Posts

IRS Issues FBAR Fact Sheet | FBAR FATCA Tax Lawyer & Attorney

On April 4, 2019, the IRS issued the FBAR Fact Sheet in order to acquaint US taxpayers with this highly important reporting requirement for foreign accounts held by US persons. Let’s analyze the new fact sheet in more detail.

FBAR Fact Sheet: Organizational Structure of the Fact Sheet

The IRS FBAR Fact Sheet can be divided into seven parts: (1) introduction to FBAR and the need to report foreign accounts to the IRS; (2) identification of who needs to file FBARs; (3) explanation of how to file FBARs (including special cases such as joint accounts and the determination of highest balances); (4) discussion of Form 8938 and FBAR; (5) amended and late FBARs; (6) description of FBAR recordkeeping requirements; and (7) more IRS resources concerning FBAR. These parts are not clearly delineated in the Fact Sheet; rather, they are summaries of various information that this brochure contains.

FBAR Fact Sheet: Introduction to FBAR

The IRS FBAR Fact Sheet commences with the warning to US taxpayers that they are required to report their foreign bank and financial accounts even if they do not produce any interest income. April 15 is identified as the critical deadline for these taxpayers. Later, the IRS also states that there is an extension available for FBARs. Again, the IRS did not do a very good job in organizing the Fact Sheet.

FBAR Fact Sheet: Who Needs to File FBARs?

Then, the IRS Fact Sheet finally introduces FBAR and states that it was created by the 1970 Bank Secrecy Act; there is no discussion of the significance of this legal history. Then, the IRS focuses on the persons who may have to file FBARs and introduces the concept of “US Person”. It defines US person as a “citizen or resident of the United States or any domestic legal entity such as a partnership, corporation, limited liability company, estate or trust.”

There is a hidden trap in this IRS definition. “Resident of the United States” does not only include US permanent residents (as most non-lawyers would read it), but also US tax residents. I encourage the readers to read this article with respect to the definition of “resident” for FBAR purposes.

The IRS also defines “United States” for FBAR purposes. The readers can read this article published by Sherayzen Law Office for a more detailed analysis of this concept.

FBAR Fact Sheet: How to File FBARs

This part of the FBAR Fact Sheet focuses on the details concerning how to file FBAR electronically. The IRS cautions taxpayers that FBAR should not be filed with their federal tax returns.

Then, the IRS discusses in more detail certain special cases such as joint accounts and US retirement accounts. The IRS finishes this part of the FBAR fact sheet with the discussion on the determination of the highest value of a foreign account.

FBAR Fact Sheet: Form 8938 & FBAR

In this part of the Fact Sheet, the IRS introduces taxpayers to an existence of another requirement concerning foreign accounts, FATCA Form 8938. The IRS urges the readers to search the IRS website with respect to this form and how it compares to FBAR.

FBAR Fact Sheet: Amended and Late FBARs

The next part of the Fact Sheet focuses on amended and late FBARs. First, the IRS discusses how to amend an FBAR. Then, the IRS states that, as soon as a taxpayer learns that he did not file the required FBARs, he needs to e-file them. At that point, the IRS casually discusses that there is space available on the form to explain the reason for late filing. Finally, the IRS describes the severe FBAR criminal penalties, stating the following: “the IRS will not penalize those who properly report a foreign financial account on a late filed FBAR, and the IRS finds they have reasonable cause for late filing.”

Sherayzen Law Office believes that the IRS has not done a good job in this part of the Fact Sheet. It has completely failed to emphasize the importance of seeking a legal advice prior to filing a late FBAR. A taxpayer may get the wrong impression that he should file a late FBAR as soon as possible before exploring the options on how to do it in a way that protects him from excessive FBAR penalties.

Moreover, the IRS also failed to emphasize the importance of offshore voluntary disclosure with respect to late FBARs. Besides a casual mention of an “IRS compliance program”, there is nothing about the various available voluntary disclosure options for US taxpayers who are filing late FBARs. The IRS does not refer at all to the Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures.

FBAR Fact Sheet: Recordkeeping Requirements

In the next part of the Fact Sheet, the IRS discusses how many years the FBAR filers need to keep the supporting documentation and copies of FBARs. Curiously, the IRS states that the filers should keep the documents for five years from the due date of FBAR, but the FBAR Statute of Limitations is six years.

Sherayzen Law Office does not believe that the IRS advice is correct here. We urge FBAR filers to keep their FBAR records and copies of the filed FBARs for six to ten years.

FBAR Fact Sheet: IRS Resources

The IRS concludes its FBAR Fact Sheet with the discussion of additional available resources to US taxpayers, including FBAR hotline and Publication 4261.

Sherayzen Law Office’s View of the FBAR Fact Sheet

We believe that the FBAR Fact Sheet can serve only as a general introduction to FBAR, but it is not sufficient to provide US taxpayers with sufficient guidance on how to properly deal with late FBARs. On the contrary, a US taxpayer may actually put himself in a worse legal position if he only relies on the Fact Sheet to file his late FBARs.

If you should have filed FBARs but you have not done so, contact Sherayzen Law Office for professional help. As the IRS states in its FBAR Fact Sheet, the FBAR penalties are extremely severe. Hence, it is important to approach any FBAR violations with an extreme caution and retain Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world to deal with late FBARs, and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

FinCEN Form 114 Business Filers | FBAR Lawyer & Attorney Delaware

In a previous article, I described individuals who need to file FinCEN Form 114. This essay is a continuation of the same series of articles concerning FinCEN Form 114 filers. Today, I will devote my attention to FinCEN Form 114 Business Filers.

FinCEN Form 114 Business Filers: FBAR Filing Requirement

We first need to understand what Form 114 is. The Report of Foreign Bank and Financial Accounts, FinCEN Form 114 also known as “FBAR”, is one of the most important information returns administered by the IRS since 2001 (the form itself has existed since 1970). FBAR requires a US person to disclose his financial interest in or signatory authority (or any other authority) over foreign bank and financial accounts as long as the highest balance of these accounts, in the aggregate, exceeds $10,000 at any point during a calendar year.

FBAR is the creation of the Bank Secrecy Act, Title 31 of the United States Code (“USC”). In other words, it is technically not a tax form. In fact, its original purpose was to fight financial crimes.

Due to this legal history, FBAR has a ruthless yet highly elaborate penalty system. FBAR penalties range from criminal penalties that include incarceration to the astonishingly high willful and even non-willful civil penalties. This severe penalty system makes FBAR one of the most dangerous US international information returns.

FinCEN Form 114 Business Filers: General Definition

As described above, only US persons are required to file FBARs. There are various categories of US persons: individuals, businesses, trusts and estates. Our focus today is on business filers.

The general rule is that a business entity is considered a US person if it was created or organized in the United States or under the laws of the United States. There are two terms that we need to understand within this general rule in order to the rule apply correctly: entity and the United States.

FinCEN Form 114 Business Filers: Entity

For FBAR purposes, the word “entity” is defined broadly to include without limitation a corporation, a partnership and a limited liability company. This term applies even if a business is a disregarded entity for US tax purposes.

In other words, a single member limited liability company is required to file an FBAR if it has foreign accounts that satisfy the FBAR filing threshold. Again, the reason for applying the legal, rather than a tax a definition of “entity”, is driven by the FBAR’s legal history; it is a Title 31 requirement, not a Title 26 (i.e. the Internal Revenue Code) requirement.

FinCEN Form 114 Business Filers: Definition of the United States

I have already explored the FBAR definition of the United States in another article. Hence, I will only briefly state the rule here. 31 CFR 1010.100(hhh) defines the United States for FBAR purposes as: the States of the United States, the District of Columbia, the Indian Lands (as defined in the Indian Gaming Regulatory Act) and the territories and insular possessions of the United States.

Thus, a business entity formed in Guam is considered a US person for FBAR purposes. Similarly, a partnership formed in Delaware by two non-resident aliens is also a US person. Even an entity created under the laws of the Commonwealth of Puerto Rico will still be a US person. If these entities have foreign financial and bank accounts which exceed the FBAR filing threshold, they will also be considered FinCEN Form 114 business filers.

Contact Sherayzen Law Office for Professional FBAR Help

If you are a US business entity which maintains foreign accounts outside of the United States, please consider contacting Sherayzen Law Office for professional legal help. We have extensive experience in helping US businesses to comply with their FBAR requirements as well as to remedy their past FBAR noncompliance through an offshore voluntary disclosure.

Contact Us Today to Schedule Your Confidential Consultation!

This article focuses on FinCEN Form 114 business filers and is part of the series of articles on FinCEN Form 114 filers. The series began with the article that FBAR and Form 114a are the same form, then another article on the FBAR definition of the United States and still another article on the FinCEN Form 114 Filers (with the focus on the individual filers). Future articles are planned to continue this series.

FinCEN Form 114 and FBAR Are the Same Form | FBAR Tax Lawyers

In my practice, I often receive phone calls from prospective clients who treat FinCEN Form 114 and FBAR as two different forms. Of course, these are the same forms, but I have asked myself: why do so many taxpayers believe that FinCEN Form 114 and FBAR are two different forms?

The simplest answer, of course, would be that taxpayers are simply so unfamiliar with US international tax law that they do not know the form with which both titles, FinCEN Form 114 and FBAR, should be associated. There is definitely a lot of truth to this conclusion, but it does not tell the whole story.

Upon more profound exploration, I found that a significant amount of potential clients believed that either FBAR or FinCEN Form 114 was a tax form while the other form was something else. In other words, some of the taxpayers think that FinCEN Form 114 is a tax form while FBAR is not a tax form while other taxpayers believe that FBAR is a tax form while FinCEN Form 114 is something else.

After making this discovery, I realized that the very nature of FBAR is at the heart of the problem, because FBAR is not a tax form and has nothing to do with Title 26 (i.e. the Internal Revenue Code) of the United States Code. Rather, the Report of Foreign Bank and Financial Accounts, FinCEN Form 114, commonly known as FBAR, was created by the Bank Secrecy Act of 1970. The Bank Secrecy Act forms part of Title 31 of the United States Code. In fact, prior to September 11, 2001, the IRS had almost nothing to do with FBAR.

It was only after the 9/11 terrorist attacks in the United States when the Congress decided to turn over the enforcement of FBAR to the IRS. Initially, the official purpose was to facilitate the Treasury Department’s fight against terrorism. Within a year, though, it became clear that the IRS would use FBAR in its fight against offshore tax evasion and other noncompliance with US international tax laws.

Using the draconian FBAR penalty structure (at that time, the form was still called TD F 90-22.1) against noncompliant US taxpayers turned out to be a highly effective intimidation tool for the IRS – a tool which works very well even today. Once the Treasury Department mandated the e-filing of FBARs, the name of FBAR was changed from TD F 90-22.1 to FinCEN Form 114.

Thus, the confusion over the relationship between FinCEN Form 114 and FBAR stems from FBAR’s peculiar legal history. Most of US taxpayers do not know any of it; they are simply confused by the fact that the IRS is enforcing a form that has two names and which has nothing to do with the Internal Revenue Code.

Why the IRS Loves FBAR | International Tax Attorney Houston

The IRS loves FBAR. Undoubtedly, FATCA Form 8938 is a very serious rival, but even this form cannot match the FBAR‘s popularity among the IRS agents with respect to foreign accounts. What is behind this popularity? Or, stated in another way, why does the IRS love FBAR and prefers them to any other international tax enforcement mechanism for undisclosed foreign accounts?

First Reason Why the IRS Loves FBAR

The first reason why the IRS loves FBAR is because FBAR used to be the main and almost only form that dealt directly with the foreign accounts. Until 2011, when Form 8938 appeared for the first time, there was simply no form created pursuant to the Internal Revenue Code that would match the FBAR’s reach with respect to foreign bank and financial accounts.

Second Reason Why the IRS Loves FBAR

The second reason why the IRS loves FBAR is the ease with which a taxpayer can commit an FBAR violation. First, since FBAR comes from Title 31 and it is not part of the Internal Revenue Code, it is a fairly obscure requirement. Obviously, it is much better known now after the IRS voluntary disclosure programs. Still, there are many taxpayers and even accountants who simply do not know of FBAR’s existence.

Second, FBAR has a very low reporting threshold. As long as the highest aggregate balance on the foreign accounts was $10,000 or more at any point during a year, all of the accounts must be reported on FBAR. In essence, any more or less active use of an account is likely to trigger the FBAR requirement.

Third Reason Why the IRS Loves FBAR

The third reason why the IRS loves FBAR is the wide net that the FBAR casts over taxpayers. Not only does the FBAR define the term “account” in a very broad manner (including in this term such odd “accounts” as life insurance policies, bullion gold investments and so on), but its penalty structure forces compliance among all levels of taxpayers irrespective of their earnings or their willfulness (or lack thereof) with respect to FBAR violations.

Fourth Reason Why the IRS Loves FBAR

Finally, the fourth reason why the IRS loves FBAR is its draconian penalty structure that may result in the imposition of penalties that far exceed the balance (to emphasize: not the earnings, but the balance) of the unreported accounts. FBAR imposes high penalties of up to $10,000 even with respect to non-willful violations. Criminal penalties, including jail time, may be possible for willful violations.

In other words, FBAR is the ultimate punishment that the IRS can hammer out on noncompliant US taxpayers. This is probably the most important reason for the popularity of FBAR among IRS agents and even US Department of Justice prosecutors.

Contact Sherayzen Law Office for Professional Help with Undisclosed Foreign Accounts and Foreign Assets

If you have not disclosed your foreign accounts on FBARs or you have other unreported foreign assets, contact Sherayzen Law Office for professional help as soon as possible. Our legal and accounting team is led by one of the best international tax lawyers in the country, Mr. Eugene Sherayzen. We have helped hundreds of US taxpayers around the world with their FBAR compliance and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

FBAR PFIC Reporting | FBAR Tax Attorney

FBAR PFIC Reporting is an important issue for U.S. shareholders of passive foreign investment companies (“PFICs”). I will now briefly explore the FBAR PFIC Reporting requirement and when it applies to U.S. shareholders of a PFIC.

FBAR PFIC Reporting: FBAR Background

FinCEN Form 114, the Report of Foreign Bank and Financial Accounts, commonly known as FBAR, originally came into existence as a result of the 1970 Bank Secrecy Act. FBAR is one of the main and arguably the most important international tax requirement in the IRS. The form must be filed by every U.S. tax resident who has foreign financial accounts the aggregate value of which exceeds $10,000 at any time during the calendar year. The aggregate value should be calculated based on all foreign bank and financial accounts in which this U.S. tax resident has financial interest or over which he has signatory or other authority.

Failure to file an FBAR may result in the imposition of draconian FBAR penalties, including criminal penalties in grave cases of willful noncompliance.

FBAR PFIC Reporting: PFIC Definition

PFIC (Passive Foreign Investment Company) is one of the most complex tax requirements of the U.S. tax system. In addition to the potentially tremendously burdensome tax compliance required for PFICs, PFICs may result in the imposition of a much higher income tax with PFIC interest on the PFIC tax.

The basic definition of a PFIC is any foreign corporation in which: “(1) 75 percent or more of the gross income of such corporation for the taxable year is passive income, or (2) the average percentage of assets (as determined in accordance with subsection (e)) held by such corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50 percent.” IRC Section 1297(a). While many types of companies may unexpectedly be classified as PFICs by the IRS, foreign mutual funds seem to be the most common trap for the unwary U.S. taxpayers.

If a U.S. taxpayer has PFICs, he/she is required to file a separate Form 8621 “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund” for each PFIC.

FBAR PFIC Reporting: Three Potential FBAR Requirements

There are three most common situations when an FBAR should be filed for a PFIC, assuming the statutory aggregate threshold of $10,000 is satisfied. First, FBAR PFIC reporting is required if a PFIC is held in a financial account; in this case, FBAR PFIC reporting will occur for the account itself (which, in India especially, may correspond to the folio number of a PFIC in any case). For example, if a U.S. person has an Assurance Vie account in France that contains PFICs, he would have to report the Assurance Vie account on the FBAR, including the value of the PFICs.

Second, FBAR PFIC reporting is required if a PFIC shareholder has signature authority over foreign financial accounts owned by a PFIC. In this case, FBAR PFIC reporting will occur for these foreign financial accounts in Section IV of the FBAR.

Finally, the third most common situation where FBAR PFIC reporting is required is a scenario where a U.S. person owns more than 50% of a PFIC and this PFIC has foreign financial accounts. In such case, the U.S. person is assumed to have a financial interest in the foreign financial accounts of this PFIC and he needs to disclose these accounts on his FBAR.

FBAR PFIC Reporting: Filing Form 8621 does NOT Satisfy the FBAR Filing Requirement

It is important to emphasize that filing form 8621 for a PFIC does not relieve the filer from his FBAR obligations. Even if Form 8621 is filed, the filer must also file the FBAR.

Contact Sherayzen Law Office for Professional Help with FBAR PFIC Reporting

FBAR PFIC reporting can be extremely complex and it is very easy to make mistakes with respect to what needs to be disclosed and how. These mistakes, however, can be expensive to remedy and may result in imposition of various large penalties.

This is why, if you have PFICs that require FBAR and Form 8621 disclosure, you need to contact Sherayzen Law Office for professional help. Our team of experienced tax professionals will help you properly disclose your PFICs on your FBAR and report your PFIC income on your personal or business tax returns. If you have not complied with your FBAR PFIC reporting requirement in the past and wish to remedy this situation, Sherayzen Law Office will also help you with the voluntary disclosure of your FBARs and PFICs, including the preparation of all necessary tax forms and legal documents.

Contact Us Today to Schedule Your Confidential Consultation!