Category Archives: FBARs

Beneficial Ownership, Income Tax, and FBARs

By Stephen J. Dunn

For U.S. income tax purposes, ownership of property means beneficial ownership.  Only the beneficial owner of property is required to report taxable income from the property on a U.S. income tax return.

The beneficial owner of property is its real, true owner, the person entitled to control the property, and to realize the benefit of it.

The legal owner of property, in contrast, is the person whose name is on title documents to the property, such as a deed to real property or signature cards to a bank account.

A person is required to report an account on a FinCEN Form 114, Report of Foreign Bank and Financial Accounts, (“FBAR”), if the person had a financial interest in the account, or signature authority over it.  Financial interest in an account is beneficial or legal title to the account.

Assume that Jack, a native of Sweden, lives in the United States.  Sarah, Jack’s mother, resides in her native Sweden.  Sarah titles $1,000,000 of Swedish financial accounts in the names of Sarah and Jack, as joint tenants with rights of survivorship.  Sarah does this as a will substitute, to pass the accounts to Jack at her death.  Sarah accesses the accounts, making deposits to them and withdrawals from them, for her benefit.  Jack acknowledges the accounts as Sarah’s during her lifetime, and makes no transactions in them.

Jack does not have beneficial ownership of Sarah’s accounts.  Accordingly, Jack does not report income from the accounts on Schedule B, Interest and Ordinary Dividends, to his U.S. income tax return.  Nor does Jack respond concerning the accounts to the questions on Schedule B, line 7a. Nor does Jack report the Swedish accounts on a Form 8938, Statement of Foreign Financial Assets, filed with his U.S. income tax return.

Jack does, however, report his financial interest in the accounts on an FBAR.

If Jack has been out of compliance with U.S. laws concerning Sarah’s Swedish accounts for several years, all he has to do to become compliant is file FBARs for the last six years reporting the accounts.  Because Jack does not beneficially own the Swedish accounts, he does not report the accounts or income therefrom on a U.S. income tax return.   Because he does not have unreported U.S. income tax with respect to the Swedish accounts, he is not under audit or investigation concerning the accounts, and the IRS has not contacted him concerning the accounts, all he has to do to become compliant with U.S. laws concerning the Swedish accounts is file FBARs or delinquent FBARs for the last six years reporting them.

This article originally appeared on Newsmax on January 27, 2017.

You May Only Need to File Delinquent FBARs

By Stephen J. Dunn

Many U.S. persons are alarmed upon learning of their reporting obligations with respect to foreign financial accounts.  Those obligations include reporting the accounts and income therefrom on U.S. income tax returns, and reporting the accounts on FinCEN Forms 114, Report of Foreign Bank and Financial Accounts, (“FBARs”).

“U.S. persons” required to report foreign financial accounts include U.S. citizens, lawful permanent residents (“green card” holders), and others who reside in the U.S. (I will explain the “substantial presence test” in a later post).

U.S. persons are subject to heavy penalties for failing to perform their reporting obligations with respect to foreign accounts.  Those penalties include a negligence penalty equal to 20% of tax underreported on an income tax return, a penalty of $10,000 for failing to file a Form 8938, Statement of Specified Foreign Financial Assets, and a penalty equal to the greater of $100,000 or 50% of the taxpayer’s high aggregate balance of foreign accounts for failure to file an FBAR (this is called the “draconian” penalty).  Noncompliance can also be the subject of a criminal prosecution.

Internal Revenue Service voluntary disclosure programs are available to mitigate the cost of coming into compliance with U.S. laws concerning foreign accounts.  Under the Offshore Voluntary Disclosure Program (“OVDP”), the taxpayer (1) files eight years of U.S. income tax returns reporting income from foreign accounts, (2) pays tax on the income, and a negligence penalty equal to 20% of the tax, (3) files eight years of FBARs, and (4) pays an offshore penalty equal to 27.5% of the high aggregate balance in the foreign accounts.

If the taxpayer’s noncompliance was nonwillful, then the taxpayer can come into compliance with U.S. laws concerning foreign accounts by means of the Streamlined Offshore Compliance Procedures.  Under the Streamlined Procedures, the taxpayer (1) files three years of tax returns reporting income from foreign accounts, (2) files six years of FBARs, and (3) pays an offshore penalty equal to 5% of the high aggregate balance in foreign accounts (there is no penalty if the taxpayer does not reside in the U.S.).

Congress enacted the FBAR filing requirement, and the draconian penalty for failure to file an FBAR, to curb the evasion of U.S. income tax by the use of foreign accounts.  U.S. persons were transferring money overseas, investing it there, and not reporting the income on U.S. income tax returns.  It is intuitive that the draconian penalty ought not apply to someone who has not evaded U.S. income tax by the use of foreign accounts.  Indeed the IRS has acknowledged several times that a taxpayer who—

  1. does not need to file delinquent or amended tax returns to report and pay additional tax,
  2. who is not currently under IRS examination, and
  3. who has not been contacted by the IRS concerning delinquent FBARs,

can come into compliance with U.S. laws with respect to foreign accounts by reporting the accounts on FBARs for the last six years, the open years under the statute of limitations on assessment of the FBAR penalty.  Such a taxpayer need not make a submission under the OVDP or Streamlined procedures, or pay an offshore penalty.   Willfulness is not an issue for such a taxpayer.  Such a taxpayer may need to file amended tax returns to file delinquent Forms 8938.

This article originally appeared on Newsmax on January 20, 2017.