In 1970, Congress passed the Bank Secrecy Act. The purpose of that Act was to combat money laundering. It granted broad authority to the Internal Revenue Service to enforce the Act. This meant the implementation of the Report of Foreign Bank and Financial Accounts (FBAR).
The FBAR was the IRS’s attempt to ensure the maintenance and monitoring of records where, up and until its implementation, those records had been used in criminal, tax, or regulatory investigations or proceedings. The IRS requires that U.S. persons, who have a financial interest in or signature authority over, foreign accounts in the aggregate value of more than $10,000.00, file an FBAR on an annual basis.
A U.S. person has recently been redefined as a citizen or resident of the U.S.; entities, including but not limited to, corporations, partnerships, or limited liability companies created or organized in the U.S. or under the laws of the U.S.; and trusts or estates formed under the laws of the U.S.. The aforementioned includes non-green card U.S. residents by reference to the residency test in IRC §7701(b).
Financial interest is usually determined by examining direct ownership or indirect ownership. Direct ownership is fairly straightforward. Indirect ownership generally occurs through an agent, a corporation (more than 50% share value or vote), a partnership (more than 50% profits or capital), a trust (either as the grantor or more than a 50% beneficial interest), and any other entity (more than 50% vote, value, or profit interest). These must be present, not future, interests.
Like with any IRS rules, there are exceptions. Public entities have different reporting obligations because they are already under a lot of scrutiny. Aggregate values are determined using the maximum value at any point in the year. For non monetary assets, like stocks or mutual funds, the value shall be determined at the end of the calendar year.
The FBAR is due by June 30th for the prior calendar year. There is no timely mailed is timely filed rule for the FBAR. The IRS must have it on or before June 30th.
There are significant penalties for failing to timely file an FBAR. Civil penalties can be up to $10,000.00 per violation. If the violation is deemed to be willful, it can be $100,000.00 or 50% of the amount in the account, whichever is greater. There are also criminal penalties that can result in a $500,000.00 fine or 10 years in prison.
FBAR obligations present taxpayers and their representatives with a host of potential problems. Be sure to review the IRS’s guidance so you can understand the issues the IRS is focused on. It is important to get all of the facts of each case and make a reasoned determination about how to move forward in terms of reporting. This is particularly true if the reporting is late and the taxpayer is potentially subject to the significant penalties.