The Foreign Account Tax Compliance Act (FATCA) enables the U.S. government to identify attempts at tax evasion and to expand enforcement of tax laws involving foreign financial assets and offshore accounts in a few ways.

Beginning in 2014, FATCA will require foreign financial institutions to report directly to the IRS, information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.[1] These financial institutions will turn over identifying information regarding thousands of U.S. taxpayers to the IRS.

U.S. citizens, residents, and legal entities must report a financial interest in or signature authority over foreign financial accounts[2] if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year, by filing a Foreign Bank & Financial Accounts report or FBAR. Having a financial interest in multiple foreign bank accounts whose combined value exceeds $10,000 at any point during the year will cause a U.S. person to have an FBAR filing requirement. Having a power of attorney giving a U.S. person signature authority over foreign financial accounts may require an FBAR filing, even if the power of attorney was never exercised. There are some exceptions to this filing requirement including officers and employees of certain financial institutions, and of large corporations (more than $10 million in assets and 500 shareholders).

FBAR Reporting Requirements

Officers and employees may have an FBAR reporting requirement, even if the officer or employee does not have a financial interest in the foreign account, and even if the corporate account owner files an FBAR that includes such accounts. An FBAR filing requirement occurs when a U.S. person has account signature authority if that person can control the disposition of money or other property in the account by delivery of a document containing his or her signature to the bank or other person with whom the account is maintained. There are filing extensions for a narrowly defined set of officers and employees of publicly traded companies with signature authority over regulated entities and controlled person of a regulated entity, due to the many questions and concerns raised.[3]

The current filing deadline for 2012 FBARs is Sunday, June 30, 2013. The deadline is essentially accelerated because of the Sunday due date so ensure timely receipt by the Treasury Department plan on a due date of Friday, June 28. The form must be received by the Detroit office by June 30 (not post-marked).

If the FBAR is filed late an attachment explaining reasonable cause must be attached for the IRS to determine if it will waive the (non-willful) failure to file penalty of $10,000 per failure to file per year.

The penalty for willful failure to file may be equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation[4] , plus criminal penalties.[5] The IRS says “willful blindness” is not an excuse for failure to file: willful blindness may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and record keeping requirements.[6] The cumulative FBAR penalties can exceed the amount in a taxpayer’s foreign accounts.[7]

FBAR Penalities

Taxpayers should be aware of the government’s increasing focus on offshore income and assets and the severe penalties for failing to file the FBAR report. So far, two “willful” FBAR violation cases have been decided in favor of the U.S. government.[8] Most recently, on June 11, 2013, the U.S. government filed to collect FBAR penalties of $3.5 milling against a Florida taxpayer for failure to timely report his financial interests in foreign bank accounts.[9] With information sought in John Doe summons, the IRS can inspect each taxpayer’s income tax return to determine if there are understatements or misstatements of income, or if the taxpayer filed FBARs. In 2013, The United States Department of Justice issued a “John Doe Internal Revenue Code” summons to Wells Fargo Bank, as a provider of correspondent bank services, requiring it to turn over records relating to foreign bank accounts held by United States Taxpayers between 2004 through 2012, and a John Doe summons to UBS AG to obtain information about U.S. customers of Swiss bank to which UBS provided services. The U.S is investigating other foreign banks from Switzerland to Israel in a effort to pursue international tax enforcement.

The current IRS offshore voluntary disclosure program (the OVDP) began in 2012 and offers taxpayers the opportunity to file amended returns and file FBARs for eight tax years, pay the appropriate taxes and interest together with an accuracy related penalty equivalent to 20 percent of any income tax deficiency and an “FBAR-related” penalty (in lieu of all other potentially applicable penalties associated with a foreign financial account or entity) of 27.5 percent of the highest account value that existed at any time during the prior eight tax years.

 


[1] http://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-(FATCA).

[2] §103.24

[3] FinCEN Notice 2011-1, FinCEN Notice 2012-1 and FinCEN Notice 2012-2.

[4] 31 U.S.C. section 5321(a)(5).

[5] 31 U.S.C. section 5322(a), 31 U.S.C. section 5322(b), or 18 U.S.C. section 1001.

[7] 31 U.S.C. 5314(a)(5),

[8] Williams,131 TC 54 (2008) (“Williams I”), 106 AFTR 2d 2010-6150 (DC Va., 2010) (“Williams II”), rev’d110 AFTR 2d 2012-5298, 489 Fed Appx 655 (CA-4, 2012) (“Williams III”), and in McBride,110 AFTR 2d 2012-6600

[9] United States v. Carl R. Zwerner, Case # 1:13-cv-22082-CMA (SD Florida, June 11, 2013).