In an effort to standardize the way the administration enforces the FBAR (Foreign Bank Account Report) rules and penalties, the IRS recently produced an internal memorandum to facilitate consistency in this area.  Among other things the IRS’ internal memo details are methods for calculating penalties and how to determine willfulness on the part of the account holder. 

For those unfamiliar with the FBAR (Foreign Bank and financial Accounts Report) reporting regime, a US person (citizen or resident individual, corporation, trust or partnership) is required to provide a report of all foreign bank and investment accounts to the government if their combined value exceeds $10,000 in US dollars.  The $10,000 threshold is determined at the point during the year at which the account value is highest, even it only due to a temporary transfer of funds.  The amount also includes commodities futures and options accounts, mutual funds and insurance policies with cash values.  There are exceptions for payroll clearing accounts, foreign accounts owned within IRAs or certain qualified retirement plans, and accounts equivalent to social security.  Presently, the report of foreign bank accounts (Form FinCEN 114) must be separately filed with the government on June 30th, has no extension of time to file, is not part of the filing for taxes, and must be filed electronically.  There is no tax due with this filing, but it is administered by the IRS (there is also a parallel reporting that is due with the tax filing for individuals, Form 8938, which has a higher filing threshold).  The filing is also required if the US person merely owns a beneficial interest in a qualifying group of accounts, or simply has a signing authority with no actual ownership interest. 

Failing to file this form each year it is due can have dramatic consequences.  If there is no willful intent not to report foreign accounts a penalty “not to exceed $10,000” may be imposed on any US person that fails to file the FBAR report.  However, as the FBAR regime has been in place for quite some time now, and the penalty applies for each year of delinquency, a failure to comply for 5 years could result in a combined penalty of up to $50,000, regardless of the value of the account.  This is only the potential fine if there is no willful intent.  When there is willful intent, a penalty can be imposed as much as “the greater of $100,000 or 50% of the balance of the account at the time of the violation”.  Unlike the penalty without intent, the new guidance provides the penalty with willful intent is a single penalty for the entire period (which, prior to the guidance, it was not).  As such, the same 5 year failure to report, if willful, would result in a potential fine of $100,000 on an account with a balance as little as $15,000.  If the account balance were $1,000,000, the fine could be as much as $500,000. 

The IRS’ internal memo may have been issued as a result of greater amounts of information on foreign accounts that has been generated through the FACTA program (Fair and Accurate Credit Transactions Act); however, this is purely conjecture.  Under this act, over 80 countries have agreed, by treaty, to have financial institutions in their countries provide some level of information to the US government regarding the accounts of US citizens and businesses.

If an individual or business is at risk of being scrutinized for failing to comply with the FBAR regime (or another foreign reporting regime such as Form 8938, failing to report a foreign gift or inheritance, or failing to report foreign income) there are presently two voluntary disclosure programs which allow them to come forward and pay a reduced penalty.  The first is a streamlined compliance procedure where, amongst other requirements, the applicant must certify the failure was not willful, and pay a penalty of 5% of the value of the foreign assets.  However, the streamlined procedure provides no protection from prosecution under the civil penalties if willfulness is determined during the procedure.  The other Program, the OVDI (Offshore Voluntary Disclosure Initiative), does provide prosecution protection from civil penalties, but the penalty associated with it is 27.5% of the value of the foreign assets.  Also, the programs are mutually exclusive, so a participant cannot fail under the streamlined program, and then apply under the OVDI.  Likewise, there are several other qualifying requirements in order to participate in either program. 

If you are curious about the foreign reporting requirements for yourself or your business, or are interested in knowing about your eligibility for the streamlined or OVDI programs, please do not hesitate to contact us.

Written by Damien Falato

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