Insights

All U.S. persons that have a financial interest in or signature or other authority over one or more foreign financial accounts with an aggregate value that exceeds $10,000 at any time during the calendar year are required to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), on or before June 30 of the following year. The June 30, 2009 deadline for reporting 2008 accounts is fast approaching.

The Treasury is currently aggressively monitoring the reporting of offshore accounts, because the IRS believes that U.S. taxpayers have been using undisclosed foreign accounts to hide assets and income from those assets. In March of this year, the IRS announced a major compliance initiative that includes a voluntary disclosure program to encourage taxpayers that have not previously disclosed foreign bank accounts and have not reported income from them to do so by September 22, 2009, or face criminal prosecution and the 75% civil fraud penalty, if convicted.

In October 2008, the Treasury revised the FBAR. The revisions to the form reflect the increasing amount of attention being paid to reporting offshore accounts. The revisions to the form include an expansion of the definition of “United States person,” a requirement of additional foreign identification information for filers with no U.S. taxpayer identification number; an expansion of the attribution rules that deem owners to have a financial interest in an entity’s accounts; and required disclosure of the actual account owner for accounts over which a U.S. person has only signature authority. The revisions to the FBAR may require some additional time and attention for proper compliance by the June 30 deadline.

One surprising revision to the form is the expansion of the scope of “United States person” to mean a “citizen or resident of the United States, or a person in and doing business in the United States.” This change would potentially mean that some non-resident alien individuals, foreign corporations and a branch of a foreign corporation or other entity would need to file the FBAR for the first time and report their ownership in foreign accounts. However, on June 5, 2009, the IRS issued Announcement 2009-51 indicating they would suspend the filing requirements by persons “in and doing business in the United States.” Accordingly, these foreign entities are not required to file the FBAR by June 30 for 2008 accounts.

Civil and criminal penalties for non-compliance with the FABR filing requirements are severe. Civil penalties for a non-willful violation can range up to $10,000 per violation. Civil penalties for a willful violation can range up to the greater of $100,000 or 50% of the amount in the account at the time of the violation. The IRS has six years to impose civil penalties on failure to file an FBAR, and they can impose the penalty for each of the six years if a taxpayer is caught with an unreported account. Accordingly, the IRS advises that if a holder of a foreign account was required to file FBARs for earlier years, he or she should file the delinquent FBAR reports and attach a statement explaining why the reports are filed late. No penalty will be assessed if the IRS determines that the late filings were due to reasonable cause.

Criminal penalties for violating the FBAR requirements can range from a $250,000 to a $500,000 fine or 5-10 years imprisonment, or both. Also, the civil and criminal penalties may be imposed together.

Summary

The combination of the increased scrutiny being placed on offshore accounts by the Treasury, and potential stiff penalties for noncompliance, requires immediate attention to completing and filing the FBAR, if required, by June 30, 2009.

Schneider Downs provides accounting, tax and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, Pennsylvania and Columbus, Ohio.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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