Form TDF 90-22.1: Disclose Foreign Bank Accounts - Or Else!

Monday, May 4, 2009 - 00:00

"Offshore accounts harbor billions of dollars, and people should take notice that the secrecy surrounding these deals is rapidly fading."

- IRS CommissionerDoug Shulman, 2008

Even individuals and businesses which do not intentionally use foreign bank accounts to maintain assets secretly should take note of increasingly stringent disclosure requirements in the United States for such accounts and should be mindful that the civil and criminal penalties associated with noncompliance have increased in both likelihood and magnitude. A perfect storm of recent factors - increased cooperation from foreign banks known for secrecy and aggressive legislation strengthening the Internal Revenue Service arsenal - has elevated foreign bank accounts into a topic that cannot be ignored.

Taxpayers with foreign bank accounts aggregating more than $10,000 at any time during the year must disclose the existence of such accounts on Form TDF 90-22.1 (Report of Foreign Bank and Financial Accounts or "FBAR"). While the FBAR originated in 1970 from the Bank Secrecy Act, significant revisions to the form and associated penalties for noncompliance have garnered attention. In addition, the FBAR is not filed with a tax return. Instead, the FBAR must be filed by June 30 (no extensions are available) each year. The general purpose of the FBAR is to provide disclosure of financial or other interests (e.g., signatory authority) in financial accounts located in foreign jurisdictions.

First, recent revisions have expanded the FBAR in terms of coverage. Previously, the FBAR was required to be filed by any United States person. The term "United States person" encompassed a citizen or resident of the United States, a domestic partnership, a domestic corporation, or a domestic estate or trust. Now, with the recent revision, "United States person" includes "a person in and doing business in the United States." Hence, a foreign person in and conducting business in the United States may now be required to file an FBAR. The definition of "financial account" has also been broadened to include mutual funds, deficit card and prepaid credit accounts in addition to any bank, securities, securities derivatives or other financial instruments accounts.

The expansion in FBAR coverage permeates the area of pass-through entities as well. In general, a United States person (as defined more broadly above) must file an FBAR if owning more than 50 percent of the total value of the shares of stock in a foreign corporation with a financial account abroad. This applies to a partnership or S corporation but, in addition, any partner or shareholder directly or indirectly owning more than 50 percent of the foreign corporation will be required to file an FBAR individually. To illustrate, consider a domestic partnership that owns 60 percent of a United Kingdom limited company. If a domestic partner owns a 90 percent interest in the partnership, both the partnership and the partner must file an FBAR separately. Hence, taxpayers should closely scrutinize their interests in partnerships and S corporations to gauge their reporting obligations.

Second, penalties associated with the FBAR have increased in recent years. In general, absent a willful violation, the maximum penalty is $10,000. By contrast, civil penalties for willful violations have increased to the greater of $100,000 or 50 percent of (1) the amount of the transaction for a violation involving a transaction or (2) the underlying account's balance at the time of violation. Criminal violations of FBAR requirements may result in a $250,000 fine and five years of imprisonment. Additionally, if the FBAR violation is in tandem with another violation of law, the fine is potentially $500,000 and 10 years' imprisonment. These penalties are illustrated in the accompanying chart.

For a limited time, taxpayers may avoid potential criminal prosecution by participating in a voluntary disclosure program reporting offshore bank accounts and assets. The six-month program was initiated on March 23, 2009. Taxpayers that participate in this program will be subject to pay back taxes and interest for the previous six years and a special 20 percent penalty in addition to other penalties that may apply. (For a further description of this program, please visit http://www.eisnerllp. com/Nep/News.aspx?id=4021.)

Taxpayers should also take note of the recent cooperation stemming from foreign jurisdictions known for protecting accountholder identities and the Internal Revenue Service. For example, the Internal Revenue Service recently successfully uncovered the identities of individuals with bank accounts in Switzerland. In general, there is an overall movement toward transparency of foreign bank accounts.

As demonstrated above, the requirements for foreign account reporting have become complex and an increasingly aggressive Internal Revenue Service has taxpayers with foreign accounts within its sights. Taxpayers with foreign bank accounts should be aware of the general trends mentioned above to avoid damaging consequences such as civil and/or criminal penalties for noncompliance. The risks associated with noncompliance far outweigh the inconvenience of reporting these accounts.

Any tax advice in this communication is not intended or written by Eisner LLP to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer, or (ii) promoting, marketing, or recommending to another party any matters addressed herein. With this article, Eisner LLP is not rendering any specific advice to the reader.

Jon Zefi is a Principal with Eisner and a member of the tax advisory services group, with expertise in federal and international tax matters. Aninda Dhar is a Senior in Eisner's tax advisory services group focusing his efforts in real estate services and international taxation .

Please email the authors at jzefi@eisnerllp.com oradhar@eisnerllp.com with questions about this article.