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Disregarded Entity FBAR Obligations | FBAR Tax Lawyer & Attorney Houston

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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 and FBAR Are the Same Form | FBAR Tax Lawyers

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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.

OVDP Closure Sets the Stage for a Dramatic Increase in IRS FBAR Audits

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There has been virtually no discussion of the impact of the OVDP closure beyond how it affects the ability of willful taxpayers to settle their past noncompliance. This is very unfortunate, because there is a direct correlation between OVDP and IRS tax enforcement activities. In this article, I will discuss how the OVPD closure sets the stage for a dramatic increase in the IRS FBAR Audits as well as IRS audits of other US taxpayers with international tax exposure.

The Utility of the OVDP Program Prior to the OVDP Closure

The IRS flagship 2014 Offshore Voluntary Disclosure Program served various purposes prior to its closure on September 28, 2018. Let’s concentrate on its two most important roles.

First and foremost, it was an important information-gathering tool for the IRS. The taxpayers who participated in the OVDP disclosed not only their noncompliance with US tax laws, but also the identity of the persons and institutions who facilitated this noncompliance. In other words, the OVDP supplied to the IRS valuable, up-to-date information about foreign financial institutions and foreign financial advisors who participated and even set-up the various tax evasion schemes. This ever-growing mountain of evidence was later used by the IRS to target these schemes effectively and efficiently.

Second, the OVDP greatly enhanced the IRS tax enforcement activities in two different ways. On the one hand, the OVDP promoted the general awareness of FBAR requirements as well as voluntary disclosures of FBAR noncompliance by US taxpayers, thereby saving the IRS the time and resources that otherwise would have been unnecessarily spent on finding and auditing these taxpayers. On the other hand, by “weeding-out” these repentant taxpayers, the OVDP allowed the IRS to concentrate its enforcement efforts on the taxpayers who the IRS believed to be true and inveterate tax evaders.

Diminished Utility of the OVDP and the OVDP Closure in 2018

Over time, however, the IRS came to conclusion that, in precisely these two most important aspects, the OVDP had lost a substantial part of its prior utility. The full implementation of FATCA and the ever-spreading web of bilateral and multilateral information exchange treaties made the OVDP a relatively unimportant information collection tool by the end of 2017.

At the same time, due to the introduction of the Streamlined Filing Compliance Procedures and the fact that most willful taxpayers who wanted to take advantage of the OVDP had already done so, fewer and fewer taxpayers were entering the OVDP. In other words, by early 2018, the IRS was in the position to make the decision that the “weeding-out” process was substantially complete.

For these two reasons as well a number of other smaller reasons, the IRS decided to finally close the 2014 OVDP (which itself was a modification of the 2012 OVDP) on September 28, 2018. The OVDP closure did not happen suddenly; rather, the IRS gave a more than nine-month notice to the public that the OVDP was going to be closed. This was done very much according to the “weeding-out” concept – the IRS gave one last opportunity to certain groups of taxpayers to settle their prior US international tax noncompliance under the established terms of the OVDP program.

The Link Between the OVDP Closure and IRS FBAR Audits

At this point, after giving noncompliant US taxpayers their last chance to “peacefully” resolve their FBAR and other US tax problems, the IRS believes that it has completed its weeding-out process. The time has come for harsh IRS tax enforcement.

Based on my conversations with various IRS agents, I have identified the trend where the IRS currently encourages IRS agents to quickly close their voluntary disclosure cases and shift to doing field audits involving international tax compliance, including FBAR audits.

In other words, the OVDP closure frees up the critical resources that the IRS needs to conduct audits based on the mountains of information it has accumulated over the past decade. Some of this information came from the OVDP, the Swiss Bank Program, from FATCA and other  information exchange mechanisms.

What is worse (from the perspective of noncompliant taxpayers) is that the IRS now can justify the imposition of higher FBAR penalties since it can claim that the taxpayers had prior chances to resolve their prior FBAR noncompliance and intentionally failed to do so.

Sherayzen Law Office Predicted the Shift Toward Tax Enforcement a Long Time Ago

All of these developments – the OVDP closure and the shift toward stricter tax enforcement – were predicted years by Sherayzen Law Office ago. As early as 2013, Mr. Sherayzen made a prediction that the Swiss Bank Program and FATCA were likely to lead to higher levels of FBAR audits and FBAR litigation as well as the general shift of the IRS policy from voluntary disclosures to tax enforcement.

Contact Sherayzen Law Office for Professional Help With FBAR Audits and Other International Tax Audits

If you are being audited by the IRS and your tax return involves any international tax issues (including FBARs), contact Sherayzen Law Office for professional help. Our experienced international tax law firm has successfully helped hundreds of US taxpayers to settle their US tax affairs.

We possess profound knowledge and understanding of US international tax law as well as the IRS procedures. We have experience in every stage of IRS enforcement: from offshore voluntary disclosures and IRS administrative appeals to IRS audits (including FBAR audits and audits of Streamlined disclosures) and federal court litigation.

We are a leader in US international tax compliance and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

FBAR Noncompliance & Taxpayer’s Options | FBAR Lawyer & Attorney

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FBAR noncompliance is the worst nightmare for US taxpayers due to enormous FBAR penalties even for non-willful taxpayers. US Taxpayers who are not facing an IRS examination or a DOJ (US Department of Justice) lawsuit have three options with respect to their FBAR noncompliance: (1) do nothing with respect to correcting their prior FBAR noncompliance, close the accounts and hope that the IRS will never discover them; (2) do a quiet disclosure; and (3) come forward and voluntarily disclose their unfiled FBARs.

I already explored the highly-risky strategy of a quiet disclosure in another article. In this article, I will focus on option #1 – doing nothing about prior FBAR noncompliance. In the next article, I will discuss the option of Offshore Voluntary Disclosure as a way to deal with prior FBAR noncompliance.

This article does not constitute legal advice, but merely provides information for educational purposes.

Advantages of Doing Nothing With Respect to Prior FBAR Noncompliance

Doing nothing with respect to FBAR noncompliance is a position that some taxpayers prefer, because it requires no action, no immediate legal expenses and no immediate payment of IRS penalties.

In other words, if a taxpayer chooses to do nothing with respect to his late unfiled FBARs and his strategy is successful, he stands to gain in two aspects: (1) he spends no effort, time or money on correcting his past FBAR noncompliance; and (2) if (and this is big “if”) the IRS never finds out about his past FBAR noncompliance, he will not pay any penalties. This whole strategy is based on the hope that the IRS will not find out about their FBAR noncompliance.

Disadvantages of Doing Nothing With Respect to Prior FBAR Noncompliance Even If the Strategy Is Successful

From legal perspective, this strategy of doing nothing can be classified as very risky. If unsuccessful, a noncompliant taxpayer who chooses to do nothing stands to lose a lot more than he could ever gain if his strategy works.

Let’s analyze the disadvantages of doing nothing based on two scenarios: the strategy is successful and the strategy is unsuccessful.

Even if the strategy is ultimately successful and the IRS does not find out about FBAR noncompliance, there is still a heavy psychological price to pay for this success, because the taxpayer will not find out about the success of his strategy until the FBAR statute of limitations expires. In other words, for six long years, the taxpayer will not have any peace of mind and will constantly worry about his potential FBAR penalty exposure. If the taxpayer does not close his foreign accounts, the waiting period could be extended even further.

Moreover, if FBAR noncompliance is combined with income noncompliance and failure to file other US international information returns, the statute of limitations on the tax returns might be open for an indefinite period of time (especially if the IRS can assert a fraud claim against the noncompliant taxpayer).

I have personally seen the psychological effects of such pressure on some of my clients. It was simply destroying their lives. Eventually, they could not live like this and came to me to do an offshore voluntary disclosure to resolve their prior FBAR noncompliance.

Disadvantages of Doing Nothing With Respect to Prior FBAR Noncompliance Where the Strategy Fails

If the success of this strategy exhorts such a heavy price, its failure may potentially result in disastrous consequences. Let’s explore the main two reasons why the strategy of doing nothing is so disfavored among international tax lawyers.

First, as described above, the current international tax enforcement structure severely undermines the entire basis for the strategy – i.e. hope that the IRS will not find out about FBAR noncompliance is simply too risky in the contemporary world dominated by FATCA, CRS and a widely-spread web of bilateral and multilateral automatic information exchange treaties. It is still possible that the IRS will not find out about a US person’s foreign accounts, but it is becoming less and less likely.

Second, since the strategy of doing nothing implies a taxpayer’s conscious choice not to comply with the FBAR requirements, it may turn a relatively simple and non-willful situation into a complex and willful one. In other words, under these circumstances, if the IRS is able to find out about prior FBAR noncompliance, the IRS may pursue willful and, in extreme circumstances, even criminal FBAR penalties.

Contact Sherayzen Law Office for Professional Help With Resolving FBAR Noncompliance Issues

If you never filed your required FBARs and other US tax forms, contact Sherayzen Law Office for professional help. Our legal team is headed by one of the most experienced international tax lawyers in this area – Mr. Eugene Sherayzen. He has helped hundreds of US taxpayers around the world to successfully resolve their prior FBAR noncompliance, and He can help You!

Contact Us Today to Schedule Your Confidential Consultation!

2017 FBAR Deadline | FinCEN Form 114 FBAR Lawyer & Attorney

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FinCEN recently confirmed the 2017 FBAR deadline and the automatic extension option.

2017 FBAR Deadline: FBAR Background

FinCEN Form 114, the Report of Foreign Bank and Financial Accounts, is commonly known as FBAR.  US taxpayers should use this form to report their financial interest in or signatory authority over foreign financial accounts. Failure to timely file the FBAR may result in the imposition of draconian FBAR penalties.

2017 FBAR Deadline: Traditional FBAR Deadline

Prior to 2016 FBAR, the taxpayers had to file their FBARs for each relevant calendar year by June 30 of the following year. No filings extensions were allowed. The last FBAR that followed this deadline was 2015 FBAR (its due date was June 30, 2016).

2017 FBAR Deadline: Changes to FBAR Deadline Starting 2016 FBAR

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the “Act”) changed the FBAR deadline starting with 2016 FBAR.  Section 2006(b)(11) of the Act requires the FBARs to be filed by the due date of that year’s tax return (i.e. usually April 15), not June 30.

Furthermore, during the transition period, the IRS granted to US taxpayers an automatic extension of the FBAR filing deadline to October 15. The taxpayers do not need to make any specific requests in order for extension to be granted.

In other words, starting 2016 FBAR, the Act adjusted the FBAR due date to coincide with the federal income tax filing deadlines. Moreover, the new FBAR filing deadline will follow to the letter the federal income tax due date guidance. The federal income tax due date guidance states that, in situations where the tax return due date falls on a Saturday, Sunday, or legal holiday, the IRS must delay the due date until the next business day.

2017 FBAR Deadline

Based on the new law, the 2017 FBAR deadline will be April 17, 2018 (same as 2017 income tax return due date). If a taxpayer does not file his 2017 FBAR by April 17, 2018, then the IRS will automatically grant an extension until October 15, 2018. Failure to file 2017 FBAR by October 15, 2018, may result in the imposition of FBAR civil and criminal penalties.