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

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 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 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 the 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, you should 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 Maximum Account Value Determination | FBAR Tax Lawyer & Attorney

Determination of the FBAR maximum account value is a problem with which every FBAR filer has to deal. In this article, I would like to provide the main guidelines for the determination of the FBAR maximum account value.

FBAR Maximum Account Value Determination: Background Information

The Report of Foreign Bank and Financial Accounts or FBAR requires each filer to disclose his financial interest in or signatory authority or any other authority over foreign bank and financial accounts to the IRS. As part of this disclosure, the filer must calculate and report the maximum account value for each of his foreign accounts on his FBAR.

FBAR Maximum Account Value Determination: Definition of Highest Value

FinCEN defines the maximum value of an account for FBAR purposes as “a reasonable approximation of the greatest value of currency or nonmonetary assets in the account during the calendar year.” In other words, the IRS does not expect you to always get the highest possible value. A reasonable approximation of this value will do if the exact highest value is not possible to determine.

FBAR Maximum Account Value Determination: Usual Problems

There are two main problems that each FBAR filer faces whenever he tries to identify the maximum account value for FBAR purposes. The first and most obvious problem is the determination of the highest account value. How does one determine the highest value for a bank account? What about a securities account where stocks fluctuate all the time? What about a precious metals account which has investments in different precious metals?

Second, FBAR requires that all amounts be stated in US dollars. Hence, an issue arises with respect to proper currency conversion – i.e. what is the proper currency exchange rate? Should the spot rates be used? Or December 31 exchange rates?

Let’s discuss each of these problems in more depth.

FBAR Maximum Account Value Determination: Methodology

Determination of maximum account value depends to a certain degree on the type of an account for which the filer is trying to determine this value. There is no question that, with respect to checking and savings bank accounts, the IRS wants you to use the full-year statements to determine the day on which the highest value was achieved for each of these accounts. This is a simple and effective method.

Determining the maximum value of a securities account is much harder, because securities fluctuate on a daily basis. For this reason, the IRS allows you to rely on periodic account statements to make this determination, especially end-of-year statements. This method is allowed only as long as the statements fairly approximate the maximum value during the calendar year.

Even this method, however, is often insufficient when one deals with mixed-currency accounts, mixed-investment accounts, mixed-metal accounts, et cetera. These situations should be handled on a case-by-case basis by your international tax attorney.

Let’s illustrate the complexity of the issues involved here by a relatively simple example. Generally, an end-of-year statement for an investment account is a good approximation of the maximum value of the account. If, however, there was a withdrawal of funds from the account following a major sale of investments, then the end-of-year statement cannot be relied upon. Instead, one should try a different method to approximate the highest value. One possibility is to use a reliable and known financial website for valuing the remaining assets on the date of the sale plus the proceeds from the sale of investments. The method, however, may fail if the highest value of investments was at the beginning of the year, not the date of sale.

FBAR Maximum Account Value Determination: Currency Conversion

Unlike the identification of the highest account value with its various complications, the currency conversation part of the FBAR maximum account value determination is fairly straightforward. All filers must use the end-of-year FBAR rates published by the Treasury Department. These rates are officially called “Treasury Financial Management Service rates”, but they are commonly called “FBAR rates” by US international tax lawyers. The FBAR rates are division rates, not the multiplication ones. This is standard in US international tax law.

Hence, for the currency conversion purposes, you need to identify the currency in which your account is nominated, find the appropriate FBAR conversion rate for the relevant year and divide your highest balance by the relevant FBAR rate. For your convenience, Sherayzen Law Office also publishes FBAR rates on its website.

Contact Sherayzen Law Office for Professional Help With Your FBAR Preparation

If you are required to file FBARs, contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers to comply with their FBAR obligations, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Disregarded Entity FBAR Obligations | FBAR Tax Lawyer & Attorney Houston

As an FBAR tax lawyer & attorney, I can see that one of the most common tax compliance mistakes made by US taxpayers is ignoring their disregarded entity FBAR obligations. These taxpayers believe that, since disregarded entities are ignored for tax purposes, these entities do not need to file any FBARs. In this article, I will explain why this view is completely false and how US taxpayers should comply with their disregarded entity FBAR obligations.

Disregarded Entity FBAR Obligations: What Are Disregarded Business Entities?

Under US tax law, certain juridical persons are disregarded for tax purposes. In other words, an entity is not recognized for tax purposes as something separate from its owner; the owner and the entity are merged into one tax person for tax purposes.

A disregarded entity may have only one owner. If there is more than one owner, then the entity is treated as a partnership for US tax purposes (unless it elects to be treated as a corporation).

A disregarded entity does not file its own tax return. Rather its owner reports all of the entity’s income and expense items on the owner’s tax return.

It is important, however, that one does not confuse the tax and legal treatment of a disregarded entity. Despite being ignored for tax purposes, a disregarded entity continues to exist legally. In other words, for all legal purposes, it is a separate juridical person with its own legal rights and obligations.

The most typical example of a disregarded entity is a single-member limited liability company (“SMLLC”). Another prominent example is a grantor trust.

Disregarded Entity FBAR Obligations: Required FBAR Compliance

A US disregarded entity must file an FBAR if it has a financial interest in or signatory authority or any other authority over foreign bank and financial accounts the highest aggregate value of which exceeds $10,000 at any point during the relevant calendar year.

FBAR is not filed with a US tax return. Hence, disregarded entities must file FBARs even though they do not file US tax returns. Taxpayers need to make sure to obtain an EIN number for their disregarded entities.

It is important to emphasize that all FBARs of disregarded entities are filed under the names of these entities, not their owners or managers. In other words, if a grantor trust files an FBAR, the trustee will sign FBAR which is officially filed in the name of the grantor trust.

Also note that I stated that a “US disregarded entity” must file an FBAR. A foreign disregarded entity does not need to file an FBAR (though, its US owner will have to do it under the FBAR rules).

Disregarded Entity FBAR Obligations: FBAR is not a Tax Requirement

Why is it that a disregarded entity has to file FBARs if it is disregarded for tax purposes? The answer to this question requires us to look into the legislative origin of FBAR.

The key to understanding why a disregarded entity has to file FBARs is the fact that FBAR is not part of the Internal Revenue Code (“IRC”). In other words, FBAR is not a tax form. FBAR is a creation of the Bank Secrecy Act and belongs to Title 31 (IRC is Title 26) of the United States Code.

As I stated above, a disregarded entity is ignored only for tax purposes, but it continues to exist for legal purposes. Hence, for FBAR purposes, the entity is not disregarded but continues to exist as a separate juridical person with its own legal compliance duties, including FBAR obligations.

Disregarded Entity FBAR Obligations: Why IRS Enforces FBAR Compliance

There is one more issue we need to clarify: if FBAR is not part of the IRC, why is the IRS agency in charge of enforcing it? The answer to this question also lies in FBAR’s history (now, the readers can appreciate why I insist that an international tax attorney should know the legal history of different legal and tax requirements).

Prior to the 9/11 terrorist attacks, the IRS was not in charge of enforcing FBAR compliance. Instead, for many years prior to 2001, FinCEN (the Financial Crimes Enforcement Network) was in charge of FBAR.

Why? The answer is simple: the original purpose of FBAR was not to fight tax noncompliance; it was not created as a tax form. Rather, FBAR was a tool to fight financial crimes, such as money laundering and terrorist financing. This fell straight within the competence of FinCEN.

In 2001, however, the US Congress turned over the function of enforcing FBAR compliance to the IRS (technically, FinCEN delegated the enforcement of FBAR to the IRS). The IRS almost immediately shifted the focus of FBAR from financial crimes to international tax enforcement.

Disregarded Entity FBAR Obligations: Frequent FBAR Violations

FBAR compliance is miserably low among disregarded entities. The main reason for so many FBAR violations is the fact that most taxpayers are completely unaware of the legal analysis of FBAR which I have set forth above. As I stated above, they incorrectly believe that FBAR is a tax form and, since disregarded entities are ignored for tax purposes, these entities do not or did not file FBARs. Unfortunately, even these non-willful situations may lead to the imposition of substantial FBAR penalties.

Contact Sherayzen Law Office for Professional Help with Your Disregarded Entity FBAR Obligations

In order to avoid these FBAR penalties and ensure proper tax compliance, you should contact Sherayzen Law Office for professional help with your disregarded entity FBAR obligations. Sherayzen Law Office has filed FBARs for every type of a disregarded entity. If your entity has not filed FBARs in the past, but it was required to do so, Sherayzen Law Office can also help you determine the best offshore voluntary disclosure option for your entity and do all of the work necessary to bring you and your entities into full compliance with US tax laws. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

FinCEN Form 114 Filers | FBAR Tax Lawyer & Attorney Minnesota Minneapolis

The Report of Foreign Bank and Financial Accounts, FinCEN Form 114 (a/k/a FBAR) is arguably the most important information return concerning foreign accounts. Its importance stems first and foremost from the extremely severe Form 114 penalties, which range from criminal penalties of up to 10 years in prison to willful and even non-willful penalties that may exceed the value of the penalized accounts. Given these penalties, it is important to understand who the FinCEN Form 114 filers are – i.e. who is required to file Form 114?

For today’s purposes, I will concentrate only on the individual FinCEN Form 114 filers.

FinCEN Form 114 Filers: General Definition

At the center of the definition of FBAR filer is a United States person (“US person”). A US person must file FinCEN Form 114 if he has a financial interest in or signatory authority or any other authority over any foreign financial accounts and the aggregate maximum value of these accounts exceeds $10,000 at any time during the calendar year.

FinCEN Form 114 Filers: Main Categories of US Persons

Under the 31 CFR 1010.350(b), the definition of a US Person is very specific and consists of five main categories: (1) a citizen of the United States; (2) a resident of the United States; (3) an entity created or organized in the United States or under the laws of the United States; (4) a trust formed under the laws of the United States; and (5) an estate formed under the laws of the United States. As I stated above, today, I will focus only on categories 1 and 2; I will deal with business, trust and estate FinCEN Form 114 filers in other articles.

FinCEN Form 114 Filers: US Citizens

This is by far the easiest category of FinCEN Form 114 filers to analyze. If an individual is a US citizen and has foreign accounts that exceed the filing threshold, then, he must file Form 114.

FinCEN Form 114 Filers: Definition of “Residents of the United States”

In the context of FBAR compliance, a “resident of the United States” has a special meaning which corresponds for the most part, but not exactly, to the US income tax definition of a tax resident. There are three distinct categories of individuals who fall within the definition of a “resident of the United States” for FBAR purposes: US permanent residents, persons who satisfy the Substantial Presence Test, and certain non-resident aliens who make the first-year election to be treated as US tax residents. Additionally, Internal Revenue Code (“IRC”) §7701(b)(2) contains a number of provisions that regulate when individuals are considered to be US residents for FBAR (as well as income tax) purposes during the first-year and the last-year of residency.

FinCEN Form 114 Filers: US Permanent Residents

The first category of residents of the United States is not complex. All US Permanent are US persons and, if they have foreign accounts that exceed the FBAR filing threshold, also FinCEN Form 114 filers.

FinCEN Form 114 Filers: Substantial Presence Test

The second category of residents of the United States for FBAR purposes are the individuals who satisfied the Substantial Presence Test described in IRC §7701(b)(3). Under the Substantial Presence Test, an individual is a US person if: (1) he was present in the United States (as defined under 31 CFR 1010.100(hhh)) for at least 31 days during the calendar year in question; and (2) the sum of the number of days on which such individual was present in the United States during the current year and the two preceding calendar years equals or exceeds 183 days. The amount of days in the two preceding years should multiplied by the applicable multiplier as follows: first preceding year – one-third; second preceding year – one-sixth.

For example, if we are trying to determine the tax residency for the tax year 2019, we will take all the sum of the days an individual was physically present in the United States in 2019, one-third of the days in 2018 and one-sixth of the days in 2017. If the total amount equals or exceeds 183 days, then this individual is a US person for FBAR purposes.

It should be pointed out that this is the general rule. There are numerous exceptions to the Substantial Present Test, including the famous “closer connection exception” and certain visa exemptions. Hence, you should retain an international tax attorney to analyze your specific set of facts in order to determine whether you should be considered a US person for FBAR purposes.

FinCEN Form 114 Filers: First-Year Residency Election

The third category of residents of the United States for FBAR purposes includes all individuals who made a first-year election on their US tax returns to be treated as residents pursuant to IRC §7701(b)(4). Generally, we are talking about a situation where a person does not have a green card, does not meet the Substantial Presence Test and comes sometime during a year. In other words, this person is not a US person under any other category, but decides to make an election to be treated as a US tax resident.

In order to make this election, the person must satisfy certain requirements outlined in IRC §7701(b)(4). Failure to meet any of these requirements will result in a person becoming a non-resident alien for the entire year.

It is also important not to confuse the IRC §7701(b)(4) election with the IRC §6013(g) or (h) election. In the latter cases, the elections do not affect the residency status for FBAR purposes.

FinCEN Form 114 Filers: First- and Last-Year Residency Provisions of IRC §7701(b)(2)

IRC §7701(b)(2) is not technically a fourth category of a resident of the United States. Rather, this section regulates when US residency actually starts or ends once it is acquired or lost under other categories. Nevertheless, it is important to understand and be aware of these provisions.

FinCEN Form 114 Filers: Tax Treaties & FBAR Residency Status

Most tax treaties contain what are known as “tie-breaker provisions” for determining a person’s tax residency. Sometimes, a person can use these provisions to escape the income tax residency rules. The IRS has specifically stated that, as long as one of the residency test of IRC §7701(b) is met, the tax treaty non-residency determination does not affect the residency status of a person for FBAR purposes.

Contact Sherayzen Law Office for the Determination of Whether You and Your Family Should Be Considered FinCEN Form 114 Filers

If you have foreign bank accounts, you should contact Sherayzen Law Office for professional help concerning whether you need to file an FBAR. Sherayzen Law Office is a highly-experienced international tax law firm which has helped hundreds of US taxpayers with their FBAR issues. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

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.