June 13th, 2012 by Angela Offerman
If the thought of IRS penalties for noncompliance on tax returns was enough to keep you tossing and turning through the month of April, you may be in for a few more long nights this month. The deadline for submitting FBARs is fast approaching, and compliance with the complex regulations and filing procedures is critical. Although Form TD F 90-22.1, more commonly known as FBAR (Foreign Bank Account Reporting), has been around since the 70’s, there has been virtually no enforcement until recent years. Now, the IRS and Treasury Department are out to show they are not messing around and compliance is critical.
Despite extraordinary penalties and complex filing procedures, the good news in there are a lot of resources out there to help you understand how to file. Still confused about your reporting responsibilities? We have broken down the basics of FBAR to help you understand the important components of this complex form.
Who must file?
Most people are aware of the basics of who must file, but several people get lost in the details. Let’s break it down. Any United States taxpayers that have financial interest in or signature authority over any foreign financial accounts totaling over $10,000 dollars at any time in a calendar year must file. To begin, United States taxpayers include any citizen or resident of the United States, a domestic partnership, a domestic corporation, and domestic estate or trust. The next point of confusion is what constitutes signature authority over an account. A person has signature authority if he or she can control the disposition of money or other property in it by delivery of a document containing his or her signature. Note that this puts filing responsibilities on many entities as well as individuals. Finally, regarding the $10,000 threshold, know that if you have foreign accounts that all together total over $10,000, you must report on all the accounts, even if some of the accounts have values below $10,000.
Don’t make the mistake of thinking FBARs are governed by the same rules as tax returns filed with the IRS. The Financial Crimes Enforcement Network, a bureau of the Treasury Department more commonly known as FinCEN, is responsible for the filing and administration of Form TD F 90-22.1, and has an entirely different set of filing rules. First, the due date is on or before June 30 each year, and there is a strict no extension policy. Second, if you are filing paper forms by mail, note that FBARs do not follow the usual “mailing is filing” rule applicable to tax returns. They must be received by June 30—no exceptions. Finally, if you are confused about whether or not you can file FBAR electronically, don’t feel bad. Several others are in the same boat, and rightfully so, since FinCEN has repeatedly changed rules around e-filing. At first, only paper forms were accepted, then they attempted to require everyone to file electronically, and now they are accepting both until further notice. FinCEN encourages individuals to utilize the e-filing system, as it is a quicker, cheaper, more secure, and more reliable option as filers will receive acknowledgement of each form filed. Unfortunately, if you are filing FBAR with a spouse though, you will not be able to file together electronically since the system does not allow for both signatures on the same electronic form.
What accounts are included?
Financial accounts that must be reported on Form TD F 90-22.1 generally include foreign bank and brokerage accounts, offshore mutual funds, and pooled investments; while individual bonds, notes, stock certificates or unsecured loans to a foreign business are usually not included. Moreover, accounts in foreign branches of U.S. institutions are included as foreign in FBAR reporting, but an account with a U.S. institution that holds foreign assets does not need to be reported on if the account holder cannot directly access foreign assets maintained in a foreign institution.
FBARs are just one part of your obligation in disclosing foreign account information.
U.S. taxpayers required to file Form TD F 90-22.1 are required to disclose foreign account information to the IRS as well. Filers report this information by completing boxes 7a and 7b on Form 1040 Schedule B, box 3 on the Form 1041 “Other Information” section, box 10 on Form 1065 Schedule B, or boxes 6a and 6b on Form 1120 Schedule N. On top of all that, there is even a new form you may need to file with your tax return to the IRS, Form 8938, which reports financial accounts and assets. Contrary to the commonly held belief that FBAR and Form 8938 are the same, this form does not replace FBAR filing obligations, as individuals must file each form for which they meet the relevant reporting threshold.
FBAR penalties are severe.
If you thought IRS penalties were high, think again. The penalties for failing to file FBARs are substantially worse than tax penalties. Failing to file FBARs carries a civil penalty of $10,000 for each non-willful violation, while violations that are found to be willful carry the greater penalty of $100,000 or 50% of the account for each violation. And if those astonishing penalties aren’t enough to scare you into filing, maybe the more frightening criminal penalty of a $250,000 fine and five years in jail will. It doesn’t stop there either. If the FBAR violation takes place while violating another law, as is usually the case with tax laws, fines increase to $500,000 and/or ten years in jail. Keep in mind, the ruling of a civil penalty does not impede criminal penalties or prosecution.
Don’t run from your reporting responsibilities.
Even if you have been outrunning the clock on the statute of limitations for FATCA and Form 8938 filing, it is crucial to start FBAR filing this year. If you never disclose your foreign account information in a tax return or FBAR, there is no statute of limitations. And if you think you can plead innocence, think again. With the IRS and FinCEN providing more education and resources around FBAR, they are not letting as many people get away with their claims of not understanding the regulations. FBAR penalty assessments increased nearly four-fold during the five year period of 2004 to 2009, jumping from $4.2 million to $20.5 million. Still, the number of FBARs filed with the IRS was only 534,043, and they are well aware that there are plenty more individuals out there that should be filing.
Convey provides tax information reporting services and software to businesses to make IRS compliance clear and uncomplicated. U.S. federal tax advice contained in this web site is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this document. (iii) The taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.