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< Back to current issue of Immigration Daily

Practice Alert: Advise Immigration Clients about Foreign Bank Account Reporting

by Tony Hardin

We are in the eleventh hour of the second Offshore Voluntary Disclosure Initiative (OVDI) to permit non- filers of the FBAR report of overseas assets to file for prior years without suffering criminal prosecution. And many people are asking: "Should I participate in this program or continue (hopefully) to fly under the radar? I could spend less on attorney's fees fighting the IRS than paying these exorbitant penalties," or "Will something better come along later? This is the second go-round after all." These questions may be keeping some of your clients up at night, and your guidance will be invaluable to them in the long run. Here I discuss some of the key facts of the FBAR and some interesting facts about the OVDI.

The FBAR is the Report of Foreign Bank and Financial Accounts. In recent years the IRS has placed a strong focus has been placed on the FBAR filing, yet it is widely discussed how largely unknown this filing is despite potentially devastating penalties for noncompliance. One obvious such group of persons is immigrants. The IRS recognizes that many people have not filed the FBAR and may be fearful of suddenly reporting their foreign financial accounts. In 2009, the IRS created the Offshore Voluntary Disclosure Program (OVDP) to assuage the fears of these outliers by offering certain reprieves and incentives. As a result of the 2009 OVDP, the IRS obtained a large amount of useful information from participants. The IRS reinstated a similar program called the Offshore Voluntary Disclosure Initiative (OVDI) in February, 2011. It expires August 31, 2011.

The obvious first step is to find out whether your client is required to file the FBAR and whether he has been reporting all foreign assets properly. If a person has not been filing the FBAR and should have filed at any time since 2003, then your client may want to consider participation in this program. The 2011 Offshore Voluntary Disclosure Initiative (OVDI) offers a reprieve of criminal penalties and a substantial reduction of civil penalties for those who come forward before August 31, 2011[1]. Ordinarily civil penalties for the willful failure to file are the greater of $100,000 or 50% of the highest balance of each account for each year back to 2004[2]. Criminal sanctions may also be imposed. Those who come in from the cold through the OVDI have reduced penalties to 25% of the highest account balance and foreign asset between 2003 and 2010[3]. Taxpayers already under investigation by the IRS are not eligible for the program[4].

Clients who believe their foreign accounts will remain undetected by the IRS should be informed that during the 2009 OVDI the IRS collected enormous amounts of information to fill their arsenal of intelligence to find the remaining noncompliant persons. Participants were required to list their contacts through the years at each foreign financial institution and disclose any communications including names dates and locations of such meetings to the IRS[6] . The IRS has authority to exercise whatever means necessary to glean the perpetrators of noncompliance6. The Commissioner of the IRS has reiterated on several occasions that international tax evasion is high priority[7] .

Taxpayers whose aggregate account balance between 2003 and 2010 is less than $75,000 qualify for a 12.5% offshore penalty[8] . Still several others may qualify for a further reduced offshore penalty of 5%, if they fall into one of the following categories:

i. Did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account);

ii. Have exercised minimal, infrequent contact with the account, for example, to request the account balance, or update accountholder information such as a change in address, contact person, or email address;

iii. Have, except for a withdrawal closing the account and transferring the funds to an account in the US not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure; or

iv. Can establish that all applicable US taxes have been paid on funds deposited to the account (only account earnings have escaped US taxation).[9]

Under the terms of the 2011 Offshore Voluntary Disclosure Initiative, taxpayers must complete all the required documentation and pay all related taxes and penalties by August 31, 2011. The required documents include all original and amended tax returns, amended and original Forms TDF 90-22.1, full cooperation in the disclosure process by providing information of all offshore accounts, financial institutions and facilitators, and finally execute Form 906, the Closing Agreement on Final Determination Covering Specific Matters.[10]

The beginning happened in 1970 when Congress enacted the Bank Secrecy Act (BSA) as a means to control money laundering and to detect tax evasion. In addition to the various reports that the BSA requires banks to file, it also requires individuals to file the FBAR annually. The BSA states in part, "[T]he Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency".[11]

Later the US Treasury delegated full investigatory and enforcement authority to the IRS who has the power to take any action reasonable necessary. The Patriot Act further brought the issue to the forefront by expressly stating that the FBAR is vital to the US government in conducting intelligence activities to protect against international terrorism. In 2004 a separate penal structure was created for non-willful versus willful FBAR violations.[12] Make no mistake, the government has made this report top priority and is working tirelessly to close any gaps. Douglas H Shulman, Commissioner of the IRS, stated, "Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. The new disclosure initiative is the last, best chance for people to get back into the system."[13]

The jurisdictional reach of the FBAR is quite extensive. Essentially U.S. residents or persons in and doing business in the US must file if they have a financial account in a foreign country with a value exceeding $10,000. A person must file an FBAR if the "U.S. person," had a "financial interest" in, or "signature authority" over, or "other authority" over one or more "financial accounts" located in a "foreign country," and the aggregate value of such account(s) exceeded $10,000, at any time during the calendar year.[14] A "U.S. person" means a U.S. citizen, U.S. resident, domestic partnership, domestic corporation, domestic estate, or domestic trust.

A person with direct financial interest has legal title or is owner of record. A person has indirect control when i) he/she is the agent, nominee, or attorney of the owner of record; ii) he/she has power of attorney that gives signatory authority or comparable authority; iii) the person owns 50% or more of the shares of a corporation or owns more than 50% of a partnership; iv) the person is beneficiary of greater than 50% of a trust or has interest in greater than 50% of the trust's assets; v) the person can exercise power comparable to signature authority by communicating directly to the person who maintains the account either orally or some other means.[16]

The Internal Revenue Code definition of a "U.S. resident" is different than a lawful permanent resident as defined by the Immigration and Nationality Act (INA). A "U.S. resident" for tax purposes is more broad and includes individuals who have become tax residents because they have satisfied the substantial presence or "green card test". Immigration practitioners should be aware that their "non-immigrant" clients as defined by the INA will likely be "U.S. residents" for purposes of the FBAR. Also, lawful permanent residents who live outside the U.S. are still tax residents even though they live abroad. Non-immigrants and lawful permanent residents who live outside the U.S. are two groups of individuals that might not think they are subject to the FBAR, and immigration practitioners should take the opportunity to put their clients on notice of the FBAR deadline.

A financial account includes bank accounts, securities accounts, securities derivatives accounts, other financial instruments accounts, savings accounts, demand accounts, deposit accounts, time deposit accounts, mutual funds, and any other accounts maintained with either a financial institution or a person engaged in the business of a financial institution.[19] In addition, a recent IRS legal memorandum indicates that a foreign credit card account may constitute a "financial account" in certain circumstances. For instance, if a credit card agreement requires the cardholder to make advance payments to cover anticipated charges, then the card would be considered a debit card and thus a "financial account."[17]

The term "foreign country" includes all geographical areas, except the United States, Puerto Rico, Northern Mariana Islands, Guam, American Samoa, and the Virgin Islands.[18]

The actual FBAR form is TDF 90-22.1 and is due to the Department of the Treasury by June 30 of the year following what is being reported. All records supporting the disclosure should be maintained for seven years. The FBAR report itself is not part of the tax return, and it is considered late if not actually received by June 30. A postmark by June 30 does not qualify. In some instances violators could face criminal as well as civil charges. Penalties may be the greater of $100,000 or 50% of the high balance in an unreported foreign account per year for each year since 2004.[19] Certain IRS forms ask, "At any time during 2010, did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?" This question is found on the following forms:

i. Form 1040 US Individual Tax Return, Schedule B Interest and Ordinary Annuities Line 7

ii. Form 1041 US Income Tax Return for Estates and Trusts, Box 3 Other Information

iii. Form 1065 US Return of Partnership Income, Schedule B Interest and Ordinary Annuities Box 10

iv. Form 1120 US Corporate Income Tax Return, Schedule N Operations of US Corporations, Box 6a and 6b

The IRS website provides very useful information concerning both the FBAR and OVDI. Go to www.irs.gov and search for either "FBAR FAQ" or "OVDI FAQ".

Copyright 2011 Tony Hardin, CPA

_________________________________

Footnotes

1 IR-2011-84, August 8, 2011.

2 Charles P. Rettig and Kathryn Keneally, The Last, Best Chance to Disclose Foreign Financial Accounts and Assets - The 2011

Offshore voluntary Disclosure Program and Beyond!, Journal of Tax Practice & Procedure, February - March 2011, at 33, 35.

3 Department of Treasury Memo from Steven T. Miller, Deputy Commissioner for Services and Enforcement, Memorandum for Commissioner, Large Business and International Division, Commissioner Small Business/Self-Employed Division, March 1, 2011.

4 Department of Treasury Memo from Steven T. Miller, Deputy Commissioner for Services and Enforcement, Memorandum for Commissioner, Large Business and International Division, Commissioner Small Business/Self-Employed Division, March 1, 2011.

5 Charles P. Rettig and Kathryn Keneally, The Last, Best Chance to Disclose Foreign Financial Accounts and Assets - The 2011 Offshore voluntary Disclosure Program and Beyond!, Journal of Tax Practice & Procedure, February - March 2011, at 33, 34.

6 Hale E. Sheppard, Evolution of the FBAR: Where We Were, Where We Are, And Why It Matters, Houston Business and Tax Journal, 2006, at 2.

7 IRS Commissioner Douglas H. Shulman, February 8, 2011.

8 Department of Treasury Memo from Steven T. Miller, Deputy Commissioner for Services and Enforcement, Memorandum for Commissioner, Large Business and International Division, Commissioner Small Business/Self-Employed Division, March 1, 2011.

9 Department of Treasury Memo from Steven T. Miller, Deputy Commissioner for Services and Enforcement, Memorandum for Commissioner, Large Business and International Division, Commissioner Small Business/Self-Employed Division, March 1, 2011.

10 FAQ 7 of the 2011 OVDI

11 31 U.S.C. 5314(a) (1970).

12 Hale E. Sheppard, Evolution of the FBAR: Where We Were, Where We Are, And Why It Matters, Houston Business and Tax Journal, 2006, at 2.

13 IRS Commissioner Douglas H. Shulman, February 8, 2011.

14 Hale E. Sheppard, Evolution of the FBAR: Where We Were, Where We Are, And Why It Matters, Houston Business and Tax Journal, 2006, at 5.

15 Ibid, 6.

16 Ibid, 6 and 7.
17 Ibid, 7.

18 www.irs.gov FBAR FAQ.

19 Charles P. Rettig and Kathryn Keneally, The Last, Best Chance to Disclose Foreign Financial Accounts and Assets - The 2011 Offshore voluntary Disclosure Program and Beyond!, Journal of Tax Practice & Procedure, February - March 2011, at 33.


About The Author

Tony Hardin is a licensed CPA by the Georgia State Board of Accountancy. His accounting experience encompassed industries such as state government, life and health insurance, engineering and environmental consulting services, and finance. After moving to Atlanta in 1997 Mr. Hardin gained an international perspective of business by traveling to Western Europe and Central and Southern Africa as a member of the internal audit team of Law Engineering and Environmental Services. From 2001 through 2005 Mr. Hardin worked for the ING Groep in the Financed Shared Services department. ING is a large insurance and banking business based in Holland. While at ING he was responsible for preparing and consolidating the financials for the literal hundreds of legal entities owned by ING. Before branching on his own to begin Hardin CPA, LLC, Mr. Hardin served as Controller for two companies in the consumer financial lending space. He was responsible for all departments of the corporate office including financial reporting, tax, human resources, and treasury.


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