Reporting of Foreign Bank and Financial Accounts Under the Bank Secrecy Act

The Department of Treasury has the authority to establish recordkeeping and filing requirements for United States persons with financial interest or signature authority, or other authority over financial accounts maintained with financial institutions in foreign countries under the Bank Secrecy Act.  Taxpayers must file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) if the aggregate balances of their foreign accounts exceed $10,000 at any time during the year.

The Financial Crimes and Enforcement Network delegated enforcement authority to the Internal Revenue Service (IRS).  The IRS is responsible for investigating possible civil violations, assessing and collecting civil penalties as well as issuing administrative rulings.

Why do we have FBAR laws?

Compliance with FBAR regulation assists the government agencies in criminal tax investigations, development and conduct of intelligence or counterintelligence activities to protect against international terrorism.  Taxpayer reports filed under FBAR provide leads to investigators that facilitate the identification and tracking of illicit funds or unreported income, and provide additional prosecutorial tools to combat money laundering and other crimes.

Who must file the FBAR?

A United States person must file an FBAR report if a taxpayer has financial interest in, signature authority or other authority over any financial accounts in a foreign country and the aggregate value of these accounts exceeds $10,000 at any time during the calendar year.

The account value is the largest amount of currency and/or monetary instruments that appear on any quarterly or more frequently issued account statement for the applicable year.  If a bank does not issue a periodic account statement, the maximum account value is the largest amount of currency and/or monetary instruments in the account at any time during the year.  If the account value exceeds $10,000 on any account statement at any time during the calendar year, the taxpayer must file FBAR.

Who is a “United States Person?”

A “United States person” is a citizen or resident of the United States or person in and doing business in, the United States.  The term "person" includes individuals and taxpayers and all forms of business entities, trusts, and estates.

What Accounts are considered to be “Foreign Financial Accounts?”

Foreign financial accounts are accounts that are located outside of the United States, Northern Mariana Islands, District of Columbia, Puerto Rico, Guam, U.S. Virgin Islands, and territories of the Pacific Islands.  Foreign financial accounts consist of bank accounts, savings accounts, checking accounts, and time deposits, securities accounts such as mutual funds, brokerage accounts, and securities derivatives accounts.   In addition, FBAR extends to the accounts where the assets are held in a commingled fund and the account owner holds an equity interest in the fund.  Any accounts maintained in a foreign financial institution or with a person doing business as a financial institution must be also reported.

What is “Financial Interest?”

Financial interest includes accounts for which the U.S. person is the owner of record or has legal title, whether the account is maintained on his or her own benefit or for the benefit of others including non-United States persons.

Financial interest also includes accounts where the owner of record or holder of legal title is a person acting as an agent, nominee, or in some other capacity on behalf of a U.S. person.

Example: Jack, a U.S. citizen who resides in France, granted his uncle, Jacob, a U.S. citizen, a Power of Attorney to access his French bank accounts.  Jacob is the owner of record. 

Jack has a financial interest in the account. Jacob is acting only as an attorney on behalf of Jack. Jacob also has a financial interest in the account, since he is the owner of record. Both Jack and Jacob must file an FBAR.

Example: Given the information in the above example, if Jacob is a French citizen, must he file the FBAR?

No, Jacob is not considered to be a U.S. person.

Financial interest in an account also includes a corporation in which a U.S. person directly or indirectly owns more than 50 percent of the total value of the shares of stock.

Example: A Missouri corporation that owns 100% of a foreign company that has foreign financial accounts has to file an FBAR because the corporation is a U.S. person and the owner of record or holder of legal title is a corporation that directly owns more than 50% of the total value of the shares of stock.

Example: A U.S. person who owns 75% of the Missouri Corporation in the previous example has to file an FBAR because he indirectly owns more than 50% of the total value of shares of stock of the foreign corporation.

Financial interest also includes an account where the owner of record or holder of legal title is:

• A partnership in which the U.S. person owns interest in more than 50% of the profits.
• A trust in which the U.S. person either has a present beneficial interest in more than 50% of the assets or receives more than 50% of the current income.

What is “Signature Authority?”

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 signature to the bank or other person with whom the account is maintained.

What is “Other Account Authority?”

A person with other authority over an account is one who can exercise power that is comparable to signature authority over an account by direct communication, either orally or by some other means to the bank or other person with whom the account is maintained,.

Example: A person who has the power to direct how an account is invested but cannot make disbursements or deposits to the account does not have to file an FBAR because the person has no power of disposition.

What are reporting requirements for joint accounts?

If two persons jointly maintain an account, or if several persons each own a partial interest in an account, then each U.S. person has a financial interest in that account and each person must file an FBAR.

A spouse having a joint financial interest in an account with the filing spouse should be included as a joint account owner in Part III of the FBAR.  The filer should write (spouse) on line 26 after the last name of the joint spousal owner.  If the only reportable accounts of the filer's spouse are those reported as joint owners, the filer's spouse need not file a separate report.  If the accounts are owned jointly by both spouses, the filer's spouse should also sign the report.  It should be noted that if the filer's spouse has a financial interest in other accounts that are not jointly owned with the filer or has signature or other authority over other accounts, the filer's spouse should file a separate report for all accounts including those owned jointly with the other spouse.

What are recordkeeping rules under FBAR?

FBAR records should be kept for five years from the due date of the report which is June 30 of the following calendar year.  The records should contain the following:

• Name maintained on each account.
• Number or other designation of the account.
• Name and address of the foreign bank or other person with whom the account is maintained. 
• Type of account.
• Maximum value of each account during the reporting period.

Are there any exemptions from FBAR filing?

The following types of accounts and persons are exempt from the FBAR filing requirement.

• Accounts held in a military banking facility operated by a United States financial institution designated by the United States Government to serve U.S. Government installations located abroad.
• Officers or employees of a bank under the supervision of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, or the Federal Deposit Insurance Corporation are exempt from filing the FBAR, if that officer or employee has NO personal financial interest in the account.
• Officers or employees of a domestic corporation whose equity securities are listed on national securities exchanges, or which has assets exceeding $10 million and 500 or more shareholders of record, need not file an FBAR concerning the other signature authority over a foreign financial account of the corporation, if:
  1. the officer or employee has NO personal financial interest in the account, and
  2. has been advised in writing by the chief financial officer of the corporation that the corporation has filed a current report which includes that account.

What Penalties might taxpayers face for violation of FBAR rules?

Violation of FBAR results in civil and criminal penalties.  For example, the IRS may assess up to $500 for negligent violation of FBAR under 31 USC 5321(a)(6)(A)31 C.F.R. 103.57(h), up to $10,000 in civil penalties for each negligent violation under 31 U.S.C. § 5321(a)(5)(B). 

If the IRS finds pattern of negligent activity the civil penalty assessed might be not more than $50,000 under 31 USC § 5321(a) (6) (A). The most severe penalties are for willful violations of FBAR where a taxpayer fails to file or retain records. 

The penalties for willful violation can be to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation.  In addition, to civil penalties, the IRS might open criminal prosecution. 

If indicted the taxpayer faces up to $250,000 in penalties or five years in jail or both pursuant to 31 USC § 5321(a)(5)(C), 31 U.S.C. § 5322(a) and 31 C.F.R. § 103.59(b).  If a taxpayer violates any other laws in addition to willful failure to file FBAR or retain records of account, the taxpayer faces civil penalties up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation pursuant to 31 USC 5322(b). In addition to civil penalties the IRS may asses up to $500,000 in criminal penalties.  The sentence for the criminal violations is 10 years pursuant to 31 C.F.R. § 103.59(c).  The law imposes draconian penalties for knowing and willful filing of false FBAR.  A taxpayer faces up to the greater of $100,000 or 50 percent of the amount in the account at the time of the violation in civil penalties and $10,000 or five years of jail for criminal violation of 18 USC § 1001 and 31 C.F.R. § 103.59(d).  The penalty applies to all U.S. persons.  Title 31 U.S.C. § 5321(d) allows IRS to impose civil and criminal penalties together. 

We routinely represent taxpayers concerned with FBAR disclosures.  In the past we have been successful in reducing FBAR civil and criminal penalties.  Contact our office to discuss your FBAR concerns.  When you call you will speak directly to an experienced tax attorney, not a legal assistant to get the answers you need. 

This article is intended as general information and not as specific legal advice, and this communication does not create an attorney-client relationship. 

Stientjes & Tolu LLCTax & Immigration Attorneys