United States: IRS Issues Revised Foreign Account Reporting Form

Last Updated: October 2 2008

Article by Scott D. Michel1

In an unanticipated development, the IRS posted on its website on September 30, 2008, a new version of Treasury Department Form 90-22.1, named "Report of Foreign Bank and Financial Accounts," and known as the "FBAR." The FBAR has been the focus of increasing practitioner attention as a result of IRS efforts to publicize its filing requirements and because of ongoing investigations involving Americans who have undeclared foreign accounts at LGT Bank of Liechtenstein, UBS, and other institutions. This recent activity has included the service of a "John Doe" summons on UBS for a list of American account holders, the plea agreement of a Geneva-based UBS private banker, and hearings held by the Senate Permanent Subcommittee on Investigations into the problem of undeclared accounts.

The FBAR is not a tax form. It is a creation of the Bank Secrecy Act, 31 U.S.C. § 5314, which, with its associated regulations, requires any U.S. person with signature authority or a financial interest in a foreign bank or financial account to file an information return with the Treasury Department by June 30 of the succeeding calendar year. The filing requirement applies to corporations and individuals, although there are special rules for large corporations that permit abbreviated filings with an explicit commitment to provide more information on request.

There are criminal sanctions and substantial civil penalties for any "willful" failure to file the FBAR, up to as much as 50% of the balance of an undeclared account, per year, for forms due after a legislative change in October 2004. 31 U.S.C. §§ 5321, 5322. As it has ramped up enforcement activity against Americans with undeclared offshore accounts, the IRS, which is delegated the authority to enforce the FBAR provisions, has made it a point to publicize the filing requirement. On June 17, 2008, two weeks prior to this year's FBAR deadline, the Service issued I.R. 2008-79, reminding taxpayers and practitioners of the obligation to file the FBAR.

This article will identify substantive changes in the FBAR form and instructions that appear in part to be a reaction to recent enforcement activity.

First, the IRS has clarified the definition of a "financial" account to include "debit card and pre-paid credit card accounts." The prior set of instructions did not contain this explicit provision, and some practitioners questioned whether a filing requirement was imposed on a U.S. person with nothing more than a debit or credit card issued by a foreign bank, perhaps guaranteed with deposited funds. The new instructions now make this clear. This clarification is undoubtedly a result of recent IRS enforcement efforts, including reams of data obtained by the Service earlier this decade after serving John Doe summonses on U.S. credit card processors identifying Americans who used credit and debit cards issued on foreign accounts.

Second, the new instructions wade into the problem area of foreign trusts. The instructions provide that a U.S. person has a financial interest in any foreign account "for which the owner of record or holder of legal title is a trust, or a person acting on behalf of such a trust, that was established" by that person "and for which a trust protector has been appointed." Trust protector is defined as "a person who is responsible for monitoring the activities of a trustee, with the authority to influence the decisions of the trustee or to replace, or recommend the replacement of, the trustee."

Many undeclared foreign accounts are associated with trusts, in some places called "Stiftungs," where a trust protector is in place. These instructions now make it clear that the FBAR filing requirement applies to a U.S. person who has established such a foreign trust or Stiftung, bringing a fairly routine form of tax non-compliance involving undeclared accounts explicitly within the ambit of the serious civil and criminal sanctions noted above.

Interestingly, however, the filing requirement applies only to the U.S. person who has established the trust, not that person's heirs. Many situations involving undeclared accounts emerge after the death of the person who created the account, when that person's children have, only immediately before or after their parent's death, learned of the existence of the account. Under the new FBAR instructions, such heirs or beneficiaries do not appear to have an FBAR filing requirement. Having said that, the new instructions include the previous rule whereby any U.S. person who is more than a 50% beneficiary in a foreign trust has an FBAR filing requirement.

Third, the IRS has clarified a provision involving corporate filings. The FBAR requirement applies not just to corporations, but to individual employees who hold signature authority over corporate accounts, even where, as in most cases, those employees have no financial interest in the account. The IRS previously did not require individual employee filings where an account was included on a company's filing if the CFO of the company certified this in writing to the employee. This "CFO certification" exception, however, did not, at least explicitly, apply in the parent/subsidiary context, for example, where the account may have been included in a parent company filing but the CFO did not so certify to the subsidiary company's employees. The new instructions now clarify that the employee of the subsidiary need not file a separate form where the parent's CFO makes the proper certification to the subsidiary's employees and the account has been included in the parent company filing.

Fourth, of great interest to practitioners who counsel U.S. persons on voluntary disclosures involving undeclared accounts, the new form and the instructions provide for a specially designated amended filing, by including a box on the form noting that it is in fact an amendment. The instructions request that the filer "attach a statement explaining the changes." Similarly, the instructions note that for delinquent filings, the filer should "attach a statement explaining the reason for the late filing."

When taxpayers make voluntary disclosures involving undeclared accounts, they generally file delinquent or amended FBARs in addition to amending their tax returns. They will now need to include statements explaining why the FBAR is late or has been amended. Voluntary disclosures offer some general assurance that the IRS will not proceed criminally, but given the size of the potential civil penalties (possibly 50% of the account balance per year), these statements should be drafted with care, as they will undoubtedly be important factors in any IRS decision to seek any such penalties for prior non-compliance.

There are other changes in the form and the instructions:

  • The instructions make it clear that one has "signature or other authority" if he or she can exercise authority over an account "directly or through an agent, nominee or attorney . . . either orally or by some other means."
  • In a somewhat surprising addition, the instructions extend the filing requirement to persons "in or doing business in the United States" without regard to citizenship status. This somewhat vague language will surely create issues for foreign persons who have business interests in the U.S.
  • They add an explicit five year record retention requirement, which is already in the pertinent regulations.
  • The form itself is easier to use and clearer, divided into separate sections for separate filing categories, including allowing for consolidated filings by spouses; previously, each spouse had to file a separate form.
  • There are more specific instructions for calculating the account's maximum balance during the year, including directions as to the impact of foreign currency holdings.
  • Foreign subsidiaries of U.S. parent companies are explicitly excluded from the filing requirement, but the U.S. parent may have to file, as may an unincorporated branch of a foreign entity doing business in the U.S.
  • And the instructions make clear that individual stocks or other instruments, in and of themselves, are not separate "financial accounts," and that an unsecured loan to a foreign business (not a financial institution) does not trigger the filing requirement.

All in all, the new form makes some significant clarifications, and may impact the advice practitioners give to the growing number of U.S. persons who are seeking to make voluntary disclosures arising from previously undeclared foreign accounts, as well as to clients who annually face this filing requirement. The issuance of the new form and instructions is a significant event, and tax advisors should parse the new rules carefully.

Footnotes

1. Scott D. Michel is a Member of Caplin & Drysdale, the Washington, DC tax and litigation boutique. He specializes in criminal tax matters, including voluntary disclosures for U.S. persons with undeclared foreign accounts and representing clients in criminal tax investigations and sensitive civil audits. He is the past-Chair of the Committee on Civil and Criminal Tax Penalties of the American Bar Association's Section of Taxation.

2. The new instructions also make clear that correspondent or "nostro" accounts maintained by banks for bank to bank settlements are not the subject of the filing requirement.

This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
25 Apr 2019, Conference, Washington, DC, United States

Event Sponsor: 2019 Representing and Managing Tax-Exempt Organizations Conference

19 Dec 2019, Speaking Engagement, Washington, DC, United States

This panel will discuss practical and technical issues that arise after a major change in law such as the 2017 Tax Act. We will explore the impact of proposed, temporary, and final regulations on the interpretation of a newly enacted statute as well as the opportunities and ethical risks the resulting uncertainty creates for lawyers of all ages and experience levels.

 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions