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!

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FBAR Criminal Prosecution and Smaller Banks: The Case of Wegelin

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.

FBAR: Reporting Foreign PayPal Accounts

Whether an account is reportable for FBAR purposes can sometimes be a relatively complicated question. It is true that it is easy to see that a foreign bank and investment accounts should be reported on the FBAR as long as all other requirements are met. It is also well-established that a gold bullion account is reportable for FBAR purposes.

What about foreign PayPal accounts? This question has arisen in the past with some of my clients. On the other one hand, PayPal describes itself as a payment system; on the other hand, the account holder does own the funds within the account – i.e. the account holder has a present-interest value on the account that can be easily withdrawn from the account.

This is why the IRS considers a foreign PayPal account as a reportable account for the FBAR purposes. In fact, whenever I asked the IRS this question with respect to my clients, this determination has been confirmed by the IRS.

Contact Sherayzen Law Office For Help With FBAR Issues

If you have any questions with respect to the FBAR, you want to find out whether you have reportable accounts, or you wish to file your delinquent FBARs and you do not know how to approach it correctly, contact Sherayzen Law Office for legal assistance. Our experienced FBAR tax firm will help you deal with all of your FBAR issues in a professional, efficient, and effective manner.