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.
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.