By Stephen J. Dunn
The Bank Secrecy Act and the Internal Revenue Code both require reporting by United States persons concerning their foreign financial accounts. For purposes of both acts, “United States person” means a citizen or resident of the United States, and “foreign financial account” means an account that is located outside the United States. Thus, a German national who is not a citizen of the U.S., but who is married to a U.S. citizen, and who resides outside the U.S., is not required to report under either act. Nor need an account maintained at the New York branch of the Bank of India by a U.S. citizen or resident be reported under either act.
The Bank Secrecy Act requires a United States person with foreign financial assets as of the end of the calendar year to report them onForm TD F 90-22.1, Report of Foreign Bank and Financial Accounts, (“FBAR”), which is due to be filed with the Internal Revenue Service by the ensuing June 30. There is no duty to file Form TD F 90-22.1 where the total value of assets held in foreign accounts at December 31 is less than $10,000.
Failure to timely file a correct FBAR subjects the person obligated to file it to a civil penalty not to exceed $10,000. If a correct FBAR is filed late, there is no penalty if the failure to timely file it was due to reasonable cause. But if the failure to timely file a correct FBAR waswillful, the person obligated to file it is subject to a draconian penalty of the greater of $100,000 or 50% of the value of the reportable assets on the reporting date, December 31.
Willful failure to comply with the FBAR also is a felony punishable by fine of up to $100,000 or imprisonment of up to five years or both per offense. But the willful failure to file an FBAR while violating another law of the United States (such as the Internal Revenue Code) or as part of a pattern of criminal activity involving more than $100,000 within a twelve-month period is punishable by fine of up to $500,000 or imprisonment of up to ten years or both per offense.
The IRS has offered initiatives for U.S. persons delinquent in filing FBARs to voluntarily comply with the law. Under the current Offshore Voluntary Disclosure Initiative (“OVDI”), the maximum penalty is 27.5% of the highest value of the accounts during the reporting period, provided the reporting person complies with all of the
OVDI requirements. Those requirements include amending the filer’s federal income tax returns for the last eight years to report income realized on the foreign accounts. The OVDI program is voluntary, which means that is not available once the IRS has contacted the account holder about the delinquency, or begun an investigation concerning the delinquency.
An act is willful if it is done with knowledge that it violates the law. For example, many people succeed to an account opened by their parent at a European bank. They may not find out about the account until after their parent has died. Under the law of the country in which the account was opened, it may be unclear who owns the account—the designated joint owner, or the decedent’s estate. It may be necessary to retain legal counsel in the host country to answer this and other questions concerning the account. In such circumstances, the inheriting child cannot be said to be willful as to the account until he has been definitively advised that he legally owns the account, and he thereafter fails to report it.
Ignorance of the law is a defense to willfulness. One’s case against willfulness is much more difficult when he has knowingly made untruthful answers the following questions at the bottom of Schedule B, Interest and Ordinary Dividends, to his federal income tax return:
7a At any time during [the year], did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country?
b If ‘Yes,’ are you required to file Form TD F 90-2.1 to report that financial interest or signature authority? See Form TD F 90-22.1 and its instructions for filing requirements and exceptions to those requirements.
Obviously the case against willfulness is much tougher for the person who opened the foreign account.
The Internal Revenue Code also requires reporting of interests in foreign financial accounts, as well as in other foreign financial assets. But there are thresholds to this reporting requirement. For taxpayers living in the United States, the threshold is foreign financial assets with a total value of at least $50,000 on the last day of the taxable year, or at least $75,000 on any day during the taxable year ($100,000 or $150,000 for a married couple filing a joint tax return). For taxpayers living abroad, the threshold is foreign financial assets of at least $200,000 on the last day of the taxable year, or at least $300,000 on any day during the taxable year ($400,000 or $600,000 for a married couple filing a joint tax return). The IRC reporting is done onForm 8938, Statement of Specified Foreign Assets, required to be filed with the taxpayer’s federal income tax return. The Form 8938 Instructions are helpful.
Failure to file a Form 8938 that is due is punishable by civil penalty of $10,000 for each month of the noncompliance, up to a maximum of $50,000 per taxable year. A taxpayer who willfully files a materially false income tax return, or who willfully fails to file an income tax return when there is income to report and tax due on it, is subject to criminal prosecution.
The IRS has a long-standing administrative policy that it will not prosecute a taxpayer who voluntarily complies with the law. The voluntary disclosure program has evolved over the years. Currently, the disclosure must be made in writing to the IRS Criminal Investigation Division. And the program is available only where the IRS has not begun an investigation concerning the taxpayer. The process should begin with a phone call by the taxpayer’s counsel to IRS CID inquiring about whether an investigation is afoot concerning the taxpayer. The making of the inquiry does not prejudice the taxpayer.
Obviously, only experienced tax counsel should attempt a voluntary disclosure on behalf of a taxpayer.