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FBAR Voluntary Disclosure | International Tax Lawyer & Attorney

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I often receive calls from prospective clients who talk about FBAR voluntary disclosure. They usually have no clear idea of what is meant by this term and what its requirements are. In this article, I will discuss this concept of FBAR Voluntary Disclosure and explain how this concept covers a variety of offshore voluntary disclosure options.

FBAR Voluntary Disclosure: What is FBAR?

Before we discuss the meaning of FBAR Voluntary Disclosure, we need to understand what “FBAR” is. FBAR is an acronym for Report of Foreign Bank and Financial Accounts, officially known as FinCEN Form 114. US Persons must file FBAR to report their financial interest in or signatory authority or any other authority over foreign bank and financial accounts if the aggregate value of these accounts exceeds $10,000 at any point during a calendar year.

FBAR Voluntary Disclosure: Why FBAR Compliance Is So Important?

US taxpayers who fail to comply with their FBAR obligations may find themselves in an extremely difficult legal position, because FBAR has a highly complex and an exceptionally severe penalty system, which includes even criminal penalties for FBAR noncompliance. The form’s civil penalties include not only willful penalties, but also non-willful penalties – i.e. the IRS can assess FBAR penalties even if a taxpayer’s failure to file his FBARs was unintentional and accidental.

FBAR Voluntary Disclosure: What is Voluntary Disclosure?

“Voluntary disclosure” is a process by which taxpayers voluntarily self-correct their past noncompliance. When this process involves foreign assets, it is called “offshore voluntary disclosure”.

FBAR Voluntary Disclosure: Offshore Voluntary Disclosure Options (Tax Year 2020)

The IRS has created a number of voluntary disclosure programs to encourage taxpayers to come forward and correct their past US tax noncompliance. These offshore voluntary disclosure options include: Streamlined Domestic Offshore Procedures, Streamlined Foreign Offshore Procedures, Delinquent FBAR Submission Procedures, Delinquent International Information Return Submission Procedures (effectively discontinued several weeks ago), IRS Criminal Investigation Voluntary Disclosure Practice (used to be called “Traditional IRS Voluntary Disclosure”) and the now-closed OVDP (Offshore Voluntary Disclosure Process) and OVDI (Offshore Voluntary Disclosure Initiative).

Moreover, there is also a voluntary disclosure based on Reasonable Cause exception that is sometimes called “noisy disclosure”. This is not an official IRS voluntary disclosure program, but simply a voluntary disclosure venue based on specific provisions in the Internal Revenue Code.

Finally, some taxpayers attempt to do “quiet disclosures”. A quiet disclosure can mean a range of actions voluntarily taken by a taxpayer to comply with US international tax laws without officially informing the IRS about his past noncompliance with them. In other words, a taxpayer never takes advantage of any of the voluntary disclosure options and does not claim Reasonable Cause Exception defense; rather, he either files amended tax returns or simply starts to comply with US international tax laws without doing anything about his past noncompliance.

The IRS strongly disfavors quiet disclosures and does not consider them to be voluntary disclosures. In fact, the IRS has officially stated that the agency will try to identify the taxpayers who are doing it and audit them in order to impose penalties for past noncompliance.

FBAR Voluntary Disclosure Versus Offshore Voluntary Disclosure

You probably already noticed that I never listed “FBAR Voluntary Disclosure” as a voluntary disclosure option. The reason is because it is not an official voluntary disclosure option. Rather, FBAR Voluntary Disclosure is merely a term that refers to any offshore voluntary disclosure option involving past FBAR noncompliance (such as Streamlined Domestic Offshore Procedures).

Hence, when a prospective client calls me to discuss his FBAR voluntary disclosure, I know that he does not mean any specific offshore voluntary disclosure program but merely wishes to know what option he should use to voluntarily correct his past FBAR noncompliance.

Contact Sherayzen Law Office About Your FBAR Voluntary Disclosure

If you have not filed your required FBARs for prior years, you should contact Sherayzen Law Office as soon as possible. Sherayzen Law Office is a leader in offshore voluntary disclosures involving FBARs – this is our core specialty.

We have filed thousands of FBARs for hundreds of clients all over the world. We have prepared hundreds of voluntary disclosures under all offshore voluntary disclosure options, including Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

FBAR Financial Interest Definition | FBAR International Tax Lawyer & Attorney | FinCEN Form 114

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In this article, I discuss one of the most important aspects of FBAR compliance – the FBAR financial interest definition.

FBAR Financial Interest: Legal Relevance and Context

FBAR is the acronym for the Report of Foreign Bank and Financial Accounts, FinCEN Form 114. A US person who has a financial interest in foreign bank and financial accounts must file FBARs to report these accounts as long as their aggregate value exceeds the FBAR filing threshold. The key issue here is the definition of “financial interest” for FBAR purposes.

FBAR Financial Interest: Classification of Financial Interest

As I just stated, the FBAR financial interest definition describes a situation when a US person has a “financial interest” in a foreign account. It turns out that there are six possible situations when a US person may have a financial interest in a foreign account.

These situations can be divided into three categories: direct ownership, indirect ownership and constructive ownership. Let’s explore them in more detail.

FBAR Financial Interest: Direct Ownership

A US person has a financial interest in a foreign account if he is the owner of record or holder of legal title for this account. It does not matter whether he maintains the account for his own benefit or for the benefit of another person (US or foreign). As long as he is the owner of the account, he has a financial interest in the account and must file an FBAR to report it if the account’s highest value (together with all other foreign accounts of this person) exceeds $10,000.

FBAR Financial Interest: Indirect Ownership

There are four different scenarios which may result in having a reportable indirect FBAR financial interest in a foreign account:

1. Indirect Ownership Through a Corporation

A US person has a financial interest in a foreign account if the owner of record of holder of legal title is a corporation in which a US person owns directly or indirectly: (i) more than 50 percent of the total value of shares of stock; or (ii) more than 50 percent of the voting power of all shares of stock.

This means that, if a US corporation owns a foreign company which has a foreign account, then this US corporation has a financial interest in this account through its direct ownership of the foreign company. In other words, the US corporation will need to file an FBAR for the foreign company’s foreign bank and financial accounts.

One of the most frequent sources of FBAR noncompliance, however, is with respect to indirect ownership of the foreign account by the owners of a US corporation. For example, if a Nevada corporation owns 100% of a French corporation and a US owner owns 51% of the US corporation, then, the US owner must disclose on his FBAR his financial interest in the French corporation’s foreign accounts. This financial interest is acquired through indirect 51% ownership of the French corporation.

2. Indirect Ownership Through a Partnership

This scenario is very similar to that of corporations. A US person has a financial interest in a foreign account if the owner of record or holder of legal title is a partnership in which the US person owns directly or indirectly: (i) an interest in more than 50 percent of the partnership’s profits (distributive share of partnership income taking into account any special allocation agreement); or (ii) an interest in more than 50 percent of the partnership capital.

3. Indirect Ownership Through a Trust

This is a more complex category which includes two scenarios. First, a US person has a financial interest in a foreign account if the owner of record or holder of legal title is a trust and this US person is the trust grantor who has an ownership interest in the trust under the 26 U.S.C. §§ 671-679.

Second, a US person has a financial interest in a foreign account if the owner of record or holder of legal title is a trust in which the US person has a greater than fifty percent (50%) beneficial interest in the assets or income of the trust for the calendar year. This second scenario is a true FBAR trap for US taxpayers, because while grantors may anticipate their FBAR requirements, beneficiaries are usually completely oblivious to this requirement.

This category of FBAR financial interest definition is even more complicated by the fact that it requires a very nuanced understanding of US property law and FBAR regulations. For example, how many taxpayers can answer this question: if a US person has a remainder interest in a trust that has a foreign financial account, should he disclose this account on his FBAR?

4. Indirect Ownership Through Any Other Entity

This a “catch-all” category of indirect FBAR financial interest definition. If a situation does not fall within any of the aforementioned categories, a US person still has a financial interest in a foreign account if the owner of record or holder of legal title is any other entity in which the US person owns directly or indirectly more than 50% of the voting power, more than 50% of the total value of equity interest or assets, or more than 50% of interest in profits.

FBAR Financial Interest: Constructive Ownership

This is a very dangerous category of FBAR financial interest definition, because, in the event of an unfavorable determination by the IRS, it may have highly unfavorable consequences, including the imposition of FBAR willful penalties and even FBAR criminal penalties. A US person has a financial interest in a foreign account if the owner of record or holder of legal title is a person who acts on behalf of the US person with respect to the account. Various classes of persons fall under this description: agents, nominees and even attorneys.

This category of FBAR financial interest definition targets situations where a US person is trying to hold his money under the name of a third party. It is not easy, however, to determine whether the foreign person is holding this money on behalf of the US person.

The key consideration here is the degree of control that the US person exercises over the account. If the agent can only access the account in accordance with the instructions from the US person, if there is an understanding that the agent holds the account on behalf of the US person and if the agent does not independently distribute funds for his own needs, then the IRS is likely to find that the US person has a financial interest in the account for FBAR purposes.

On the other hand, if the account owner uses the funds for his own purposes and makes gifts to third parties, the situation becomes increasingly unclear. In this case, one has to retain an international tax attorney to analyze all facts and circumstances, including the origin of funds.

Contact Sherayzen Law Office for FBAR Help, Including the Determination of FBAR Financial Interest in a Foreign Account

FBAR is a very dangerous form. FBAR noncompliance penalties are truly draconian. They range from FBAR criminal penalties (of up to ten years in prison) to civil FBAR willful penalties (with 50% of the account or $100,000 (adjusted for inflation) whichever is higher) and even civil FBAR non-willful penalties of up to $10,000 (adjusted for inflation) per account per year. FBAR’s unusual Statute of Limitation of six years also means that the IRS has an unusually long period of time to assess these penalties.

This is why, if you have foreign bank and financial accounts, contact Sherayzen Law Office for professional help. We are a highly-experienced international tax law firm that specialized in US international tax compliance and offshore voluntary disclosures (including for prior FBAR noncompliance). We have helped hundreds of US taxpayers around the world, and We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

FBAR Criminal Prosecution and Smaller Banks: The Case of Wegelin

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On January 3, 2013, Wegelin & Co., the oldest Swiss private bank announced that it will close down following its guilty plea to criminal charges of conspiracy to help wealthy U.S. taxpayers evade taxes through secret financial accounts. The guilty plea and the closure of one of the most prestigious European banks that served its clients since the year 1741 constitute big victories for the U.S. authorities. It surely will inspire additional movement of non-compliant U.S. taxpayers into the 2012 OVDP (Offshore Voluntary Disclosure Program) as well as ensure more widespread compliance with the FBAR, Form 8938 and other numerous international tax forms required by the IRS.

However, in addition to its significance to U.S. tax compliance, the Wegelin case also has other interesting features that may point to future trends in the IRS international tax enforcement. In this article, I will outline these trends and explore their potential implications for U.S. tax enforcement.

Jurisdiction to Prosecute Foreign Banks: Minimal Contact Will Suffice

In order to criminally charge a foreign bank, U.S. tax authorities need to establish some connection between the United States and the foreign bank. It appears that after the Wegelin case, proving U.S. exposure will not a be a significant problem for the IRS.

The main reason for Wegelin’s bold defiant behavior (Wegelin specifically advertised itself as a safe, tax-free alternative to U.S. taxpayers who were fleeing UBS after criminal prosecution charges were filed against UBS in 2008) was its deep belief that it cannot be criminally prosecuted in the United States because U.S. tax authorities have no jurisdiction over it. Unlike UBS, Wegelin had virtually no physical presence in the United States, no operating divisions and no branch offices in the United States.

However, Wegelin miscalculated. The IRS discovered that Wegelin did have presence in the United States because it “directly accessed” the U.S. banking system through a correspondent account that it held at UBS AG (“UBS”) in Stamford, Connecticut. The Justice Department successfully argued that this one correspondent account was sufficient to give the United States government the jurisdiction to criminally charge Wegelin.

Hence, one of the biggest consequences of the Wegelin case is that it will not be difficult for the U.S. tax authorities to establish jurisdiction to criminally charge foreign banks even with very insignificant presence in the United States.

Size Matters: Increased Risk for Smaller Banks

The other important lesson of the Wegelin case is that it appears that the IRS is more likely to aggressively pursue smaller banks than the bigger banks the demise of which can cause systemic instability in the world economy.

The collapse of Wegelin stands in stark contrast to the survival of its bigger Swiss rival, UBS. UBS offered pretty much the same services to U.S. taxpayers as Wegelin involving vastly larger number of U.S. persons and amounts of money (at the very least, 20 billion dollars versus Wegelin’s 1.2 billion dollars). The IRS did file criminal charges against UBS, but UBS entered into a deferred prosecution agreement and charges were dropped eighteen months later.

It could be that some of the aggressiveness of the U.S. government came precisely from Wegelin’s defiant stance. In order to reinforce its recent victory in the UBS case, the IRS had to adopt a more assertive stand. However, it did not necessarily have to end in Wegelin’s demise.

Some commentators argued that Wegelin was already a shadow of its former self at the time of its closure, because it aggressively sold-off all of its non-US related assets. Therefore, it may be argued that it is premature to draw general conclusions from the Wegelin’s case about the risks facing small foreign banks who find themselves indicted by the U.S. government. On the other hand, the very fact that Wegelin decided that it would be better for the bank to sell off its assets rather than fight the IRS and the fact that the U.S. government was not concerned about this decision do point to a conclusion that the Wegelin case may be demonstrative of the general vulnerability of smaller banks in such situations.

Unresolved Issues: Client Information and Sold-Off Practice

One of the most important issues, however, is still unresolved in the Wegelin case and makes it worthwhile to observe to its end. The issue is: will the bank disclose the names of its U.S. clients to the IRS?

Typically, disclosure of the names of U.S. taxpayers constitutes a key request by the IRS in such major investigations. Therefore, it does not seem likely that the IRS will simply leave this issue without at least attempting to obtain the names of non-compliant U.S. taxpayers as part of the final deal.

The other unresolved issue is whether a strategy similar to Wegelin’s sale of its non-US accounts to the Austrian Bank Raiffeisen just before the indictment is going to challenged by the IRS if the sale does involve U.S. clients and maybe even if it does not (especially where the bank is left without any assets). It is not known if we are going to get an answer at this time, but it is likely that this issue will show up again in a future case.

Contact Sherayzen Law Office for Help With Voluntary Disclosure of Foreign Financial Accounts

If you have undisclosed offshore accounts (whether in the hard-hit Switzerland or any other country) , you should contact Sherayzen Law Office as soon as possible to explore the voluntary disclosure options available in your case. Our experienced voluntary disclosure firm will thoroughly review your case, explore available options, propose a definite plan for moving forward, prepare all of the necessary legal documents and tax forms, and guide you though the entire case while rigorously representing your interests in your negotiations with the IRS.