2014 presents particular challenges with respect to FBAR, the Report of Foreign Bank and Financial Accounts, for certain U.S. persons with interests in or signature authority over assets exceeding $10,000 held outside the U.S. in foreign accounts.  The deadline for calendar year 2013 reporting obligations is June 30, 2014, and by then all taxpayers must e-file completed forms using the Bank Secrecy Act (BSA) E-Filing System.  Failure to file the FBAR can result in criminal sanctions.  In addition, failure to file the FBAR can result in civil penalties exceeding 100 percent of the foreign account balance, as recently determined by the Federal District Court in the May 28, 2014, decision in U.S. v. Carl R. Zwerner.

The BSA requires any U.S. person with a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust or other type of foreign financial account, exceeding certain thresholds to report the “maximum value of the account” yearly to the Internal Revenue Service (IRS).  This requirement may now only be satisfied by filing electronically a Financial Crimes Enforcement Network (FinCEN) Form 114, FBAR, which replaces Form 90.22-1.  An overview of the FBAR filing requirements is provided by the IRS.  But in summary, an FBAR must be filed by any U.S. person who either owns or has signature authority over a foreign account that, at any point during the year, was valued at or greater than $10,000.  For FBAR purposes, a foreign account includes any account that is held outside the United States, including those at foreign branches of U.S. banks.  For more details regarding the specifics of which accounts must be reported, two prior On the Subject newsletters about FBAR reporting can be found here and here.

FinCEN is attempting to make the new e-filing user friendly.  The mandatory e-filing requirement information, capability to register and to upload completed FBARs, and new Form 114 for those individuals and businesses that must file an FBAR is accessible through the BSA e-file website.

The BSA e-file website allows a taxpayer to either file the Form 114 directly as an “Individual” by uploading a completed file or, alternatively, to fill out Form 114a permitting another party, designated by the BSA system as an “Institution,” to file the Form 114 on his or her behalf.  For example, the new Form 114a may be used by an employer company to file the FBAR as an Institution on behalf of any of its executives who are required to file an FBAR because of non-exempt signatory authority over the employer’s foreign bank accounts.  (Note that FBAR filing by certain individuals with signatory authority but no ownership interest in a foreign account may be deferred until June 30, 2015, pursuant to FinCEN Notice 2013-1.)  For its own FBAR, the employer company may register as an Institution and designate a “Supervisory User,” who has authority to file on behalf of the company and who, in turn, can designate other Supervisory Users.  Taxpayers with 25 or more foreign accounts use a simplified process of reporting.

It is important to be prepared for the new e-file requirement as non-compliance can result in significant sanctions.  Monetary penalties equal to the greater of $100,000 or 50 percent of the account balance for each year of violation can apply.  Because taxpayers may have multiple years of violations on a single account, penalties can easily exceed the account balance.  Criminal sanctions of up to 10 years in prison could be imposed for willful violations.  However, the IRS offers a number of procedures, including the ongoing Offshore Voluntary Disclosure Program, that allow taxpayers to disclose and remedy past delinquent filings in order to avoid criminal prosecution and, in most cases, reduce civil penalties.  In some cases, taxpayers may even be able to file late FBARs without incurring penalties.  Each situation is highly dependent on the taxpayer’s individual circumstances and will require compliance with the specific procedures established by the IRS in order to qualify for relief.