In-Depth Articles
Foreign Investments: IRS Crackdown on Non-Disclosure
Are You in Compliance?
During the past year the Internal Revenue Service has been targeting taxpayers with control over any financial holdings outside the U.S. for failure to properly disclose these interests and /or include related income in their U.S. tax filings. With initiatives at an all time high, it is imperative that you have an understanding of what these foreign reporting requirements are and how they may impact you and your business.
What is FBAR and How are Disclosures Made?
Foreign Bank Account Reporting (FBAR) has become the most common form of foreign disclosure having a broad reaching impact on U.S. taxpayers with even the most minimal of foreign holdings. FBAR compliance has been the primary focus of the recent IRS Settlement Initiative as the Service continues to aggressively pursue offshore tax evasion. In accordance with the Bank Secrecy Act of 2003, certain taxpayers with financial interest in, signing authority, or other authority over a financial account held outside of the United States must disclose such interest on their income tax return and file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts.
The FBAR form had undergone significant changes during 2008 with many unanswered questions remaining well past the June 30, 2009 filing deadline. One of the most notable changes has been the broadened definition of a reportable account. For 2008 and beyond a taxpayer is required to file a FBAR form for the disclosure of any accounts with an aggregate balance greater than $10,000 at any time during the calendar year. Prior to 2008, the disclosure was only required if the balance exceeded $10,000 as of December 31st of the calendar year. Therefore, it is vital that you reassess your status based on these revised rules.
Additionally, under the new FBAR requirements, the IRS has expanded the definition of a U.S. person to include U.S. citizens, residents, domestic entities, and “a person in or doing business in the U.S.”. The expanded definition which implies that certain non-residents may be subject to the FBAR disclosure has been the subject of much concern. Although the IRS had suspended this filing requirement for non-resident taxpayers for 2008, we are still awaiting guidance on how FBAR will impact non-resident aliens for 2009 and future reporting periods.
With such an intense focus on proper disclosure, it is important to note that the FBAR filing obligation is separate and distinct from any income tax reporting requirements. Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, should not be filed with your income tax return but rather submitted as a separate informational filing. The due date for the FBAR Form is June 30th of the following year with no extensions available. Unlike other tax filings which must be postmarked by the due date, the FBAR form is deemed filed when received so certified mailing is highly recommended.
In their most highly publicized efforts to enforce compliance with FBAR, the IRS has targeted potential evaders through its litigation against UBS seeking information regarding U.S. persons with Swiss bank accounts at UBS. After reaching a settlement with UBS and under cooperation of the Swiss government, the Service will be receiving unparalleled amounts of information on U.S. account holders at the Swiss bank UBS. It is anticipated that FBAR enforcement efforts will continue to be unrelenting.
As further evidence of the broad spectrum of taxpayers affected by the FBAR rules, having signing authority or other authority over a foreign account may also subject you to FBAR. For instance, as a corporate officer, managing member, or other key member of a business entity acting as a signer on a reportable foreign business account you may be required to personally file under FBAR in addition to any filing requirement at the entity level. It is important to review all business and personal relationships in determining if you are subject to disclosure.
Furthermore, financial interest in a foreign account for purposes of FBAR includes accounts where the owner of record or holder is an agent, nominee, or in some other capacity on behalf of a U.S. person, as well as, direct and indirect ownership of more than 50% of the total value of the shares of stock in a foreign corporation. Therefore, if you hold interest in a domestic entity that has interest in a foreign entity you may have a filing requirement under FBAR.
What are the Penalties for Non-Compliance?
As with all foreign disclosures, the FBAR penalties for non-compliance are relatively severe. In the case of a non-willful violation, civil penalties up to $10,000 may be imposed upon the negligent taxpayer. If non-compliance is deemed to be a result of willful neglect, the taxpayer may face both civil and criminal penalties. Civil penalties for a willful violation may be assessed up to the greater of $100,000 or 50% of the account balance at time of violation. Criminal penalties may include up to $500,000 in fines and up to ten years in prison. Particularly, the Internal Revenue Service warns that taxpayers filing amended returns to report foreign income without making a voluntary disclosure are at significant risk for examination and potential criminal persecution for all applicable tax years. This form of “quiet disclosure” does not constitute compliance.
For taxpayers who have signing authority over but no financial interest in a foreign account or interest in a foreign comingled fund there is still some time to come forward under the voluntary disclosure initiative and take advantage of reduced fines. These taxpayers have until June 30, 2010 to file an FBAR for the 2008 and earlier years relating to these types of foreign accounts.
Other Foreign Reporting Considerations
As a U.S. citizen, resident alien, or domestic entity you are required to report your income on a worldwide basis. Your worldwide income includes all earnings on non-U.S. checking, savings, and other brokerage accounts, as well as, net profits from rental real estate and business operations situated outside the United States. Furthermore, a grantor of a foreign trust must report all income derived from trust activities.
In addition to disclosure under FBAR and reporting foreign income on your tax return, separate forms may be required to disclose information about your interest in certain trusts, corporations, and disregarded entities irrespective of income production. Particular consideration should be given to the due dates for these various types of informational returns and the severe penalties associated with non-compliance. Depending on the nature of the disclosure, you may need to submit certain attachments along with your income tax filing in addition to the filing of an informational return.
Given the recent IRS initiatives and in light of the substantial penalties associated with violation of a FBAR obligation, now is the time to make certain you are in compliance. As the reporting burden of foreign disclosure continues to surmount, we at Hughes, Snell, & Co, PA are here to assist you in dealing with the intricacies of foreign informational reporting and determining your obligations under FBAR as well as other foreign disclosures. For additional information you may contact Erica K. Harp, CPA (eharp@hughessnell.com).
To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used for the purpose of avoiding penalties assessed under the Internal Revenue Code.
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