Spring is here, meaning (among other things) that the deadline to file your annual report on foreign bank and financial accounts is rapidly approaching. Taxpayers who have financial interests in or signature authority over certain foreign financial accounts must file Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR") by June 30 of each year. Failure to file the FBAR when required could result in substantial penalties and even criminal prosecution. Taxpayers who are delinquent on FBAR filings from prior years may be able to mitigate their penalty exposure and avoid prosecution by participating in a voluntary disclosure program.

Background

In 1970 Congress enacted "The Currency and Foreign Transactions Reporting Act" (the "Act") to ensure that U.S. persons properly report all income earned and held in offshore bank accounts. Under the Act, U.S. persons were required to keep records and file reports relating to certain transactions with offshore banks.

U.S. persons must file by June 30th of each year the Report on Foreign Bank and Financial Accounts (Form TD F 90.22-1), commonly referred to as an "FBAR." The FBAR rule requires:

United States persons having a financial interest in or signature authority or other authority over financial accounts in a foreign country are required to report those accounts to the Treasury Department if the aggregate value of the financial accounts exceeded $10,000 at any time during the year. The filing deadline is June 30 of the following year.

"Financial account" includes any bank, securities, securities derivatives or other financial instruments account. These accounts generally also encompass any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund (including mutual funds). It remains uncertain whether certain interests in commingled funds, such as foreign private investment funds, must be reported.

Exceptions to the FBAR filing include (i) officers or employees of a commercial bank; (ii) officers or employees of public domestic corporations which are listed on a national exchange or the corporation has more than $10 million in assets or at least 500 shareholders, and the employee or officer has no personal interest in the account; (iii) accounts maintained by a "U.S. military banking facility" or as a "U.S. military finance facility"; and (iv) accounts maintained with the U.S. branch of a foreign bank.

Penalties

Penalties for failing to file an FBAR will be asserted unless the taxpayer can prove that the "reasonable cause" exception applies. Non-willful violations are subject to a $10,000 penalty per violation. The penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50% of the total balance of the financial account for each violation. The government can also bring criminal charges and assert fines and penalties as well.

If certain "mitigating factors" are present, an examining agent has the discretion to reduce or eliminate the penalties. If "the amount of the transaction or the balance in the account at the time of the transaction was properly reported" and the failure to file an FBAR is due to "reasonable cause," the government may not impose FBAR penalties.

Proposed changes. As part of the 2010 budget, the Administration proposed changes to FBAR filing that would create a "rebuttable evidentiary presumption" that "would be applicable in a civil administrative or judicial proceeding providing that failure to file an FBAR with respect to any foreign bank, brokerage, or other financial account held with a nonqualified intermediary is willful if the account has a balance of greater than $200,000 at any point during the calendar year." This effectively shifts the burden to the FBAR violator to demonstrate that the account threshold for filing an FBAR, or to trigger the presumption of the willful failure to file, was not met.

Voluntary Disclosure

The IRS has a voluntary disclosure program, principally used in connection with potentially criminal matters, if a taxpayer wants to "come in from the cold." Taxpayers who willfully failed to file FBARs may reduce their penalties and the risk of criminal prosecution by applying for the Offshore Voluntary Disclosure Program ("OVDP"). Under the current iteration of the OVDP, in lieu of other penalties that may apply to undisclosed foreign assets, a penalty is assessed equal to 27.5% of the highest aggregate balance in foreign bank accounts/entities during the period covered by the voluntary disclosure. Reduced penalties of 15% and 5% are available in limited circumstances.

The first offshore voluntary disclosure program expired in October 2009. In February 2011, the Service announced a second voluntary disclosure program (the "OVDI"), as it continued to crack down on international non-compliance. Under the OVDI, taxpayers were subject to substantial but reduced penalties, and examination agents made no determinations about such factual matters as willfulness or reasonable cause. Rather, if taxpayers wanted to have these issues addressed, they had to drop out of the OVDI and request an examination, in which event the OVDI terms were unavailable. IRS officials advised that taxpayers who do not participate in the second round of offshore account voluntary disclosure will retain their rights outside the program.

A third, open-ended voluntary disclosure program relating to disclosure of offshore assets was announced in January 2012, with detailed questions and answers to facilitate engagement in the program. Taxpayers who do not file FBARs in the U.S., but instead challenge disclosure in foreign countries, must notify the Service upon pain of being barred from the program.

The OVDP is intended for taxpayers who underreported taxable income in the past. Taxpayers who reported, and paid tax on, all of their taxable income for prior years but did not file FBARs, should simply file delinquent FBAR reports according to the form instructions and attach a statement explaining why the reports are filed late. The IRS will not impose a penalty for the failure to file the delinquent FBARs if there are no underreported tax liabilities and you have not previously been contacted regarding an income tax examination or a request for delinquent returns.

The IRS, on March 19 2013, released new Form 14457 (Offshore Voluntary Disclosure Letter) and Form 14454 (Program Letter Attachment) on its website to be used for OVDP submissions to replace the documents previously posted on its website.

The Offshore Voluntary Disclosure Programs brought in over $5.5 billion in back taxes, interest and penalties according to a report issued by the Government Accountability Office in March 2013. Accordingly, it is a safe bet that the IRS will continue its focus on offshore financial assets. Contact your local CBIZ MHM tax advisor for assistance with your FBAR filing obligations and to assess your exposure from delinquent filings.

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