Bank finance articles and tips

In order to comply with laws, the regulatory entities publish forms that can be completed by complying individuals and entities. Such is the FBAR form TD F 90-22.1, which is what you should use for your annual FBAR reporting.

This is not part of your income tax return form 1040, rather an attachment or supplementary document that goes to the IRS and the US Secretary for information reporting purposes only. In this article I will discuss the FBAR reporting requirements, guidelines and timelines. I hope you find it useful as you stay compliant with the foreign bank account reporting regulations.

FBAR Reporting Tips

Many do not file FBAR forms despite owning or having interest in offshore bank accounts because their accounts do not accrue or earn interest / income. However, the reporting guidelines do not excuse such situations. You must file an FBAR form even if your foreign financial accounts do not produce income. Remember, the FBAR is an annual information reporting requirement, not a tax reporting requirement.

Another common mistake many make is that they think they can get a reporting extension simply because they extend the date their income tax returns are due. But remember, the FBAR form is not part of your income tax return, rather a supplemental attachment. Therefore, getting an extension on your income taxes has no impact on when your foreign bank account reporting is due. Now there are extensions granted for the FBAR, but you must file this request separately before June 30th of the year following the relevant year for which you are reporting.

Enforcement of FBAR Reporting - Civil and Criminal Cases

Many continue wonder how the IRS will manage to enforce the reporting requirements as this is not their core competency. The IRS is in the taxation business. But if you think of it, one of the objectives of reporting is to avoid tax evasion, thus the IRS has a vested interest in full compliance with reporting.

Through FBAR reporting, individuals and businesses disclose their foreign earnings, whether interests, business profits or capital gains from asset sales. Because the United States taxes global earnings, no matter where the earnings are generated the IRS has a claim on their share.

The US Secretary's delegation to the IRS with regard to reporting compliance can be found in the US Government's code Title 31. However the IRS has its own guidance under Internal Revenue Code (IRC) Section 6201, which also passes some taxing related rights to the Secretary in reciprocity. Therefore as far as reporting compliance is concerned, it is prudent to believe that both the Secretary and the IRS can enforce the regulation.

How FBAR Reporting Penalties are Communicated

When an individual or an entity is deemed to be non compliance with the reporting guidelines, the IRS typically communicates this by sending the non compliance party a 30 day letter. Once received, the recipient (the defendant in this case) has 30 days to appeal for a review. What's interesting is that the US Tax court has not been given the responsibility to review FBAR related matters, and that's why the appeal process can get quite messy. Attorneys and CPAs have taken advantage of this gap to help their clients.

Normally however, if the person or entity shows cooperation and no mal intent, the FBAR penalty and fines can be reduced by the IRS. Here are some situations under which FBAR penalties and fines may be reduced.

+ Full cooperation by the individual or entity questioned for non compliance with reporting
+ Non recurrent nature of non compliance with reporting regulations
+ No sign of illicit use of funds in foreign bank accounts, such as for illegal activities, money laundering, terrorist activities, etc.
+ No indication that the individual or entity purposely underpaid its tax obligation directly resulting from misreporting foreign income or gains in any foreign financial account

As you can imagine, if these four situations are present and clear, then there is a good chance that the IRS either drops the case or reduces the FBAR penalties significantly. This number can be as low as 5% to 10% of the balances held in the foreign accounts. This amount cannot exceed $100,000 however per foreign account that was not reporting. With that said, if the four situations are unclear or not present at all, the individual or entity is subject to the maximum FBAR penalties.

(Note: Historically there have been FBAR amnesty programs. Keep an eye out for these)

Concluding Thoughts on FBAR Reporting

To reiterate a very important point, the FBAR form is not part of your income tax return. This is a separate form that must be filed for information reporting purposes. If you want an extension to file this report, you must do so separately before June 30 of the year following the reporting year.

Reporting is a serious matter and every citizen has the obligation to comply with it. Failure to comply with the law can mean severe FBAR penalties and other fines, both civil and criminal, which include jail time.

Account holders who do not comply with the reporting requirements may be subject to civil penalties, criminal penalties, or both. You can file your FBAR TD F 90-22.1 forms and mail them to the following address:

United States Department of the Treasury
P.O. Box 32621 Detroit, MI
48232-0621.

You can use the following address if you want to send express delivery:

IRS Enterprise Computing Center
ATTN: CTR Operations Mailroom, 4th Floor
985 Michigan Avenue
Detroit, MI 48226

Telephone number: (313) 234-1062

It is true that historically FBAR reporting compliance has been low, but this is also because the enforcement standards have not been quite up to par. However, as we have seen in the recent years, the Government is cracking down hard on non compliant individuals and entities and this trend is only likely to improve.

A step in the positive direction made by the authorities is by having the US Secretary office delegate enforcement of compliance with FBAR form reporting to the IRS. This will certainly improve compliance in the future, and with that we will also see more civil and criminal FBAR non compliance cases.

Curt Matsen, CPA is the author of the FBAR filing guide, a comprehensive resource that discusses FBAR reporting requirements, filing the FBAR form correctly and penalties for non compliance. Read more at: http://www.file-fbar.com

By Curt Matsen