The U.S. requirement to report on foreign bank accounts has been around for years.  Recently, the often forgotten filing took on greater importance.  MFR's Carrie Koshkin, JD, a Senior Manager in the tax practice, outlines the basics related to this requirement. If you are interested in learning more, contact Carrie at ckoshkin@mfrpc.com.

Are you ready for the June 30 deadline?

The U.S. requirement to report on foreign bank accounts has been around for years.  Recently, the often forgotten filing took on greater importance.  The IRS, rather the Treasury, became responsible for compliance, and penalties were raised to $10,000, an amount that can increase to $ 50,000 for on-going non-compliance.  The concern is that taxpayers are attempting to hide money offshore and avoid U.S. tax.  If that is the case, a 40% accuracy-related penalty could apply in addition to interest on the under payment of tax.  For tax years beginning after March 18, 2010, individuals will need to disclose certain foreign assets in their income tax returns.  The United States also has agreements with many countries which are intended to help identify U.S. taxpayers hiding assets abroad. 

The magnitude of non-compliance has certainly gotten the attention of Congress and the IRS.  “If you have funds offshore, you need to review these rules carefully,” according to Carrie Koshkin, a Senior Tax Manager with MFR. P.C.  “The rules have changed and more people need to file.  These rules are important.  In the 70s, the IRS was trying to get ‘Rolodex’ records and monitor incoming mail from foreign financial institutions to identify taxpayers with undisclosed assets.  Today, it is just a matter of electronic search, followed by potential prosecution.”

In general, a U.S. person that has a financial interest or signature authority over foreign financial accounts must report such an interest (by filing a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”)) if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.  Knowing whether or not you have a filing requirement can be confusing.  The IRS has provided responses to many frequently asked questions. 

The FBAR must be received by Treasury on or before June 30^th of the year immediately following the calendar year being reported.  Fiscal year persons need to file on a calendar year basis.  Extensions are not allowed.  The IRS has provided an extended deadline for FBAR forms for the 2009 and earlier calendar years for persons having signature authority over, but no financial interest in, a foreign account.  The deadline for these forms is June 30, 2011.

Who Must File?

The FBAR must be filed by U.S. persons (individuals and legal entities) with certain financial interests in foreign financial accounts.  U.S. persons include U.S. citizens, U.S. residents (persons taxable in the United States on worldwide income, without considering income tax treaties), legal entities formed in the United States, or under its laws, and trusts and estates formed under the laws of the United States. Merely earning income from U.S. sources does not mandate FBAR filing. 

An FBAR is required by U.S. persons with such interests regardless of its federal tax treatment.  For instance, a disregarded entity is required to file an FBAR if it has a financial interest in a foreign financial account that exceeds $10,000.  This is a new requirement.  Since indirect ownership rules apply, unless exempted, multiple persons will need to file.  While the disregarded entity may need to file a FBAR, its foreign owner may not.

What is a Reportable “Foreign Financial Account”?

Under recently issued regulations, the definition of a foreign financial account has been made more inclusive – it is not just bank deposits.  A financial account includes securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution.  This also includes a commodity, futures or options account, an insurance account with a cash value, and annuity policy with a cash value, and shares in a foreign mutual fund. 

Accounts are treated as foreign financial accounts if they are located outside the United States, including accounts maintained with a foreign branch of a U.S. bank.  A financial account maintained by a U.S. branch of a foreign bank is not a foreign financial account.

What is a Financial Interest?

A “U.S. person” has a financial interest in a foreign financial account if they own or holds legal title of the account, regardless of for whom the account is maintained.  “In my experience,” Koshkin notes, “most people underestimate how inclusive the term ‘financial interest’ is.  You may be holding the account as an agent or indirectly because of ownership of a foreign business and have a reporting obligation.  Many people overlook the fact that a controlling interest in a foreign subsidiary with a bank account causes a reporting obligation for the U.S. shareholder.” 

A U.S. person has a financial interest if the owner of record or holder of legal title is any of the following: 

1. An agent, nominee, attorney, or a person acting on behalf of the U.S. person with respect to the foreign financial account;
2. A domestic or foreign corporation in which the U.S. person owns more than 50% (directly or indirectly) of the vote or value of all the shares of stock;
3. A domestic or foreign partnership in which the U.S. person owns more than 50% (directly or indirectly) of the partnerships profits or capital;
4. A trust in which the U.S. person has more than a 50% beneficial interest in the assets or income for the calendar year or  a trust in which the U.S. person is the grantor or has an ownership interest in the trust for U.S. federal tax purposes;
5. Any other entity in which the U.S. person owns more than 50% (directly or indirectly) of the voting power, value of equity interest or assets, or interest in profits.

What is Signature Authority?

This is often an easy one, except for when a person has authority because of a job -- e.g., attorney, executive etc.  Signature authority is the authority of an individual to control the disposition of assets held in a foreign financial account by direct communication to the financial institution that maintains the account.  This authority may exist with an individual alone or in conjunction with other individuals.

Several exceptions exist for officers and employees of banks that have signature authority.  Specifically, individuals who have signature authority over, but no financial interest in, a foreign financial account are not required to file an FBAR with regards to such account in certain situations.

Are there any Exceptions to Filing?

As described below, there are several exceptions to the FBAR reporting requirements that we want to highlight.  The exceptions should remind you how broad the general rule is.

Spousal Joint Accounts.
The spouse of an individual who files an FBAR is not required to file a separate FBAR if: (1) all of the financial accounts that the non-filing spouse is required to report are jointly owned by the filer; (2) the filing spouse reports the jointly owned accounts on a timely filed FBAR; and (3) both spouses sign the FBAR.  If these three requirements are not satisfied, then both spouses are required to file separate FBARs, with each spouse reporting the entire value of the jointly owned accounts.  This is a narrow exception.

Consolidated FBAR.
If a U.S. entity is named in a consolidated FBAR filed by a greater than 50% owner, the separate entity is not required to file a separate FBAR.

IRA Owners and Beneficiaries.
An owner or beneficiary of an IRA is not required to report a foreign financial account that is held in the IRA.

Participants in and Beneficiaries of Tax-Qualified Retirement Plans.
A participant in or beneficiary of a retirement plan (as described in Internal Revenue Code sections 401(a), 403(a) or 403(b)) is not required to report a foreign financial account held by or on behalf of the retirement plan.

Trust Beneficiaries.
A trust beneficiary that has a greater than 50% present beneficial interest in the assets or income of the trust for the calendar year is not required to report the trust’s foreign financial accounts on an FBAR if the trust, trustee or agent of the trust is a U.S. person that files and FBAR disclosing the trust’s foreign financial accounts.

United States Military Banking Facility.
A financial account maintained with a financial institution located on a U.S. military installation in not required to be reported.  This exception applies even if the installation is outside of the United States.