Recently, the IRS and the Financial Crimes Enforcement Network of the United States Treasury (FinCEN) each took steps to ease the FBAR reporting obligations of United States persons, including:
- Creating a new voluntary disclosure initiative that may substantially reduce the penalties for which a taxpayer otherwise would be liable;
- Providing a no-penalty safe harbor for taxpayers that do not have unpaid federal income tax related to an undisclosed foreign account;
- Clarifying that no reporting is necessary for certain foreign pooled funds, such as hedge funds or private equity funds, that are not offered to the general public; and
- Limiting the definition of persons that have signature authority over a foreign account.
General Reporting Obligation
A U.S. person that has a financial interest in, or signature authority over, a foreign bank, securities or other financial account must annually report these accounts to the IRS if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. The information is reported on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, which is commonly referred to as the FBAR. The FBAR is due June 30 following the year being reported.
There has been confusion, a lack of information and a lack of knowledge about the need to file an FBAR, generally leading to a widespread failure to comply with this requirement. The issue became more pronounced after Congress in 2004 significantly increased the civil penalty for a failure to file. The civil penalty for a nonwillful failure to file is up to $10,000. The civil penalty for a willful failure is the greater of 50 percent of the balance of the unreported accounts or $100,000. For a more detailed discussion of the penalty, click here to read our prior alert, published when the new penalty first went into effect.
The IRS and FinCEN have taken the following actions to allow taxpayers to more easily resolve failures to file for prior years and to comply with filing obligations for 2010 and future years:
2011 Voluntary Disclosure Initiative
Following the success of its 2009 voluntary disclosure initiative that ended on October 15, 2009, the IRS announced a 2011 voluntary disclosure initiative available through August 31, 2011. This initiative is substantially similar to the 2009 program, except that the penalty generally has increased from 20 percent to 25 percent of the highest account balance for the reporting period.
Taxpayers with undisclosed foreign accounts can resolve the issue by paying a one-time penalty based on the highest account balance between 2003 and 2010, and filing an FBAR for each year. The general 25 percent penalty is reduced to 12.5 percent or 5 percent in certain situations. Participating taxpayers must ensure that all income from the foreign bank account in the years 2003 to 2010 has been properly reported and, if necessary, file amended income tax returns and pay applicable income tax, penalties and interest. Taxpayers currently under examination by the IRS or investigation by the IRS criminal investigation division, even if the matter is unrelated to a foreign bank account, may not participate in the initiative.
The 2011 initiative contains the same safe harbor as the 2009 program for taxpayers that paid all income tax on income earned from their undisclosed foreign accounts, but simply failed to file an FBAR. These taxpayers can avoid any penalty by filing an FBAR for each applicable year and attaching a statement explaining why the reports are filed late. An FBAR for 2009 or earlier must be filed by August 31, 2011. The due date for the 2010 FBAR, however, remains June 30, 2011. Because this safe harbor generally applies only to taxpayers that originally paid tax due for income from a foreign bank account, it will not apply, for example, to taxpayers that filed amended income tax returns after the announcement of the 2009 voluntary disclosure initiative and made a so-called "quiet" disclosure of unfiled FBARs, but did not pay any FBAR penalty.
Revised FBAR Rules
Separate from the 2011 voluntary initiative program announced by the IRS, FinCEN revised the federal rules generally applicable to FBARs. Among other items, these final rules provide the following relief:
- No reporting obligation for foreign hedge funds or foreign private equity funds that are not publicly offered. In the preamble to the final rules, FinCEN emphasized that mutual funds and other foreign pooled funds are reportable only if an investment in the fund is offered to the general public. Accordingly, a foreign pooled fund such as a hedge fund or private equity fund is not reportable if the investment is not available to the general public. The new rules, however, reserve on the definition of "other investment fund," which later could be revised to include such investments.
- Limitation on the definition of a person that has signature authority over an account. The final rules define signature authority as having the ability to control the disposition of assets in a foreign financial account by "direct communication" with the applicable financial institution. This limitation relieves persons that communicate only through an intermediary (e.g., members of a committee who can direct only a trustee or an investment manager) from having signature authority.