Reporting Foreign Accounts in the Age of Transparency

By R. Scott Jones, Esq

Well, it had to happen sooner or later.....The tax professional community working regularly in the international space has known for some time that a new and improved TD F 90-22.1 Report of Foreign Accounts Form (known as the "FBAR") was to be introduced.

And now it has arrived...

As part of its enforcement initiative against abusive offshore transactions and clamp-down on the underreporting of worldwide income by "U.S. persons", the Internal Revenue Service (IRS) has introduced a new and "improved" version of the FBAR. The IRS has sought to tackle some of the unresolved issues regarding the FBAR's reporting requirements - but sends a note of caution to potential filers at the same time.

It seems clear that the renewed emphasis voiced by the IRS on information reporting and international co-operation is making itself increasingly felt. No-one should doubt the willingness of the IRS to use more fully the growing armory of disclosure requirements and enforcement provisions at its disposal. Recent initiatives to punish non-compliers that have garnered significant media publicity are ample evidence of this fact.

Reporting Foreign Accounts

The FBAR was created under the Bank Secrecy Act. It actually collects information for the database of the Financial Crimes Enforcement Network (FINCEN) as part of the United States Treasury Department in support of federal efforts aimed at countering terrorism, money laundering and tax avoidance. In other words, it is not a tax form per se.

It is not subject to the normal taxpayer confidentiality provisions and, as such, the information on the Form is available to any law enforcement agency.

As of January 1, 2009, taxpayers must use the new FBAR form issued this month. This is also true for late-filed FBARs covering prior years.

Very generally, a "United States Person" must report a financial interest in, signature authority over or other power of disposition over an account in a foreign bank or other financial institution, if the value of such accounts held by the person at any time during the calendar year is greater than US$10,000 in aggregate. Once this threshold is triggered, the requirement to file the Form then applies to ALL foreign accounts as defined by the Form. The FBAR must be filed by US persons on an annual basis and is due on June 30 of the year following the year in which the filing requirements are met.

Unlike for tax return filings, there are no extensions to the filing date available, and the form is considered late if received after June 30 (i.e. postmarking the filing date is not sufficient). Somewhat new, however, is that the filer of the Form now has the option to hand deliver the FBAR to any local IRS office within the U.S. and, for filers located outside the US, to tax attaches located in U.S. embassies in certain foreign countries. The Form is filed at:

The Department of Treasury
P.O. Box 32621
MI 48232

It is not filed with the income tax return Form 1040.

The duty to file the FBAR exists independently of the obligation to file an income tax return, although the FBAR is cross-referenced on Form 1040, Schedule B, Part III.

Any dividends and interest are earned by U.S. person on such accounts are also reportable on Schedule B, and one is also required to check the box on Part III Line 7a and indicate the country or countries where the accounts are located.

A Multitude of Sins?

So now we know that a filing needs to be made and it is taken somewhat seriously. But what about the fine print? That, unfortunately, seems to get progressively finer, commensurate with the increase in penalties for non-compliance.

What is often overlooked about the Form 90-22.1 reporting is that it is not restricted to simply bank accounts. Indeed, the instructions to the updated Form issued this month specifically address the fact that the filing requirement encompasses foreign mutual fund accounts. Moreover, other investment accounts, including foreign retirement accounts, are also included.

Indeed, the same also seems to be true of offshore variable life insurance contracts and annuities. It also includes debit card or prepaid credit card accounts. Individual bonds, notes, or stock certificates held by the filer are not financial accounts per se, nor is an unsecured loan to a foreign trade or business that is not a financial institution.

Important to note is that it is the geographical location of the account that counts, not the nationality of the financial entity institution in which the account is found, that determines whether one is dealing with a foreign account.

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