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Usefulness of FBARs for the IRS and DOJ | International Tax Law Firm

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The usefulness of FBARs for the U.S. tax enforcement agencies may seem to be an odd issue, but, in reality, it concerns every taxpayer with foreign bank and financial accounts. Why the FBAR is important and how the IRS and the U.S. Department of Justice (“DOJ”) utilize it in their prosecution tactics is the subject of this essay.

Two Periods of the Usefulness of FBARs

In describing the usefulness of FBARs, one can distinguish two distinct periods of time. The first period lasted from the time FBAR came into existence in the 1970s through most of the year 2001. It is definitely a simplification to place this entire period of time into one category, but this simplification is intentional in order to contrast this first period of usefulness of FBARs with the second one.

The second period commenced right after the FBAR enforcement function was turned over to the IRS in 2001 and it continues through the present time. In this period of time, the usefulness of FBARs was expanded to a completely different level. It is important to point out, however, that it has not lost its original usefulness that dominated the first period of time of its existence.

Usefulness of FBARs Prior to 2001

Prior to 2001, the main purpose of FBAR had been the enforcement leverage in prosecution of financial crimes. This leverage came from the draconian FBAR penalties which often would offer a worse outcome than the statute associated with a criminal activity (especially after a plea deal). Moreover, it was much easier for prosecutors to establish an FBAR violation (any failure to report a foreign account on the FBAR would do) than to prove specific criminal activity.

The usage of FBAR prosecutions was particularly useful in money laundering cases where it was difficult to prove specified unlawful activities and certain criminal tax cases where it was difficult to establish the receipt of illicit income. In such criminal cases, instead of charging criminals solely with tax evasion or money laundering activities, the prosecutors would opt for charging the criminals with a (willful and/or criminal) failure to file an FBAR that occurred while the defendants engaged in a criminal activity. It was easier to get a plea deal this way, because, obviously, criminals would not report the foreign accounts used in a criminal activity on FBARs.

Why was the usefulness of FBARs limited to being an enforcement leverage; in other words, why were FBARs not used for collection of data? After all, FBAR was born out of the Bank Secrecy Act and its stated purpose was to collect data with respect to foreign bank and financial accounts owed by US persons.

The answer is fairly simple – there was no third-party verification mechanism for the data submitted on FBARs. In other words, the FBAR reporting was completely dependent on honest self-reporting (in fact, this is one of the reasons for the creation of FATCA) and, unless, an investigation was conducted with respect to a specific individual, there was no direct way for FinCEN to corroborate the information submitted on FBARs.

It is important to emphasize that, in this first period of its existence, the usefulness of FBARs was primarily non-tax in nature. It was not until after September 11, 2001, that FBAR commenced to acquire a new level of usefulness with which we are familiar today.

Usefulness of FBARs After 2001

The usefulness of FBARs underwent a tremendous change after the September 11, 2001 terrorist attacks in the United States. Soon after the 9/11 attacks, the enforcement of FBARs was taken away from FinCEN and given to the IRS.

The IRS decided to shift the scope of the usefulness of FBARs from financial crimes to tax evasion. The Congress wholeheartedly agreed and further expanded the already-severe FBAR penalties in the American Jobs Creation Act of 2004 to their current draconian state. From that point on, FBAR became the top international tax compliance enforcement mechanism for the IRS.

The potential FBAR penalties were so extreme that even non-willful taxpayers preferred to enter the IRS Offshore Voluntary Disclosure Program (and, later, Streamlined Compliance Procedures) and pay the appropriate Offshore Penalties rather than to directly confront the potential consequences of FBAR noncompliance. In other words, the usefulness of FBARs expanded further to indirect tax enforcement.

Furthermore, the UBS case victory in 2008 and the enaction of FATCA in 2010 meant that the IRS could now obtain FBAR-required information from third parties (foreign financial institutions) and verify a taxpayer’s compliance with the FBAR requirements. This further reinforced the FBARs already dominant position in US international tax compliance.

This FBARs dominance in the tax enforcement with respect to foreign accounts continues even today despite the appearance of a rival – Form 8938 (born out of FATCA). While Form 8938 has a broader scope of reportable assets, its penalty structure is highly inferior to the terrifying FBAR penalties.

Contact Sherayzen Law Office for Help with FBAR Compliance

If you have foreign bank and financial accounts that were not disclosed on FBARs as required, you should contact Sherayzen Law Office, Ltd. as soon as possible. Sherayzen Law Office is an experienced international tax law firm that has helped hundreds of US taxpayers with their delinquent FBARs, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

FBAR and Form 8938 Filings Continue to Grow

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On March 15, 2016, the IRS announced that there was continuous growth in the FBAR and Form 8938 filings. While the IRS attributes this growth in FBAR and Form 8938 filings to the greater awareness of taxpayers, one cannot underestimate the impact of the FATCA letter and the increasing knowledge of foreign financial institutions with respect to U.S. tax reporting requirements.

Background Information for the FBAR and Form 8938 Filings

FBAR and Form 8938 are the main forms with respect to reporting of foreign financial accounts and (in the case of Form 8938) “other specified assets”. The Report of Foreign Bank and Financial Accounts, FinCEN Form 114 (commonly known as “FBAR”) should be filed by U.S. taxpayers to report a financial interest in or signatory authority over foreign financial accounts if the aggregate value of these accounts exceeds $10,000. This form is associated with draconian noncompliance penalties.

IRS Form 8938 was created by the famous Foreign Account Tax Compliance Act (“FATCA”). Generally, U.S. citizens, resident aliens and certain non-resident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds the required thresholds (the lowest threshold is $50,000, but it varies by taxpayer). The noncompliance with respect to Form 8938 may result in additional penalties, including $10,000 per form.

IRS Registers Sustained Increase in the FBAR and Form 8938 Filings

Compliance with FBAR and, later, Form 8938 is one of the top priorities for the IRS according to the IRS Commissioner John Koskinen. Recent statistics with respect to the FBAR and Form 8938 filings support the conclusion that the IRS has been largely successful in achieving this task.

The IRS states that the FBAR filings have grown on average by 17 percent per year during the last five years, according to FinCEN data. In fact, in 2015, FinCEN received a record high 1,163,229 FBARs.

Similar, but far less successful trends can be seen with respect to Form 8938 filings. In 2011, the IRS received about 200,000 Forms 8938, but the number rose to 300,000 by the tax year 2013. However, it seems to have stagnated at the same number judging from the statistics for the tax year 2014.

While the lower number of Forms 8938 could be explained by the novelty of the form as well as higher thresholds, it appears that some Forms 8938 might not also be filed due to mistaken calculation of the asset base used to determine whether Form 8938 filing requirements were met.

Nevertheless, overall, it appears that the FBAR and Form 8938 filings have grown sufficiently for the IRS to be satisfied with its progress.

Contact Sherayzen Law Office for Professional Help with Your FBAR and Form 8938 Filings

U.S. international tax law is incredibly complex and the penalties are excessively high. If you were supposed to file FBARs and Forms 8938 in the past, but you have not done so, you need to contact Sherayzen Law Office as soon as possible. Mr. Sherayzen and his legal team will thoroughly analyze your case, assess your potential tax liabilities, determine the available voluntary disclosure options, and implement (including the preparation of all legal documents and tax forms) the voluntary disclosure option that fits your case best.

Contact Us Today to Schedule Your Confidential Consultation!

2012 FBAR is Due on June 30, 2013

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One of the most important tax compliance forms for businesses and individuals is the Report of Foreign Bank and Financial Accounts (the “FBAR”), FinCEN Form 114 Formerly TD F 90-22.1. Pursuant to the Bank Secrecy Act, 31 U.S.C. §5311 et seq., the Department of Treasury (the “DOT”) has established certain recordkeeping and filing requirements for United States persons with financial interests in or signature authority (and other comparable authority) over financial accounts maintained with financial institutions in foreign countries. If the aggregate balances of such foreign accounts exceed $10,000 at any time during the relevant year, the FBAR must be filed with the DOT.

The FBAR must be filed by June 30 of each relevant year, including this year (2013). Thus, the 2012 FBAR must be received by the DOT by June 30, 2013. This rule is contrary to your regular tax returns where the mailing date determines whether the filing is timely. There are no extensions available – the FBAR must be received by June 30 or it will be considered delinquent.

If the FBAR becomes delinquent, it may be subject to severe penalties.

Contact Sherayzen Law Office for FBAR Assistance

If you have any questions or concerns regarding whether you need to file the FBAR or how to prepare the form, please contact Sherayzen Law Office directly. If you have not previous filed the FBARs and you were required to do so, you may be subject to severe penalties and you may need to do some form of a voluntary disclosure. In such case, you need to contact our experienced international tax attorneys to schedule a consultation as soon as possible. Attorney Eugene Sherayzen will assess your situation, determine your potential FBAR liability, explain the available options, prepare all of the required tax forms and the necessary legal documentation, guide you through this complex process of voluntary disclosure, and vigorously represent your interests during your negotiations with the IRS.