A frequently overlooked U.S. filing requirement is with respect to foreign financial accounts. Under the Bank Secrecy Act (Title 31 of the U.S. Code), an IRS Form TD F 90-22.1 (colloquially known as the “FBAR” because the official title is “Report of Foreign Bank and Financial Accounts”) is required to be filed each June 30 for individuals and entities that have a financial interest in a foreign financial account or who have signature or other authority over such an account. Although Part III of Schedule B of IRS Form 1040 specifically asks if a taxpayer has a financial interest in or a signature or other authority over a financial account, this question often is answered in the negative due to a lack of understanding of the FBAR filing requirements.

While little guidance exists as to what a financial account is and what “other authority” is, the filing requirement is applicable under some surprising circumstances, including when a taxpayer does not have any financial interest in any foreign financial accounts. Consequently, it is important not only to consider what the term “account” might cover but also to examine closely what authority over foreign financial accounts an individual may have. A “financial account” includes a “deposit,” which the IRS interprets to include a cash surrender value insurance policy held by a U.S. person issued by an insurance company located outside the United States if the cash surrender value is greater than $10,000. While insurance products with certain investment features are not specifically identified in the 2008 instructions, the broad inclusiveness of the term “financial account” would suggest careful consideration of whether such arrangements would constitute a “financial account” and thus trigger FBAR reporting. Moreover, recent proposals by the Obama Administration (as discussed below) would require greater compliance with the FBAR filing requirements.

Penalties for failing to file the FBAR, which include both civil and criminal penalties, can be onerous. Civil penalties for a failure that is not willful are not to exceed $10,000, while a willful failure can result in a maximum penalty of $100,000 or 50% of the amount of the transaction or the balance in the account at the time of the violation. A reasonable cause exception is available for a non-willful failure to file, but not for a willful failure. Criminal penalties include monetary penalties of up to $500,000, imprisonment for not more than five years, or both.

The recently revised Form TD F 90-22.1 added a new category of persons subject to the FBAR filing requirement. The instructions to the FBAR as revised December 31, 2008, include as a “U.S. person” any person “in and doing business in the United States.” Additionally, the FBAR instructions require the branch of a foreign entity that is doing business in the United States to file an FBAR (assuming the other requirements are met) even if not separately incorporated under U.S. law. The revised instructions also broadened the meaning of “other authority.” Although the instructions require the revised form to be used even for pre-2008 calendar years, the former instructions control according to the 2008 instructions. This is important because of the expanded definition of “U.S. person” and the broadening of the meaning of “other authority,” which now is extended to apply to power exercised either directly or through an agent, nominee, attorney, or other capacity on behalf of a U.S. person. The only guidance as to what the phrase “in and doing business in the United States” is contained in an IRS “Headliner” dated February 26, 2009, which may be found on the IRS website at http://www.irs.gov/businesses/small/article/0,,id=204798,00.html . It should be noted that, because the FBAR requirement is not imposed by the Internal Revenue Code (IRC), but by the Bank Secrecy Act, the IRC meanings are not necessarily controlling for purposes of interpreting the FBAR requirements.

The Headliner states that whether a person is “in and doing business in the United States” is a facts and circumstances determination; however, generally a person is not “in and doing business in the United States” unless that person is conducting business within the United States on a regular and continuous basis.

The Obama Proposals include the following:

  • A proposal to require FBAR filers to disclose much of the information that is currently reported on an FBAR on a schedule to their income tax returns. Inclusion of such a schedule with the return would be in addition to filing the FBAR on June 30.
    • The FBAR penalties would continue to apply to FBAR filing failures, and penalties and “other consequences” would be imposed under the IRC, including the extension of the statute of limitation to six years.
      • The 20% accuracy-related penalty would be increased to 40% when the understatement is a result of failure to disclose FBAR related information on an income tax return.
      • The reasonable cause exception would not apply.
    • A rebuttable evidentiary presumption that would apply in civil administrative or judicial proceedings that would:
      • Treat any foreign financial account over which any person subject to the FBAR filing requirement has a financial interest or signatory authority as having the requisite amount of funds to trigger the FBAR filing requirement; and
      • Treat any failure to file an FBAR with respect to a financial account with a nonqualified intermediary as “willful” if the account has a balance of more than $200,000 at any point during a calendar year.
        • This presumption would not apply to accounts over which an individual has signature or other authority as a result of the individual’s position as an officer or employee of a corporation and which the individual has no more than a de minimis financial interest in that corporation. Note that significant shareholder interests could prevent this exception from applying.