Daily Tax Report. N ew rules requiring reporting of specified foreign. FBAR and FATCA Foreign Financial Assets Reporting: Seeing Double?

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1 Daily Tax Report NUMBER 246 DECEMBER 22, 2011 FBAR and : Seeing Double? Not Really BY CHARLES M. BRUCE N ew rules requiring reporting of specified foreign financial assets were enacted in March 2010 and generally became effective for calendar year 2011; people beginning to work on their 2011 tax returns early in 2012 will run into these new rules. If they are used to filing foreign bank account reports (FBARs), they will think they are seeing double. Found in new Section 6038D, these were enacted as part of what is commonly called FATCA, for the Foreign Account Tax Compliance Act, a reporting and withholding regime that was enacted to uncover U.S. taxpayers using foreign financial accounts and similar holdings to avoid U.S. tax. New Form 8938, Statement of Specified Foreign Financial Assets, published Dec. 19, which will be part of a taxpayer s regular tax return, embodies the new requirements. This set of reporting rules sits alongside existing requirements to report foreign bank accounts (FBAR rules) that were only recently elaborated upon in final regulations from Treasury s Financial Crimes Enforcement Network (FinCEN), which became effective March 28. The FATCA rules are tax rules. The FBAR rules are Treasury Department, Bank Secrecy Act rules. Form 8938 is filed to comply with the FATCA rules. Form TD F , which has been in existence since the 1970s, is required under the FBAR rules. There is a great deal of overlap in the requirements of these two reporting regimes. Definitions that seem to be addressing the same thing, however, are really different. All this, it can be predicted, risks causing a great deal of confusion and dismay. The following side-by-side comparison is intended to help filers and return preparers begin to come to grips with this subject. Charles M. Bruce is a partner at Moore & Bruce LLP (Washington, D.C.) and counsel at Bonnard Lawson (Lausanne, Switzerland). Copyright 2011 Charles M. Bruce. Observations A few observations, repeated below, may also help lay a groundwork. FATCA reporting is clearly broader than FBAR reporting. It is more problematic for being both new and largely undeveloped by official guidance. Examples of problem areas include the application of Section 6038D to indirect ownership of foreign financial assets by individuals. Setting aside an abusive situation where an individual creates a Delaware corporation for the sole purpose of holding these assets, how will the rules be applied to a U.S. family partnership that has foreign financial assets? Or to an incorporated family business? If indirect ownership through domestic entities is affected, how is the reporting made if, in fact, there are tiered domestic entities? (The Section 6038D regulations (see below) indicate relief on these points, at least for the time being.) Assume, for example, that a U.S. holding company, owned by a U.S. individual, holds 100 percent of a firsttier operating company, and that the operating company owns foreign financial assets. Do the U.S. individual and the holding company and the subsidiary, all three, file Form 8938? In determining who has to file, Form 8938 and the instructions provide different rules, including different thresholds, for individuals who live abroad as opposed to in the United States. Is the test for living/residing abroad the same as that in Section 911, which provides a foreign earned income and housing cost exclusion? The instructions seem to parrot the Section 911 rules, which means the filer is introduced to concepts of tax home, presence abroad, and bona fide resident, but there is no cross-reference. For the reporting requirement to apply, an individual must hold interest in specified foreign financial assets. Broad brush language in the instructions provides that an individual has an interest in an asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the asset are or would be required to be reported, included, or otherwise reflected in the individual s income tax return. This applies regardless whether there was any income, etc., during the year in question. COPYRIGHT 2011 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN

2 2 What point is all of this language addressing? What is reached that the simple concept of ownership does not reach? Will the FATCA reporting rules be applied to a real estate holding company that is really a straw man visibly acting only to hold bare legal title? 1 FATCA reporting is less likely to be done by a taxpayer without the assistance of a return preparer. Taxpayers will likely be baffled by the wording of the Form 8938 and the instructions. The requirement to summarize tax items attributed to specified foreign financial assets in Part III of the form will leave many people scratching their heads. Return preparers, if they are preparing the basic return, likely will have to do the Form 8938, unlike with FBAR forms that, rightly or wrongly, were often left to the taxpayer to complete. Furthermore, Section 6038D, Form 8938, and the instructions clearly contemplate that the form will be an attachment to a return in the same way that a Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, is an attachment to the return of a U.S. shareholder of a controlled foreign corporation. A return preparer is therefore no more likely to prepare a return leaving off the Form 8938 telling the taxpayer that he or she should do this himself or herself than to prepare a return leaving off a Form By signing the return, a preparer under Circular 230 is accepting a level of responsibility for the entire return, including all required forms, attachments, and statements. Look for new guidance from the Treasury Department Office of Professional Responsibility. In preparing these two reports, it makes sense to start with the FBAR form, because foreign deposit and custodial accounts, which are the subject of the FBAR form, are the first thing dealt with on the FATCA form (Part I, Form 8938). Every preparer that the author has surveyed has said that the cost of compliance preparing the forms will increase significantly. Unlike old-style FBAR reporting, the preparer or the taxpayer cannot simply work off last year s filing. As every preparer knows, you cannot begin to complete a form like this until you have gathered all the information, including information that ultimately might not find its way onto the form. Preparers will have to obtain and verify information about all foreign deposit and custodial accounts and will probably need to start with those required to be disclosed on the FBAR. Then they will have to identify and value all other foreign assets. Some values will have to be stated with precision. Some can be placed within bands. Foreign currency figures will have to be converted. Information about foreign entities will have to be reviewed and a determination made as to what the entity is for FATCA reporting purposes. The Form 8938 (November 2011) and instructions were released Dec. 19. Internal Revenue Service Notice suspends the requirement to file Form See Commissioner v. Bollinger, 485 U.S. 340 (1988). 2 July 18, before the release date of the final form. Following this date, individuals will be required to attach Form 8938 for the suspended taxable year to the next income tax return required to be filed. IRS has worked very fast to produce this guidance. The draft Form 8938 was released to the public June 28. The draft instructions were released Sept. 28. Temporary (T.D. 9567) and proposed regulations (REG ) under Section 6038D were published Dec. 14. The final form and instructions were released Dec. 19. Considering the complexity and novelty created by Congress and the need to coordinate with teams working on other FATCA rules, including the Chapter 4 withholding tax rules, this work product is quite amazing. Surprise for Many Taxpayers The overlap in FBAR and FATCA reporting is remarkable. People with foreign bank accounts totaling in excess of $10,000, if they have total assets including these accounts of more than $50,000, will file both forms. People with foreign bank accounts of more than $10,000 but with total foreign financial assets, including the bank accounts, of no more than $50,000, will file only an FBAR. People with nonfinancial account assets in excess of $50,000, but no or just small foreign bank accounts, will file only Form Many Americans will be surprised to learn that they have to file Form 8938 even though they do not live abroad and do not have a foreign bank account. But they hold shares in foreign corporations, including ones listed on a foreign exchange. Or they own an interest in a foreign hedge fund or private equity fund. Fortunately, if this type of asset is owned through a domestic financial institution, or a domestic branch of a foreign bank, or a foreign branch or subsidiary of a U.S. financial institution, it is exempted. Thus, most mutual funds sold by U.S. brokerage houses and other U.S. financial institutions, which invest for example in assets in emerging markets, are exempted. There will be dozens more novel issues that arise for the first time. Americans living abroad are going to be especially burdened because their everyday lives entail ownership of many different types of foreign financial assets. The temporary and proposed regulations recognize this fact: An individual residing outside the United States can reasonably be expected to have a greater amount of specified foreign financial assets for reasons unrelated to the policies underlying section 6038D. The regulations and instructions therefore lift the filing thresholds for individuals residing outside the United States from $50,000 ($100,000 married filing jointly) to $200,000 ($400,000 married filing jointly). The residence test appears to be the same as that in Section 911(d)(1) (the individual qualifies for the foreign earned income and housing cost amount exclusion). It is anyone s guess as to how many additional Forms 8938 will need to be filed. Based on 2008 figures, about 350,000 FBAR forms are filed each year. The Treasury To request permission to reuse or share this document, please contact permissions@bna.com. In your request, be sure to include the following information: (1) your name, company, mailing address, and telephone number; (2) name of the document and/or a link to the document PDF; (3) reason for request (what you want to do with the document); and (4) the approximate number of copies to be made or URL address (if posting to a website) COPYRIGHT 2011 BY THE BUREAU OF NATIONAL AFFAIRS, INC. DTR ISSN

3 3 Department has estimated that, in reality, this represents only 20 percent of what should be filed; therefore, there should be more than 1.7 million filed each year. A guess is that there will be or should be even more FATCA filings, especially if the threshold remains at $50,000 (individuals living in the United States)/ $200,000 (individuals living abroad) or anything close to these figures. Check the instructions for details. IRS, one would think, must be desperate to knock down the numbers of people having to file the new Form It should do everything possible to reduce the population by increasing thresholds, eliminating nonresident aliens, getting rid of duplicative filings, etc. It also must find ways to simplify the form. Both the FBAR form and the FATCA form are tricky for taxpayers. The problems for the Treasury Department and IRS are going to be huge also. Together, the FBAR and FATCA forms will contain an enormous amount of data. This data will have to be posted in databases. Undoubtedly, there will be a move to match FBAR figures with FATCA figures. If this is not done efficiently, overseers and inspectors will be on top of the subject. The worst result would be for taxpayers, faced with all this, to throw up their hands and reduce their compliance. It will undoubtedly occur to some taxpayers simply to staple their FBAR reports to their income tax returns and append a note saying Call me if you have questions. Do not do this! DAILY TAX REPORT ISSN BNA

4 4 Comparison of FBAR Reporting and TD F (March 2011). See also IRS Form 1040, Schedule B, Part III (Foreign Accounts and Trusts), Line 7a. Number of Filings; Estimated Time to Prepare 349,667 (2008). Treasury estimated in 2003 that compliance might be as low as 20 percent (real number 1,748,335?). Estimated time to prepare: 75 minutes. Authority Bank Secrecy Act (BSA); Treasury regulations at 31 CFR (formerly 31 CFR ). Regulations Final Financial Crimes Enforcement Network (FinCEN) regulations amending BSA regulations at 31 CFR Part Changes are effective March 28, (Last amended in April 1987.) Instructions are included in Form Also, instructions on back of Schedule B, Form Due Date June 30 each year for prior calendar year. Form must be received on or before due date. No extensions. Where to File Department of the Treasury, P.O. Box 32621, Detroit, Mich Can be hand delivered to IRS offices in American embassies but not considered filed until received by Treasury in Detroit. Form 8938, to be attached to regular tax return, to be finalized and issued by IRS. Front page of 2011 Form 1040 instructions warns, If you have foreign financial assets, you may have to file new Form Instructions to Schedule B, Part III (dealing with foreign accounts and trusts), 2011 Form 1040, contains a TIP : Regardless of whether you are required to file Form TD F (FBAR), you may be required to file Form 8938, Statement Of Specified Foreign Financial Assets, with your income tax return. Failure to file Form 8938 may result in penalties and extension of the statute of limitations. Unknown. Estimated time to prepare: 1 hour, 5 minutes. I.R.C. Section 6038D, enacted as part of what is commonly referred to as FATCA in the Hiring Incentives to Restore Employment Act (HIRE Act; Pub. L. No ), which incorporated as a subtitle a set of provisions that had previously been proposed as the Foreign Account Tax Compliance Act. Temporary (T.D. 9567) and proposed regulations (REG ) issued on Dec. 14, 2011 (effective Dec. 19, 2011). Same due date as Form 1040, with extensions. Same place as Form COPYRIGHT 2011 BY THE BUREAU OF NATIONAL AFFAIRS, INC. DTR ISSN

5 5 Comparison of FBAR Reporting and Continued Who Is Subject to Rules? Any U.S. person, including individuals, companies, partnerships, trusts, estates, etc. Individual can be U.S. citizen or resident alien as defined in I.R.C. Section 7701(b). Resident alien includes green card holder whether or not living in United States. (Resident alien: Individual who is [l]awfully admitted for permanent residence. Such individual is a lawful permanent resident of the United States at any time during such calendar year. Section 7701(b)(A)(i).) (Contrary view expressed by IRS attorney recently reported in connection with ABA Section of Taxation meeting: Green card holders who are not living in the U.S. are generally not residents for FBAR purposes, according to the Internal Revenue Manual. ) U.S. person must have financial interest in (similar to ownership) or signature power over (ability to cause amounts to be paid out) foreign financial accounts. Signature power is relevant only to individuals. Trust is any trust created, organized, or formed under the laws of United States. It must file even though the U.S. trustee must also file. Trust might be a trust technically categorized as foreign under Section 7701(a)(3). U.S. person can be owner of record or holder of legal title for itself or another (U.S. or non-u.s.) person. Owner/ holder can be (a) an agent, nominee, attorney, or a person acting in some other capacity on behalf of a U.S. person with respect to account; (b) a corporation in which a U.S. person owns directly or indirectly more than 50 percent of voting power or total value of shares; (c) a partnership in which a U.S. person owns directly or indirectly more than 50 percent of interest in profits or capital; (d) any other entity (other than a trust) in which a U.S. person owns directly or indirectly more than 50 percent of voting power, total value of equity or assets, or interest in profits; (e) a trust, if a U.S. person is trust grantor and has an ownership interest in the trust for U.S. federal income tax purposes (see Sections ); (f) a trust in which a U.S. person either has a present beneficial interest in more than 50 percent of assets or from which such person receives more than 50 percent of current income. Interest in wholly discretionary trust generally not covered. Trust beneficiary not required to report trust s foreign financial accounts if trust, trustee of trust, or agent of trust (a) is a U.S. person and (b) files an FBAR disclosing the accounts. Participants and beneficiaries in certain retirement plans and owners and beneficiaries of IRAs or Roth IRAs are not required to file FBARs for accounts held by or on behalf of retirement plan or IRA. Individuals who are U.S. taxpayers, i.e., citizens and resident aliens. As anti-abuse measure, can be extended to domestic entity formed or availed of to hold foreign financial assets (FFAs). (Statute says treasury secretary can write regulations exempting nonresident aliens.) Test for resident aliens is that in Section 7701(b) (substantial presence test and green card test). Individual must hold interest in specified foreign financial asset. Hold in most cases, but not always, probably means own. An individual has an interest in an asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the asset are or would be required to be reported, included, or otherwise reflected on his or her income tax return. This is regardless whether there was any income, etc. in the current year. Report specified foreign financial assets on Form 8938 even if none of the assets affects tax liability for the year. Exception if no income tax return is required. If no return is required for the year, then there is no requirement to file Form 8938 regardless of value of assets. Note: Scope of FATCA disclosure is broader than FBAR, so taxpayers that do not have to file FBAR may have to file Form Although the nature of the information required is similar to the information disclosed on an FBAR, it is not identical. For example, a beneficiary of a foreign trust who is not within the scope of the FBAR reporting requirements because his interest in the trust is less than 50 percent may nonetheless be required to disclose the interest in the trust with his tax return under this provision if the value threshold is met. JCT technical explanation of the Foreign Account Tax Compliance Act of 2009, JCX (Oct. 27, 2009). Note: FATCA disclosure rules require taxpayers with investments in foreign entities, such as foreign mutual funds, foreign hedge funds, and foreign private equity funds, to report the existence of these investments. Recent FBAR regulations issued by FinCEN on Feb. 26, 2010, exempt these assets from FBAR reporting. Final Form 8938 instructions clearly treat these investment vehicles as a foreign financial institution. DAILY TAX REPORT ISSN BNA

6 6 Comparison of FBAR Reporting and Continued Who Is Subject to Rules? (continued) Signature power. Signature authority is authority of an individual (alone or in conjunction with another individual) to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or otherwise) to the bank or other financial institution that maintains the financial account. Disregarded entities must file. Grantor trusts must file. Treatment of Spouses and Minors; Marital Property Spouse of filer not required to file if (a) all accounts that non-filing spouse is required to report are jointly owned with filing spouse (i.e., he or she has no other reportable accounts), (b) filing spouse timely reports jointly owned accounts, (c) both spouses sign FBAR (squeeze both signatures into box 44). No special rules for minors. No special rules or other guidance for marital property where, for example, one spouse by operation of law has an ownership interest in the other spouse s assets. What Is Covered? Financial interest in a foreign financial account. Includes securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution). Financial account includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions). The regulations specifically reserve the treatment of investment companies other than mutual funds or similar pooled funds. This reservation applies to hedge funds and private equity funds. Bullion in a vault in a bank with this arrangement tied to an account in the bank is covered. Does not include rental of vault with only the U.S. person being able to put in and take out items. Does not apply to signature power over or other power over assets. A person is not treated as having an interest in any specified foreign financial assets held by a partnership, corporation, or generally a trust but special rules can apply or an estate solely as a result of that person s status as a partner, shareholder, or beneficiary. Normal rules apply to spouses filing joint or separate returns. Normal rule for a minor is a minor must file a return. A minor is subject to the same requirements and elections for making returns of income as are other individuals. *** The return of a minor must be made by the minor himself or must be made for him by his guardian or other person charged with the care of the minor s person or property. Treas. Reg. Section No special rules or other guidance for marital property. Any holding of any interest in a specified foreign financial asset. Specified foreign financial asset means: (A) Financial account (defined in new Section 1471(d)(2)) maintained by foreign financial institution (defined in new Section 1471(d)(4)). Financial account includes depository account, custodial account and equity or debt interest in such financial institution (other than interest regularly traded on an established securities market). Foreign financial institution is any financial institution that is foreign entity. Financial institution is any entity that (a) accepts deposits in ordinary course of banking or similar business; (b) as substantial portion of its business, holds financial assets for account of others; or (c) is engaged (or holding itself out as being engaged) primarily in business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities COPYRIGHT 2011 BY THE BUREAU OF NATIONAL AFFAIRS, INC. DTR ISSN

7 7 Comparison of FBAR Reporting and Continued What Is Covered? (continued) (B) Other specified foreign financial assets. Any of the following assets that are not held in an account maintained by a financial institution, provided they are held for investment: (i) any stock or security issued by a person other than a U.S. person (e.g., stock in foreign corporation); (ii) any financial instrument or contract held for investment that has an issuer or counterparty which is other than a U.S. person (e.g., note, bond, debenture, or other form of indebtedness issued by non-u.s. person); (iii) any interest in a foreign entity, including interest in a foreign trust or foreign estate; (iv) an interest rate swap, currency swap, basis swap, interest rate, interest rate floor, commodities swap, equity swap, equity index swap, credit default swap, or similar agreement with a foreign counterparty; (v) an option or other derivative instruments with respect to any of the above examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer. An asset is treated as held for investment if it is not used in, or held for use in, the conduct of any trade or business. In other words, whatever it is, the asset is held for investment unless it is held in a direct relationship to the conduct of the person s trade or business. An interest in foreign real estate is not a specified foreign financial asset, but shares in a foreign corporation that only holds the real estate is such an asset. An interest in a foreign trust or foreign estate is not a specified foreign financial asset unless the individual knows or should have known of the interest. If an individual received a distribution from the trust or estate, he or she is treated as knowing of the interest. (A Form 3520 would be filed by the recipient.) Interests in disregarded entities are covered. (The temporary and proposed regulations provide that a specified person that is the owner of a disregarded entity is treated as having an interest in any specified foreign financial assets held by that entity.) A joint owner of an asset has an interest in the entire asset. Special rules apply to joint ownership with the spouse. See below. Financial accounts not covered include a financial account that is maintained by a U.S. payer, such as a domestic financial institution. In general, a U.S. payer also includes a domestic branch of a foreign bank or foreign insurance company and a foreign branch or a foreign subsidiary of a U.S. financial institution. DAILY TAX REPORT ISSN BNA

8 8 Comparison of FBAR Reporting and Continued What Is Covered? (continued) Threshold Taxpayer must check Yes box at bottom of Schedule B, Form 1040, if he or she has foreign accounts with aggregate (combined) value of more than $10,000 at any time during a calendar year. Also must provide name of foreign country(ies). Must aggregate all accounts, combining accounts owned, accounts as to which signature power is held, accounts owned jointly. The taxpayer must file FBAR. If not obligated to file Form 1040 because, for example, level of gross income is below reportable levels, must file FBAR anyway. Generally, periodic (e.g., monthly) account statements can be used to determine the maximum value during the year. Convert foreign currency amounts at year-end value. An individual does not have to report a specified foreign financial asset if he or she reports it on one of the following forms: Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations; Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or a Qualified Electing Fund; Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships; and Form 8891, Beneficiaries of Certain Canadian Registered Retirement Plans. The value of the assets reported on these forms is still used in determining whether the reporting threshold has been met. The individual still must complete Part IV of the Form 8938 identifying which other forms, Form 5471, etc., he or she has filed. An interest in a social security, social insurance, or other similar program of a foreign government is not reportable. Taxpayer must file Form 8938 if aggregate value of all specified foreign financial assets generally exceeds $50,000 at the end of the year or $75,000 at any time during the year. There are issues of valuation and how to convert foreign currency amounts. According to the temporary and proposed regulations, reporting threshold varies according to filing status and whether taxpayer(s) live in United States or abroad. Living in U.S./Not filing joint return: Threshold is $50,000 on last day of tax year or more than $75,000 at any time during the year. Living in U.S./Married filing joint return: Threshold is $100,000 on last day of tax year or more than $150,000 at any time during the year. Living abroad/not filing joint return: Threshold is $200,000 on last day of tax year or more than $300,000 at any time during the year. Living abroad/married filing joint return: Threshold is $400,000 on last day of tax year or more than $600,000 at any time during the year. Test of living abroad appears to be the same as the residency test for foreign earned income exclusion (Section 911(d)(1)) COPYRIGHT 2011 BY THE BUREAU OF NATIONAL AFFAIRS, INC. DTR ISSN

9 9 Comparison of FBAR Reporting and Continued Valuation of Accounts/Assets There are fewer valuation issues because taxpayers are most often reporting checking, savings, demand, time deposit, securities, and brokerage accounts. Rules can apply to bullion. Valuation must be in U.S. dollars. Unlike with FBAR reporting, it is necessary to value the assets. In most cases, you can make a reasonable estimate of the asset s maximum fair market value during the tax year. An appraisal by a third-party is not necessary to estimate the maximum fair market value during the year. Form 8938, Part II, dealing with Other Foreign Assets, allows taxpayer to check the box identifying a range: $0-$50,000; $50,001-$100,000; etc., in $50,000 increments, up to $200,000. Above $200,000, list exact value. If asset has no positive value, treat value as zero for determining whether over the threshold and for determining reportable value. Joint interests create special issues. If you jointly own an asset with someone else, the value that you use to determine the total value of all of your specified foreign financial assets depends on whether the other owner is your spouse and, if so, whether your spouse is a specified individual and whether you file a joint or separate return. (Instructions for Form 8938.) Joint ownership with spouse/filing joint return: Include 100 percent of value of asset jointly owned to determine value of all specified foreign financial assets owned by either or both. Joint ownership with spouse/filing separate tax returns: Both are specified individuals and include 50 percent of value of asset jointly owned with spouse. Joint ownership with someone other than spouse: Each joint owner includes 100 percent of the value of the jointly owned asset. Interests in trusts are specially valued. If an individual is a beneficiary of a foreign trust, the maximum value of his or her interest is the value of all distributions during the tax year, if distributions are discretionary, or if distributions are mandatory, the value using valuation tables under Section (Instructions for Form 8938.) The instructions set forth a large number of examples, which are helpful. DAILY TAX REPORT ISSN BNA

10 10 Comparison of FBAR Reporting and Continued Required Information Type of filer (individual, corporation, etc.); taxpayer identification number or other identification information; name; address; if financial interest in not signature power over more than 25 accounts, skip providing details in Parts II (Separately Owned Accounts) and III (Joint Accounts); separate out information on accounts owned separately from accounts owned jointly and from accounts where there is signature power but no financial interest. If signature power over 25 or more accounts, need only complete items (name, TIN, address, etc.) for each person on whose behalf filer has signature power. In general, provide maximum value of account during calendar year, type of account (bank, securities, other), name of financial institution, account number, mailing address. If jointly owned, number of joint owners and TIN of principal joint owner, and name and address of principal joint owner. If signature authority but no financial interest in account, maximum value of account during calendar year, type of account (bank, securities, other), name of financial institution, account number, mailing address, name of account owner, TIN of account owner (if available), filer s title with this owner (e.g., treasurer). Special rule for U.S. person residing and employed outside the United States: For signature authority accounts owned by the employer, only complete Part I and Part IV, Items See instructions at p. 8. An entity that is a U.S. person that owns directly or indirectly a greater than 50 percent interest in another entity that is required to file an FBAR is permitted to file a consolidated FBAR on behalf of itself and such other entity. An officer or employee of an entity (U.S. or non- U.S.) that has a class of equity securities listed (or American depositary receipts listed) on a U.S. exchange is not required to report signature authority over foreign accounts of that entity. If a U.S. person that is an entity is named in a consolidated FBAR filed by a greater than 50 percent owner, such entity is not required to file a separate FBAR. An individual who is officer or employee of a U.S. subsidiary need not report signature power over foreign financial accounts of subsidiary if its U.S. parent is publicly listed on a U.S. exchange and the subsidiary is included in a consolidated FBAR report of the U.S. parent. For accounts, name and address of financial institution in which such account is maintained and number of such account. For stocks or securities, name and address of issuer and information necessary to identify class or issue of which such stock or security is part. For any other instrument, contract, or interest, information necessary to identify such instrument, contract, or interest, and names and addresses of all issuers and counterparties with respect to such instrument, contract, or interest. As to each, the maximum value of the asset during the taxable year. Interestingly, Form 8938, Part III (Summary of Tax Items Attributable to Specified Foreign Financial Assets) requires the taxpayer to list income reported on his/her return relating to foreign deposit and custodial accounts and other foreign assets. As to these, various tax items must be specified (interest, dividends, royalties, etc.), the amount reported must be provided, and where on the return it was reported must be provided (i.e., which form and line or which schedule and line). Nontaxable distributions from foreign custodial accounts and from other foreign assets must also be listed. If an FBAR filer has to file Form 8938, the information required on Part III cannot simply be taken from the FBAR COPYRIGHT 2011 BY THE BUREAU OF NATIONAL AFFAIRS, INC. DTR ISSN

11 11 Comparison of FBAR Reporting and Continued Penalties Generally, the civil penalty for wilfully failing to file an Base penalty of $10,000 for the taxable year. An additional FBAR can be as high as the greater of $100,000 or 50 penalty applies if notified and failure to disclose continues: percent of the total balance of the foreign account per Beyond 90 days penalty increases by $10,000 for each violation. See 31 U.S.C. Section 5321(a)(5). Non-wilful 30-day period or fraction thereof, up to maximum of violations that IRS determines were not due to reasonable $50,000 (similar to penalties applicable under Section cause are subject to a $10,000 penalty per violation. 6038). Penalty may be waived if (a) there is reasonable cause for the failure to report and (b) the amount of the transaction No penalty in case of reasonable cause. or balance in the account was properly reported. Serious violations are subject to criminal prosecution, potentially If individual does not provide sufficient information to resulting in both monetary penalties and imprisonment. determine aggregate value, aggregate value will be Civil and criminal sanctions are not mutually exclusive. presumed to have exceeded $50,000. Confidentiality Not taxpayer return information protected by I.R.C. Section Protected byi.r.c. Section Accessible by anyone authorized to have access electronically to the Treasury Department Currency Banking and Retrieval System database. Number of Filings 349,667 in Filings have not begun. Enforcement In 2003, authority to investigate FBAR compliance was Enforcement is the same as with any other Internal delegated from FinCEN to IRS Criminal Investigation. Revenue Code provisions. Collection and enforcement powers under the Internal Revenue Code are not available to IRS to enforce FBAR civil penalties. These are collected by the Treasury Department s Financial Management Service and ultimately by the Department of Justice. Preparer Liabilities A return preparer does not sign the form. However, preparers have a duty under Circular 230 to inquire of their clients with sufficient detail to prepare proper and correct responses to the foreign bank account questions on Schedule B. The level of due diligence required is addressed in Circular 230, Section A preparer in general may rely, in good faith and without verification, on information furnished by a client. But a preparer must make reasonable inquiries when a client provides information that implies possible participation in overseas transactions/accounts subject to FBAR requirements. A preparer also must advise the client of any potential penalties likely to apply. If it is determined that an FBAR should be filed, the preparer is not obligated to prepare it. Notwithstanding the lack of obligation to prepare the FBAR, the practitioner does have an affirmative obligation to advise the client of the need to file FBAR form and the consequences of failing to do so. A return preparer signs the Form 1040 and is responsible for the entire form, including this statement or form. Circular 230 rules apply. See front page of 2011 Form 1040 general instructions (dated Nov. 28, 2011). DAILY TAX REPORT ISSN BNA

12 12 Comparison of FBAR Reporting and Continued Effective Date Requirement to file FBAR has been in place since enactment of Bank Secrecy Act in Amended several times, most notably with USA PATRIOT Act (Oct. 26, 2001). Most recent revision of Form March 26, Effective date of final FinCEN regs March 28, Effective for taxable years beginning after date of enactment, i.e., March 28, For individuals, ordinarily calendar year 2011 (returns due 2012) COPYRIGHT 2011 BY THE BUREAU OF NATIONAL AFFAIRS, INC. DTR ISSN