TAMPA, FL, June 17, 2015 — The IRS recently reminded taxpayers with foreign assets and accounts of several upcoming filing deadlines. The most well-known of these reporting requirements is the FBAR, or Report of Foreign Bank and Financial Accounts, which must be filed with the Financial Crimes Enforcement Network (FinCEN) by June 30th. It is important to note that the FBAR filing requirement is separate and distinct from the taxpayer’s obligation to disclose their interest in a foreign account on Schedule B of their federal income tax return.
Subject to certain exceptions, United States persons are required to file an FBAR if:
(1) the United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
(2) the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
Federal law defines “United States persons” to include citizens, residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.
In addition to the June 30th FBAR filing deadline, certain taxpayers may be subject to additional reporting requirements under the Foreign Account Tax Compliance Act (FATCA). FATCA was passed, in part, to deal with the prevalence of undeclared foreign bank accounts held by U.S. taxpayers. The complete IRS guidance on foreign asset and account reporting deadlines can be viewed here.
While there are several options available to taxpayers with noncompliant offshore accounts, including specially-tailored IRS voluntary disclosure programs, they face the potential for onerous civil penalties and possible criminal prosecution. For example, taxpayers who fail to file an FBAR when required by law face a civil penalty up to $10,000 per violation for nonwillful violations that are not due to reasonable cause. For willful violations, the penalty may be the greater of $100,000 or 50 percent of the balance in the account at the time of the violation, for each violation. The IRS recently issued interim guidance regarding when and to what extent it will assert the FBAR civil willfulness penalties.
“Willfulness” is a legal principle that, in theory at least, distinguishes knowing and intentional violations of the tax laws from mistaken or unintentional violations. Not surprisingly, the government may take a different view than the taxpayer as to whether his or her conduct was willful. Thus, taxpayers with undeclared foreign accounts should consult counsel experienced in dealing with these willfulness determinations. This standard not only impacts the potential civil penalties imposed for an FBAR violation but will also be evaluated by the IRS and Department of Justice in determining whether to pursue a criminal prosecution. According to the IRS, chronicled here, over fifty clients and their enablers at UBS AG alone have been prosecuted since 2009 for tax fraud and FBAR violations relating to undeclared foreign accounts. The government has subsequently set its sights beyond UBS to other Swiss banks and to banks in other jurisdictions, including India, Israel, and the Caribbean.