FBAR Lawyers

FBARs and Polish Lokata Accounts

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In recent years, I have received a number of questions from my Polish clients about whether “Lokata” accounts are reportable on the FBARs. The short answer is “Yes”.

Lokata Accounts

Lokata is a fixed-term deposit account which is very common in Polish banks; a Lokata is very similar to U.S. CD-type of accounts. There are many types of lokatas – overnight, three-month, six-month and even twelve-month lokatas. Usually, the bank would automatically take the funds from a current account (so-called “rachunek biezacy”) and deposit it on the lokata at a certain fixed percent. At the end of the lokata period, the lokata is closed by the bank and the balance with interest (minus automatic 19% tax withholding for non-business accounts) is returned to the current account.

All major Polish banks (e.g. DZ Bank and Bank Zchodni WBK S.A.) offer lokatas to their clients.

Lokata and FBAR Complications

Every time lokata is opened, it is assigned a separate account number. For the purposes of the FBAR, it is a bank account which should be reported on the FBAR separately from the current accounts (contrary to some of the widely-held beliefs among U.S. taxpayers living and working in Poland).

So far, this sounds fairly simple. However, there are serious complications with respect to reporting lokata accounts on the FBAR. First, most current bank account statements are not likely to fully identify lokata accounts.

Second, even where a lokata is identified by a separate number, you still need to make sure that the amount shown on the statements actually reflects the gross amount (i.e. before tax withholding). Usually, it would not and you will need to request the bank to supply a separate bank statement for each lokata and keep track of all gross interest and withholding tax amounts.

Third, the sheer number of lokata accounts can be overwhelming. While there are may be renewable long-term lokatas, oftentimes, it is the opposite. The problem with short-term lokatas is that they terminate once the funds with interest are returned to the current account. This means that a new lokata account is likely to be open every time a new deposit is made. Imagine if a new lokata is opened every week, every three days or every day?! This can be an extremely burdensome requirement for U.S. taxpayers who maintain bank accounts in Poland.

Other problems may arise where the taxpayer needs records for prior years, a lokata is opened in one year and is closed in the following year, et cetera.

Contact Sherayzen Law Office for Help with Reporting Undisclosed Lokata Accounts

If you have undisclosed bank and financial accounts in Poland, contact Sherayzen Law Office for help with your voluntary disclosure. Our team of experienced international tax professionals will thoroughly analyze your case, estimate your current potential FBAR liabilities, propose a solution to your FBAR problems, and implement your voluntary disclosure plan, including preparation of all required legal documents and tax forms.

New 2013 FBAR form: E-filing Explanation for Late FBARs

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On October 1, 2013, in response to various requests from FBAR tax lawyers and accountants, FinCEN updated the online FBAR filing form. There are various new technical additions and a much friendlier user interface, but the inclusion of the explanation for the delay in FBAR filing is definitely the key new feature for the FBAR tax lawyers who are thinking about recommending the reasonable cause disclosure (a/k/a Modified Voluntary Disclosure) to their clients.

The late FBAR explanation has two particularly interesting characteristics.

Analysis of the Late Filing Explanation Choices

First, a taxpayer who files his FBAR late can choose among the following ten answers to explain the reason for filing the FBAR late:

A. Forgot to file
B. Did not know that I had to file
C. Thought account balance was below reporting threshold
D. Did not know that my account qualified as foreign
E. Account statement not received in time
F. Account statement lost (replacement requested)
G. Late receiving missing required account information
H. Unable to obtain joint spouse signature in time
I. Unable to access BSA E-Filing System
Z. Other

These choices are somewhat surprising for FBAR tax lawyers because some of these choices would not normally constitute a reasonable cause, others are repetitive and some may actually get the taxpayer (especially a taxpayer who is not represented by an FBAR tax lawyer).

The most dangerous answer is “A” – forgetting the FBAR means that the taxpayer admits to the knowledge of the existence of the FBAR requirement and non-willfully but negligently fails to comply with the FBAR requirement. Potentially, the IRS can use this answer to impose a $10,000 penalty per violation.

Choice “B” is a good but insufficient choice. Lack of knowledge of the FBAR may help establish non-willfulness, but it is not sufficient in itself for a reasonable cause. FBAR tax lawyers usually start with non-willfulness, but this is not where they end.

Choices “C” and, to a lesser extent, “F” may be dangerous because it is unclear where the confusion (in case of “C”) comes from and why the statements (in the case of “F”) were lost. The taxpayer could be opening the door to potential charge that he is not compliant with the FBAR recordkeeping requirements.

Outside of U.S. territories, I am not certain who would be using answer “D”. In any case, by itself, it does not appear to be sufficient to avoid the imposition of an FBAR penalty.

Choices “E” and “G” are pretty much the same and would be useful in presenting the argument for the reasonable cause, but this task can hardly accomplished without presenting a comprehensive context in which these events occurred. The same problem applies to “H” and “I”.

Choice “Z” – Other Explanation

The second and most important feature of the new FBAR is that it provides the space for writing an explanation for why the FBARs are filed late – this is the last choice “Z”.

There is, however, a very important limitation with respect to choice “Z”; there are only a maximum of 750 characters allowed. In other words, FinCEN and the IRS only gave taxpayers a few tweets to present a complex argument for non-willfulness and reasonable cause. Most FBAR tax lawyers will agree that 750 characters is a laughable amount of space for a reasonable cause explanation.

I believe that this feature will continue to be a great obstacle to submitting reasonable cause explanations purely electronically. More likely, the electronic explanation will need to reference the reasonable cause statement on paper.

Possibility of PDF File Upload in the Future

It seems that the IRS also understands that there is a big problem with choice Z. I fully expect the IRS to finish and implement a new feature (probably in the next version of the FBAR) that would allow FBAR tax lawyers to upload their reasonable cause statements as a pdf file (in a same manner as it is currently done in many court systems in the United States).

Contact Sherayzen Law Office for Legal Help With Late FBARs

If you have undisclosed foreign accounts and you are facing a situation where your FBARs will be filed late, contact Sherayzen Law Office for professional legal help with your late FBARs. Our experienced FBAR tax firm will thoroughly analyze your case, present the available choices, and properly conduct your voluntary disclosure, including the preparation and filing of late FBARs and other necessary legal documents and tax forms.

FBAR Penalties vs Offshore Voluntary Disclosure Program Penalties

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There is a great confusion among international tax attorneys and Offshore Voluntary Disclosure Program (OVDP) applicants with respect to the OVDP Offshore Penalty and how it differs from the FBAR penalties. I already described in another article the OVDP penalties. In this article, I would like to compare and contrast some of the major features of the OVDP Offshore Penalty with the FBAR penalties.

FBAR Penalties

FBAR is one of the most unforgiving forms on the planet. The penalties associated with delinquent FBARs can be terrifying.

At the apex of the penalty structure are the criminal penalties that are imposed in association with a willful violation of the FBAR filing requirements under 31 U.S.C. section 5322(a), 31 U.S.C. section 5322(b), or 18 U.S.C. Section 1001. The criminal penalties may be up to 10 years in jail and $500,000 in fines.

Willful (i.e. where a person willfully fails to report an account or account identifying information) civil penalties equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. See 31 U.S.C. section 5321(a)(5). Note, that a penalty in this case applies to each violation which is defined as each undisclosed account per year.

Even where the violation is non-willful, a person may be subject to a civil penalty of $10,000 per violation. Again, note that this is a penalty per violation – i.e. per each unreported account per each year.

For the purposes of this article, it is also important to note that the penalties apply only to “foreign financial accounts”. This term is defined broadly to include various types of accounts which are not normally associated with the word “account” (for example: a precious metals storage or a life insurance policy with a cash-surrender value). Nevertheless, the FBAR penalty would not apply to real estate or a business interest; it would apply only to foreign financial accounts – i.e. the balances on the foreign financial accounts and the number of these accounts constitute the primary penalty base for the calculation of the FBAR penalties.

OVDP Offshore Penalties

In contrast to traditional FBAR penalties, OVDP Offshore Penalty may mean a completely different penalty range and penalty base.

Offshore Penalty Range

Unlike the FBAR penalties, OVDP Offshore Penalty is a limited penalty – i.e. there is a certain penalty that you have to pay by virtue of participating into the program. It is very important to understand that most individual circumstances, willfulness, non-willfulness and reasonable case have virtually no impact on the calculation of the Offshore Penalty.

There are three tiers of the OVDP Offshore Penalty. First, there is a 5% penalty tier. There are various possibilities how one would be entitled to such a favorable treatment; a detailed discussion of the 5% penalty possibilities is described elsewhere on sherayzenlaw.com.

Second, there is a 12.5% penalty tier. An OVDP applicant would be entitled to this penalty tier only if, during each of the years covered by the OVDP, the taxpayer’s penalty base (see below for detailed explanation of what “penalty base” means) is less than $75,000.

Finally, if neither 5% nor 12.5% penalty tiers apply, the default penalty of 27.5% of the penalty base will apply.

Penalty Base

As important as the penalty range, it pales in comparison to the determination of the OVDP Offshore Penalty base, because these calculations can be vastly different from the FBAR penalties.

First, the Offshore Penalty is imposed only once on the highest amount of the penalty base during the Voluntary Disclosure period (i.e. years covered by the OVDP which sometimes can be quite tricky to figure out).

Second, the base for the Offshore Penalty includes a wide variety of assets including foreign bank accounts, the fair market value of assets in undisclosed offshore entities, and the fair market value of any foreign assets that were either acquired with improperly untaxed funds or produced improperly untaxed income. The general rule is that the offshore penalty is intended to apply to all of the taxpayer’s offshore holdings that are related in any way to tax non-compliance, regardless of the form of the taxpayer’s ownership or the character of the asset.

This means that the Offshore Penalty may include such assets as business ownership interests, stocks, artwork, automobiles, patents, trademarks, and (very important) real estate. Even ownership of U.S. businesses acquired with tainted funds may be open to the Offshore Penalty.

In other words, the penalty base of the OVDP Offshore Penalty may include a much greater variety of assets in addition to the assets already covered by the FBAR.

Penalty Differences Between FBARs and OVDP Should Influence Your Voluntary Disclosure Options

Given the tremendous differences in the range of penalties and the calculation of the penalty base, it is highly important (and I cannot stress this point enough) to properly analyze the potential tax liabilities under both methods before making the decision on whether to enter the OVDP or pursue a reasonable cause (so-called “noisy” or “modified”) voluntary disclosure. It is highly important that the client understands the differences in the calculations and the potential risks of pursuing either option.

Contact Sherayzen Law Office for Professional Help With the Disclosure of Your Foreign Financial Accounts

If you have undisclosed foreign financial accounts or other offshore assets, contact Sherayzen Law Office for legal help. Our experienced international tax law firm will thoroughly analyze your case, calculate your potential tax liabilities, present you with a range of options, and implement your voluntary disclosure plan (including preparation of all tax forms and legal documents).

FBAR Disclosure of Offshore Assets: the Importance of Issue Spotting

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It is terrifying that so many accountants who take on the legal issue of FBAR disclosure are not trained in issue spotting. It may be the number one of the top reasons why so many voluntary disclosures handled by accountants and even attorneys have gone so wrong.

A lot of tax professionals who are familiar with voluntary disclosures concerning foreign accounts simply concentrate on the bigger issue of FBAR penalties. However, due to this over-simplification of the voluntary disclosure, they ignore the fact that most disclosures of offshore assets involve a lot of related issues that, besides their own importance, may directly influence the FBAR disclosure strategy.

For example, I have seen cases where accountants would begin a voluntary disclosure process with respect to foreign investment accounts that contains foreign mutual funds – the issue that immediately should be spotted by the accountants as potentially involving PFICs. Unfortunately, most accountants are not even aware of the existence of PFICs and their unique place in the Internal Revenue Code. Then, without recognizing this problematic issue, these accountants would herd their clients into the IRS Offshore Voluntary Disclosure Program (OVDP) closed claiming that there was full compliance with the accounts and claiming that these accounts should be excluded from the OVDP Offshore Penalty. The end-result in such cases would often be the rejection of the exclusion based on PFIC increase in tax (i.e. the PFIC distributions were reported but incorrectly calculated – i.e. income tax non-compliance).

Obviously, how the case would turn out would ultimately depend on its particular facts, but this is an example indicate of the trend and why it is so important to engage in issue-spotting.

Contact Sherayzen Law Office for Help with Your Voluntary Disclosure of Offshore Assets

If you have undisclosed foreign assets that should have been disclosed to the IRS on the FBAR, Form 8398 or other information returns, contact Sherayzen Law Office for help.

Our experienced international tax law firm will thoroughly review your case, identify the issues involved in your case, estimate your FBAR penalties, propose a definite action plan on how to deal with your situation and implement this plan.

Call or email our experienced voluntary disclosure team NOW!