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FBAR: Financial Interest, Signature Authority, and Other Comparable Authority

One of the major requirements that gives rise to the obligation to file the FBAR is that a U.S. person has either a financial interest in, or a signature authority or other comparable authority over the relevant foreign financial accounts. In deciding whether the FBAR is required, it is useful to go through all three of these requirements in order.

First, the filer needs to determine whether he has a financial interest in the account. If the account is owned by an individual, the financial interest exists if the filer is the owner of record or has legal title in the financial account, whether the account is maintained for his own benefit or for the benefit of others, including non-U.S. persons. See 75 Fed. Reg. at 8847. Hence, if the owner of record or holder of legal title is a U.S. person acting as an agent, nominee, or in some other capacity on behalf of another U.S. person, the financial interest in the account exists and this agent or nominee needs to file the FBAR. If a corporation is the owner of record or the holder of legal title in the financial account, a shareholder of a corporation has a financial interest in the account if he owns, directly or indirectly, more than 50 percent of the total value of the shares of stock or has more than 50 percent of the voting power. Id. Where a partnership is the owner of record or the holder of legal title in the financial account, a partner has a financial interest in the financial account if he owns, directly or indirectly, more than 50 percent of the interest in profits or capital. Similar rule applies to any other entity (other than a trust) where a U.S. person owns, directly or indirectly, more than 50 percent of the voting power, total value of the equity interest or assets, or interest in profits. Id. Special rules apply to trust and can be found in the Proposed Regulations. Id. Finally, a U.S. person who “causes an entity to be created for a purpose of evading the reporting requirement shall have a financial interest in any bank, securities, or other financial account in a foreign country for which the entity is the owner of record or holder of legal title.” Id.

If there is no financial interest in the foreign financial account, the filer should determine whether he has signature authority over the account. A U.S. person has account signature authority if that person can control the disposition of money or other property in the account by delivery of a document containing his signature to the bank or other person with whom the account is maintained. See 75 Fed. Reg. at 8848. Notice, once again, that control over the disposition of assets in the account is one of the main factors in deciding whether the FBAR needs to be filed.

It is important to mention that, pursuant to the IRS Announcement 2010-23, persons with signature authority over, but no financial interest in, a foreign financial accounts for which an FBAR would otherwise have been due on June 30, 2010, will now have until June 30, 2011, to report those foreign financial accounts. Combined with IRS Announcement 2009-62, this means that the deadline has been extended for the calendar year 2009 and all prior years.

Finally, even if no financial interest or signature authority exists, the filer has to continue his analysis and determine whether he has “other comparable authority” over the account. This catch-all, ambiguous term is not defined by the IRS. Nevertheless, the instructions to FinCEN Form 114 formerly Form TD F 90-22.1 generally state that the other comparable authority exists when the filer can exercise power comparable to the signature authority over the account by communication with the bank or other person with whom the account is maintained, either directly or through an agent, or in some other capacity on behalf of the U.S. person.

FBAR Penalties

In this essay, I would like to discuss some of the penalties that may be imposed as a result of the failure to file the FBAR even though you were required to do so. In particular, I will focus on three general scenarios describing specific penalties commonly attributed to each of them. The first scenario is where you willfully failed to file the FBAR, or destroyed or otherwise failed to maintain proper records of account, and the IRS learned about it when it launched an investigation. This is the worst type of scenario which carries substantial penalties. The IRS may impose civil penalties of up to the greater of $100,000, or 50 percent of the value of the account at the time of the violation, as well as criminal penalties of up to $500,000, or 10 years of imprisonment, or both.

Another scenario is where you negligently and non-willfully failed to file the FBAR, and the IRS learned about it during an investigation. Unlike the first scenario, there are no criminal penalties for non-willful failure to file the FBAR; only civil penalties of up to $10,000 per each violation (unless there is a pattern of negligence which carries additional civil penalties of no more than $50,000 per any violation). In this situation, you are likely to fare much better, and you may even be able to obtain lower penalties by showing of reasonable cause for the failure to file.

The third scenario is where you non-willfully fail to file the FBAR, accidentally discover your mistake, and come to an attorney to file a delinquent FBAR before the IRS commences its investigation of your finances. This is the most favorable of all scenarios due to the fact that you may qualify for the benefits of a voluntary disclosure program, despite the fact that the position of the IRS regarding civil penalties for voluntarily filed but delinquent FBARs is uncertain following the October 15, 2009 voluntary disclosure deadline. The best strategy for addressing delinquent FBARs, however, varies depending on the facts and circumstances of the particular case.

A word of caution: this discussion focuses solely on the penalties associated with the failure to file the FBAR. This essay does not address the various strategies that may be employed in dealing with the delinquent FBAR filings in the post-October 15, 2009 world, including qualification for the voluntary disclosure program. In certain situations, there may also be other relevant significant tax issues outside of the FBAR realm – the most important of which is non-payment of taxes on undisclosed income by the U.S. taxpayers – which may significantly alter the amount of penalties, interest, and taxes due to the IRS.

FBAR: Aggregate Value Requirement

FBAR filing is required only if the aggregate balances of a U.S. person’s foreign financial accounts exceed $10,000.

Despite appearances, the requirement that the aggregate value of all of the foreign financial accounts exceeds $10,000 at any time during a calendar year is not without complications. In order to figure out the account value in a calendar year, one needs to look first at the largest amount of currency and/or monetary instruments that appear on any quarterly or more frequently issued account statement for the relevant year. If the financial institution which manages the account does not issue any periodic account statements, then the maximum account value is the largest amount of currency and/or monetary instruments in the account at any time during the applicable year. If the account consists of stocks or other non-monetary assets, then one only needs to consider fair market value at the end of the relevant year. If, however, the non-monetary assets were withdrawn before the end of the calendar year, then the account value is determined to be the fair market value of the withdrawn assets at the time of the withdrawal.

The maximum value of a foreign financial account must be reported in U.S. dollars on the FBAR. Therefore, a taxpayer needs to convert foreign currency into the corresponding amount of U.S. dollars using the official exchange rate at the end of the relevant calendar year.

A final word of caution on the topic of the account balance. Notice the word “aggregate” – it means that the balances of all of the filer’s foreign financial accounts should be tallied to determine whether the $10,000 threshold is exceeded. For example, if the filer has one foreign bank account of $6,000 and another of $5,000, then he still needs to file the FBAR with the DOT, because the aggregate value of both accounts exceeds the required $10,000.

Deciding whether you are required to file the FBAR is a complicated process. Sherayzen Law Office can help you!

Call now to discuss your situation with an experienced tax attorney!

IRS Interest Rates: 4th Quarter of 2010

On August 19, 2010, the IRS announced that interest rates for the calendar quarter beginning October 1, 2010, will remain the same as follows:

1. Individual underpayment and overpayment: 4%;
2. Corporate overpayment: 3%
3. Large corporate underpayment: 6%
4. Portion of corporate overpayment exceeding $10,000: 1.5%

The interest rate is determined on a quarterly basis and compounds daily. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half of a percentage point.

Interest factors for daily compound interest for annual rates of 1.5 percent, 3 percent, 4 percent, and 6 percent are published in Tables 8, 11, 13, and 17 of Rev. Proc. 95-17, 1995-1 C.B. 556, 562, 565, 567, and 571.