 years No statutory or regulatory guidance The only guidance for non-ovdp or -OVDI late filings is in the form of a general FAQ* on the IRS website Only says, file the delinquent FBAR reports and attach a statement explaining why the reports are filed late * 29

30 Late-Filed FBARS How Many Years? (cont d.) Some thoughts if the client didn t file for many years If income wasn t reported, file same number of FBARs as amended returns (generally, 6 years) If income was reported, possibly start with the next timely filed FBAR and attach an explanatory statement The FBAR instructions require records to be kept for 5 years perhaps file 5 years? 30

31 Form 1040 Schedule B, Part III 31

32 Form 1041 Page 2, Other Information 32

33 Form 1120 & 1120-S Schedule N 33

34 Form 1065 Schedule B, Line 10 34

35 Form 990 Part V, Line 4 35

36 FBAR: U.S. Disregarded Entity 36

37 FBAR: Married; One Spouse Has Separate Account 37

38 FBAR: Married; One Spouse Has Separate Account (cont d.) 38

39 FBAR: Married; Spouses Have Only Joint Accounts 39

40 FBAR: Married; Spouses Have Only Joint Accounts (cont d.) 40

41 FBAR: Employee Living Abroad and Working for Employer Located Abroad 41

42 FBAR: Employee Living Abroad and Working for Employer Located Abroad (cont d.) 42

43 FBAR: Consolidated Report 43

44 FBAR: Consolidated Report (cont d.) 44

45 Specified Foreign Financial Assets New IRC 6038D enacted March 18, 2010 (FATCA) Requires individuals to attach to their returns information regarding specified foreign financial assets if the aggregate value of all such assets exceeds $50,000 (or higher if Treasury provides) For tax years beginning after March 18, 2010 (2011 for most taxpayers) Specified foreign financial assets include (among other things) foreign depository and custodial accounts Foreign for this purpose is less broad than FBAR rules U.S. possessions are not foreign 45

46 Specified Foreign Financial Assets (cont d.) New 6038D applies to individuals, but will apply to domestic entities which are formed or availed of for the purpose of holding, directly or indirectly, specified foreign financial assets Regulations forthcoming; until then, only individuals must file Statute results in duplicative reporting, so Treasury can provide exceptions to prevent duplicative reporting The statute is broad enough to catch anyone who is required to file a U.S. income tax return, so the Treasury can provide exceptions for nonresident aliens and bona fide residents of U.S. possessions 46

47 Form 8938 Draft Form 8938 (Statement of Specified Foreign Financial Assets) was released June 30, 2011 Draft Instructions to Form 8938 were released September 28, 2011 $50,000 statutory filing threshold increased Different amounts depending on filing status and whether U.S. person is living abroad The law is such a mess that the first filing is deferred (IRS Notice ) If tax return is filed before the final Form 8938 is released, file with the next return (Forms 8938 for all prior years must be attached) 47

48 Form 8938 Draft Instructions provide that Form 8938 is not required if no income tax return is required, even if specified foreign financial assets exceed threshold Draft Instructions provide that currency exchange rate to be used is the rate on the last day of the tax year, using the U.S. Treasury Department s Financial Management Service rate ( 48

49 Form 8938 and FBAR Draft instructions provide exceptions for duplicative reporting for many foreign assets except foreign accounts reported on the FBAR 49

50 Form 8938 Duplicate Reporting Exceptions Exceptions provided for assets reported on: Form 3520 Form 3520-A Form 5471 Form 8621 Form 8865 For these exceptions, the Form 8938 must still be filed, but extensive information need not be provided 50

51 Form 8938 Penalties and other Punishments $10,000 failure-to-file penalty, up to a maximum of $50,000 Exception for reasonable cause and not willful neglect IRC 6662 was also amended to add a penalty of 40% of any tax underpayment attributable to an undisclosed foreign financial asset, which includes the specified foreign financial assets listed in new 6038D (as well as assets for which reporting has always been required, e.g., foreign trusts, foreign entities, etc.) Fraud = 75% penalty and criminal exposure 51

52 Form 8938 Penalties and other Punishments (cont d.) Prior Law: IRC 6501(e) provides that, in the case of a substantial omission of income (greater than 25%), tax may be assessed, or a proceeding in court for the collection of tax may be begun without assessment, at any time within 6 years after the return was filed Amendment: FATCA amended 6501(e) so that the limitation period is 6 years for greater than 25% omissions, as well as omissions greater than $5,000 with respect to the specified foreign financial assets listed in new 6038D (even if such assets were not required to be reported under 6038D because they were below the filing threshold) Effective Date: The amendment applies to: returns filed after March 18, 2010; and returns filed on or before March 18, 2010 if the 6501 limitation period (without regard to the amendment) has not expired as of March 18,

53 Form 8938 Penalties and other Punishments (cont d.) Failure to file Form 8938 can result in the individual s tax return remaining open until 3 years after the date on which Form 8938 is actually filed 53