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How to Comply With Foreign Account Reporting Laws

How to Comply With Foreign Account Reporting Laws
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By Friday, 18 December 2020 04:10 PM Current | Bio | Archive

Over the last two decades, the IRS has ramped up enforcement of foreign financial account reporting rules for American taxpayers.

While the basic principles underlying these rules are straightforward, the details can get overwhelming. Widespread noncompliance over the years arose as much from confusion as from willful negligence.

In this article, I will explain the history behind the present-day FBAR form and other foreign account disclosure procedures. I will also provide some important tips for coming into, and staying in, compliance with the complex rules.

Origins of the FBAR and History of Enforcement

In one form or another, the FBAR has been around for 50 years, yet it has really only been a focal point of tax law enforcement since the early 2000s. Here is a rundown of the events that led to the Treasury’s current intense focus on foreign accounts reporting violations.

Founding of the OECD and Its Role in Tracking Accounts

In 1961—a decade before the creation of the first FBAR form—18 European countries plus the U.S. and Canada founded the Organisation for Economic Co-operation and Development, or OEDC. Although the agency did not principally focus on financial wrongdoing, its existence made it possible to track the global movement of money as never before. Without this tracking, any effort to monitor the offshore financial activities of Americans would have no teeth.

What Is the FBAR and When Was It Created?

As part of a widening crackdown on organized crime, the Treasury introduced the first Foreign Bank Accounts Reporting form, or FBAR, in 1970. For the first two decades of the FBAR’s existence, federal law enforcement agencies principally used the form (and delinquency in filing it) to investigate money laundering, a crime in which foreign banks often play a central role.

To this day, as various political scandals continually show, money laundering surfaces as a possible charge almost any time a prominent American’s foreign financial dealings are scrutinized.

Creation of FinCEN and the Enforcement Handoff to the IRS

Compliance with FBAR filing requirements was abysmal for the first 20 years of the form’s existence. As of the late 1980s, agencies estimated that fewer than one in five Americans required to file the FBAR actually did so.

For this and other reasons, the U.S. Treasury established a new bureau in 1990—The Financial Crimes Enforcement Network, or FinCEN. This bureau’s oversight role explains the FBAR’s current official title: FinCEN Form 114, Report of Foreign Bank and Financial Accounts.

FinCEN initially had some success in increasing reporting compliance. Yet the agency’s lack of resources to keep tracking down delinquent filers became a pressing issue in the early 2000s, when the U.S. sought to step up monitoring of offshore accounts as part of the War on Terror. Although FinCEN maintains administrative authority over the FBAR program, the IRS assumed most enforcement responsibilities in 2002.

Congress Introduces FATCA and IRS Expands Reporting Requirements

IRS efforts to enforce FBAR filing rules received a major boost from Congress in 2010, with the passing of the Foreign Account Tax Compliance Act, or FATCA. To carry out its enforcement mission, the agency introduced or modified multiple tax forms to function as a supplement to FinCEN Form 114, with potentially stiff penalties for failure to file.

Nevertheless, the IRS recognized that the focus of the FBAR program had never been punishment for non-filing per se. The primary goal remained gathering information about foreign accounts. After all, these accounts can hold the key to tracking much larger crimes, including not only money laundering but also tax evasion. Hence, the agency chose to emphasize the carrot over the stick in encouraging Americans to fix filing delinquencies.

The OVDP and Other IRS Efforts to Promote Voluntary Compliance

The IRS launched various programs under the names Offshore Voluntary Disclosure Initiative (OVDI) and Offshore Voluntary Disclosure Program (OVDP) during the 2010s. By offering reduced penalties for filing delinquency and other incentives, the programs aimed to dramatically improve compliance with FBAR filing rules. The results were impressive, with filings steadily increasing through the 2010s.

The Panama Papers, the CRS, and Tougher Enforcement

The last version of the OVDP ended in September 2018. It may well have continued to the present day, were it not for an event that shook the financial and political world in 2016. The publication of the Panama Papers, a collection of leaked financial documents, revealed vast financial crimes executed through the use of undocumented foreign bank accounts. Calls for deeper investigations and stricter rule enforcement worldwide swiftly mounted.

In response, the OEDC developed new guidelines for sharing financial information across national borders, known as the Common Reporting Standards, or CRS. This increasing international cooperation reduced the U.S. Treasury’s dependence on an honor system for the reporting of foreign holdings. Simply put, FinCEN and the IRS now often know about foreign accounts regardless of whether Americans report them.

When and How to File the FBAR Form

The upshot of this 50-year saga is that ongoing FBAR filing delinquency can be very, very costly. A one-year failure to file can result in a maximum penalty of $10,000, even if the failure resulted from an honest misunderstanding of the rules. Willful delinquency penalties can soar to the greater of $100,000 or 50% of the unreported assets. Since ignorance of the rules provides little cover, learning the rules offers the only safe way forward.

In general, U.S. persons or entities with foreign bank and financial accounts with a combined value of over $10,000 on any date of a year must file FinCEN Form 114 for that year. Accounts subject to FBAR reporting rules include bank and brokerage accounts, mutual funds, and life insurance policies with cash value. Importantly, filers must report both accounts in which they have a financial interest and those over which they merely hold signature authority.

Because FinCEN remains the official administrator of FBAR procedures, FinCEN Form 114 is not a tax form and cannot be attached to the filer’s IRS return. Instead, it must be submitted electronically through the FinCEN website. The due date usually matches the IRS filing deadline for the same calendar year, and as with the IRS deadline, all filers may receive a six-month automatic filing extension.

Additional IRS Forms and Interagency Cross-Checking

Apart from gleaning information about offshore accounts owned by Americans via the CRS, the IRS also benefits from inter-bureau cooperation with FinCEN, receiving notifications of all FBAR forms filed.

This cross-checking extends both ways. Taxpayers with foreign interest income must report that income on Form 1040, Schedule B, and the schedule also requires disclosure of any offshore accounts over which the filer holds signature authority. This disclosure has clear relevance for FBAR filing requirements.

Furthermore, for many Americans, filing FinCEN Form 114 is necessary but not sufficient to meet FATCA requirements. Individuals holding foreign accounts that total over $50,000 as of December 31, or that surpassed $75,000 in total value at any time during the year, must file IRS Form 8938, Statement of Specified Foreign Assets. (Couples filing jointly must submit Form 8938 if their foreign accounts total over $100,000 at year end over $150,00 on any other date.)

Unlike the FBAR, IRS Form 8938 must be filed with the person or entity’s federal income tax return. Before submitting the form for the first time, most filers must first register for FATCA compliance, either online at irs.gov/fatca or by completing Form 8957. As with the FBAR, penalties for failure to file or disclose are stiff. The penalty rapidly escalates from an initial $10,000 to a maximum $60,000 for an ongoing and continuing failure to file or disclose.

Complicating matters, the precise rules regarding which accounts must be reported vary between the FBAR, Schedule B, and IRS Form 8938. For example, filers must generally report foreign stock not held in a bank or brokerage account on Form 8938, but such holdings are typically exempt from FBAR reporting. And whereas the FBAR and Form 8938 have reporting thresholds, Schedule B does not. I therefore strongly recommend seeking guidance from a tax and financial pro with experience handling foreign account disclosures before filing any forms.

Conclusion: Compliance Shifts from Important to Urgent

With the combination of increased international data sharing under the CRS, stepped-up IRS enforcement, and the end of the OVDP, complying with foreign account disclosure regulations takes on greater importance with every passing year. Nevertheless, the Treasury remains more interested in obtaining the information contained on FinCEN and IRS disclosure forms than in meting out punishment for filing delinquency.

Therefore, voluntary, proactive disclosure represents by far the safest path to protecting one’s foreign assets and minimizing penalties. Anyone with overdue FBAR and/or FATCA filings, or questions about annual filing requirements, should seek qualified help as soon as possible.

As one of the most knowledgeable and well-connected tax & accounting professionals in the world, Harvey Bezozi's mission as a CPA and CFP ® is to provide concierge-level work product and service, along with seamless communication, high energy, and a super-positive attitude. Located in Boca Raton, Florida, Bezozi has been in business since 1994, and serves clients in all 50 states and internationally. More information can be found at YourFinancialWizard.com

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Anyone with overdue FBAR and/or FATCA filings, or questions about annual filing requirements, should seek qualified help as soon as possible.
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2020-10-18
Friday, 18 December 2020 04:10 PM
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