Now that the IRS has announced at more than 33,000 individuals have come forward under the various and recent Amnesty programs, it is essential to look at how the internal mechanics of your filing will be handled by the IRS and/or the Criminal Investigation Division, CID.
As I mentioned in my earlier article on the most recent Voluntary Disclosure filing, enacted January 9, 2012, there are still penalties and probably referral of your case to CID. However, should the IRS decided that you do not qualify for this amnesty filing or you are not cooperating under the subjective belief of an IRS agent, then the amnesty filing will be rejected and probably passed to CID.
This article focuses on FBAR requirements should you wish to now begin filing delinquent filings without applying for the Amnesty or if you have applied under one of the recent amnesty programs and have been rejected.
If you learn you were required to file FBARs for earlier years, you should file the delinquent FBARs and attach a statement explaining why they are filed late. You do not need to file FBARs that were due more than six years ago, since the statute of limitations for assessing FBAR penalties is six years from the due date of the FBAR. No penalty will be asserted if IRS determines that the late filings were due to reasonable cause. Keep copies for your record, of what you send the IRS and make sure the mailing is by registered mail to have as your proof of filing.
If you fail to file an FBAR, in the absence of reasonable cause, you may be subject to either a willful or non-willful civil penalty. Generally, the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50 percent of the total balance of the foreign account at the time of the violation. Note this penalty is applicable only in cases in which there is willful intent to avoid filing. Non-willful violations that the IRS determines are not due to reasonable cause are subject to a penalty of up to $10,000 per violation. There is no penalty in the case of a violation that the IRS determines was due to reasonable cause.
The IRS provides an example that may apply to you. Assume that the highest balance in your checking account exceeded $10,000 and, after reading recent press and thus learning of his FBAR filing obligations, you filed an accurate, though late, FBAR. The FBAR was accompanied by a written statement explaining why you believe the failure to file the FBAR was due to reasonable cause. The IRS will determine whether the violation was due to reasonable cause based on all the facts and circumstances. The explanation for why you failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case. Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted.
What factors will the IRS consider in your favor as well as against you. a. Factors that will benefit your case.
Factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause include, reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account, the fact the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets and finally, that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account. There may be factors in addition to those listed that weigh in favor of a determination that a violation was due to reasonable cause. No single factor is determinative.
b. Factors that will not benefit your case.
Factors that might weigh against a determination that an FBAR violation was due to reasonable cause include whether the taxpayer’s background and education indicate he should have known of the FBAR reporting requirements, whether there was a tax deficiency related to the unreported foreign account, and whether the taxpayer failed to disclose the existence of the account to the person preparing his tax return. As with factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause, there may be other factors that weigh against a determination that a violation was due to reasonable cause. No single factor is determinative.
c. Who makes this determination of factors and how to weigh each factor?
The IRS has established penalty mitigation guidelines, but examiners may determine that a penalty is not appropriate or that a lesser (or greater) penalty amount than the guidelines would otherwise provide is appropriate. Examiners are instructed to consider whether compliance objectives would be achieved by issuance of a warning letter; whether the person who committed the violation had been previously issued a warning letter or has been assessed the FBAR penalty; the nature of the violation and the amounts involved; and the cooperation of the taxpayer during the examination.
Again, the IRS provides an example to help you understand how they apply the tax law. Assuming you are a United States citizen who lives and works in Country B as a computer programmer. You have a checking and savings accounts with a bank that is located in the city where you live. The aggregate balance of the checking and savings accounts is $50,000 during the tax year. You have complied with Country B’s tax laws and properly reported all his income on Country B tax returns. However, you failed to file federal income tax returns and failed to file FBARs to report his financial interest in the checking and savings accounts. After reading recent press and thus learning of his federal income tax return and FBAR reporting obligations, you filed delinquent FBARs, reporting both foreign accounts, and attached statements to the FBARs explaining that you were simply previously unaware of your obligation to report the accounts on an FBAR. You did manage to file federal income tax returns properly reporting all income and no tax was due. The IRS will determine whether the FBAR violation was due to reasonable cause based on all the facts and circumstances. You did have a legitimate purpose for maintaining the foreign accounts, there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and no tax was due. Your truthful and provable explanation for why you failed to timely file an FBAR appears reasonable in view of the facts and circumstances of your particular case. Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted.
With the information above, you may think that by filing the delinquent FBAR reports and a simple explanative letter is all that you need to do to be safe with the IRS; is that right? Well, most likely not since the delinquent FBAR filing is far more complicated that the IRS discloses in its two above examples.
First you have to determine who you really are in view of the FBAR rules. Generally, the public believes that you only need to meet these four elements:
A. The FBAR filer is a U.S. person;
B. The U.S. person has a financial account(s);
C. The financial account is in a foreign country;
D. The U.S. person has a financial interest in the account or signature or other authority over the foreign financial account; and,
E. The aggregate amount(s) in the account(s) valued in dollars exceed $10,000 at any time during the calendar year.
Are you correct if you think the above elements will determine if you have a problem with the IRS or not?
Please read on and you will see the true test to determine whether you have a problem or not. The following are entities or people required to file FBAR if they maintain foreign bank accounts: 1. A citizen of the United States has a U.S. birth certificate or naturalization papers. Documents to substantiate citizenship, however, would not normally be requested as part of the FBAR examination.
2. A “resident” of the United States is a permanent resident.
A. The green-card test – Individuals who at any time during the calendar year have been lawfully granted the privilege of residing permanently in the U.S. under the immigration laws automatically meet the definition of resident alien under the green-card test; or
B. Individuals who are not lawful permanent residents are defined as resident aliens under the substantial-presence test if they are physically present in the U.S. for at least 183 days during the current year, or they are physically present in the U.S. for at least 31 days during the current year.
C. The person files a first year election on his income tax return to be treated as a resident alien.
3. For FBAR purposes, the definition of “person” also includes a corporation, trust, or partnership.
A. A certificate of incorporation from a state of the United States establishes that the corporation is a U.S. person, WHICH INCLUDED SINGLE MEMBER LLC.
B. A corporation that owns directly or indirectly more than a 50 percent interest in one or more other entities is permitted to file a consolidated FBAR, on behalf of itself and the other entities. The consolidated report must include a list of the entities. An authorized official of the parent corporation should sign the consolidated report.
C. The instructions to the July 2000 FBAR (the current version) define “United States person” as “a citizen or resident of the United States, a domestic partnership, a domestic corporation or a domestic estate or trust.”
D. “United States” includes the states, territories, and possessions of the United States.
1. The commonwealth of Puerto Rico,
2. The commonwealth of the Northern Mariana Islands,
4. American Samoa, and
5. The United States Virgin Islands.
What documentations are you required to obtain and to keep?
The Secretary of the Treasury requires a resident or citizen of the United States, or a person in and doing business in the United States, to keep records and/or file reports when making transactions or maintaining a relationship with a foreign financial agency. Also, each person subject to the jurisdiction of the United States (except a foreign subsidiary of a U.S. entity) who has a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country must report that relationship to the Commissioner of the Internal Revenue for each year in which the relationship exists. The U.S. person must provide information as specified in the required reporting form.
1. The FBAR must be filed on or before June 30 for foreign financial accounts aggregating more than $10,000 in the previous calendar year. 31 C.F.R. § 103.27(c)
2. Any person required to file the FBAR must keep certain records of the account for five years. Records may need to be maintained for a longer period by persons who have been formally charged with a criminal tax violation.
3. The authority to enforce the provisions of retention of records and related filings has been re-delegated from the Financial Crimes Enforcement Network (FinCEN) to the Commissioner of the Internal Revenue Service by a Memorandum of Understanding (MOU) between FinCEN and IRS. This includes authority to:
A. Investigate possible civil violations of these provisions;
B. Assess and collect civil FBAR penalties;
C. Employ the summons power;
D. Issue administrative rulings; and,
E. Take any other action reasonably necessary for the enforcement of these and related provisions, including pursuit of injunctions.
What types of financial accounts are the IRS requiring reporting on the FBAR?
1. A financial account includes:
A. A bank account, such as a savings, demand, checking, deposit, time deposit, or any other account maintained with a financial institution or other person engaged in the business of a financial institution. A bank account set up to secure a credit card account is an example of a financial account. An insurance policy having a cash surrender value is an example of a financial account.
B. Securities, securities derivatives, or other financial instruments account.
C. Other financial accounts generally encompass any accounts in which the assets are held in a commingled fund and the account owner holds an equity interest in the fund. A mutual fund account is an example of such an account.
D. Individual bonds, notes, or stock certificates held by the filer are not a financial account.
Do I have an interest in a foreign account?
1. A United States person has a financial interest in each account for which such person is the owner of record or has legal title, whether the account is maintained for his own benefit or for the benefit of others including non-United States persons.
2. If an account is maintained in the name of two persons jointly, or if several persons each own a partial interest in an account, each of those United States persons has a financial interest in that account and, generally, each person must file the FBAR.
3. Under the individual reporting requirement, persons who file a joint tax return must file separate FBARs. In the past however, FinCEN has accepted a single FBAR for an account jointly held by husband and wife. IRS is continuing this practice.
4. A United States person also has a financial interest in each bank, securities, or other financial account in a foreign country for which the owner of record or holder of legal title is:
A. a person acting as an agent, nominee, attorney, or in some other capacity on behalf of the U.S. person; or
B. a corporation, whether foreign or domestic, in which the United States person owns directly or indirectly more than 50 percent of the total value of shares of stock; or
C. a partnership, whether foreign or domestic, in which the United States person owns an interest in more than 50 percent of the profits (distributive share of income); or,
D. a trust, whether foreign or domestic, in which the United States person either has a present beneficial interest in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income.
5. A bank is not required to file the FBAR to report a financial interest in an international interbank transfer account (commonly called a ” nostro” account).
6. A person having signature or other authority over a foreign financial account must file the FBAR even if the person has no financial interest in the account.
7. A person has signature authority over an account if that person can control the disposition of money or other property in it by delivery of a document containing his signature (or his signature and that of one or more other persons) to the financial institution where the account is maintained.
8. A person has other authority if the person can exercise power comparable to signature authority over an account by communication to the financial institution where the account is maintained, either orally or by some other means.
Are there any exceptions to filing?
1. The following are exceptions to the FBAR reporting requirement:
A. An officer or employee of a bank that is subject to the supervision of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, or the Federal Deposit Insurance Corporation need not file the FBAR reporting that he has signature or other authority over a foreign bank, securities, or other financial account maintained by the bank, if the officer or employee has NO personal financial interest in the account.
B. An officer or employee of a domestic corporation whose equity securities are listed on a national securities exchange or which has assets exceeding $10 million and 500 or more shareholders of record need not file the FBAR concerning his signature or other authority over a foreign financial account of the corporation, if he has NO personal financial interest in the account and he has been advised in writing by the chief financial officer of the corporation that the corporation has filed a current FBAR, which includes that account.
C. An officer or employee of either a domestic subsidiary of a domestic corporation or a foreign subsidiary that is more than 50% owned by a domestic corporation which has securities listed on a national securities exchange or which has assets exceeding $10 million and 500 or more shareholders of record, need not report that he has signature or other authority over a foreign financial account of the subsidiary if he has NO personal financial interest in the account and has been advised in writing by the chief financial officer of the parent corporation that the corporation has filed a current FBAR which includes that account.
D. An employee or officer of a wholly owned domestic subsidiary of a domestic parent corporation whose equity securities are listed on a national securities exchange or which has assets exceeding $10 million and five-hundred or more shareholders of record, need not file the FBAR concerning his signature or other authority over a foreign financial account of another domestic or foreign subsidiary of the same domestic parent if he has NO personal financial interest in the account and has been advised in writing by the chief financial officer of the parent corporation that the corporation has filed a current FBAR which includes that account.
How much money needs to be in this foreign account during any particular year?
1. The FBAR is required for each calendar year during which the aggregate amount(s) in the account(s) exceeded $10,000 valued in U.S. dollars at any time during the calendar year. The maximum value of an account is the largest amount of currency and non-monetary assets that appear on any quarterly or more frequent account statement issued for the applicable year.
For example, if the statement closing balance is $9,000 but at any time during the year a balance of $15,000 appears on a statement, the maximum value is $15,000.
2. If periodic account statements are not issued, the maximum account asset value is the largest amount of currency and non-monetary assets in the account at any time during the year.
3. Convert foreign currency by using the official exchange rate in effect at the end of the year in question for converting the foreign currency into U. S. dollars. In valuing currency of a country that uses multiple exchange rates, use the rate that would apply if the currency in the account were converted into U. S. dollars at the close of the calendar year. The official Treasury Reporting Rates of Exchange for the previous quarter year can be obtained at http://fms.treas.gov/intn.html#rates.
4. The value of stock, other securities, or other non-monetary assets in an account reported on the FBAR is the fair market value at the end of the calendar year, or if withdrawn from the account earlier in the year, at the time of the withdrawal.
5. If the filer had a financial interest in more than one account, each account is valued separately in accordance with the previous paragraphs.
6. If a person had a financial interest in one or more but fewer than 25 accounts and is unable to determine whether the maximum value of these accounts exceeded $10,000 at any time during the year, the FBAR instructions state that the person is to complete Part II of the FBAR and if needed, the continuation page(s) for each of these accounts. If the maximum aggregate value of the accounts was not in excess of $10,000, then there would be no FBAR violation if the person did not file the FBAR, whether or not the person knew the value of the accounts at the time the FBAR was due. This is because section 103.27(c) of the Title 31 regulations only requires FBARs to be filed when the value of the accounts exceeds $10,000 during a calendar year.
How and when do I file the FBAR?
1. The determination to file the FBAR is made annually.
For example, the FBAR may be required to report an account for one year but not for the subsequent years if the aggregate account balances in the subsequent years do not exceed $10,000.
2. The FBAR must be filed for each year that the person has a financial interest in or authority over the foreign financial account when the balance exceeds the $10,000 threshold.
3. The FBAR must be filed on or before June 30 each calendar year.
4. The FBAR is filed by mailing it to the U.S. Department of the Treasury, Post Office Box 32621, Detroit, MI 48232-0621.
5. The FBAR should not be filed with the filer’s federal income tax return.
6. The FBAR is considered filed when it is received in Detroit, not when it is postmarked.
7. Extensions of time to file federal income tax returns do not extend the time for filing FBARs. There is no statutory or regulatory provision specifically granting an extension of time for filing FBARs.
8. Time for performing certain acts postponed by reason of service in combat zone or contingency operation does not grant U.S. persons that are U.S. Armed Forces members any extension to file the FBAR.
Are there record keeping requirements imposed on me?
1. If the FBAR is required, certain records must be retained by the filer. Each person having a financial interest in or signature or other authority over any such account must keep the following records:
A. Name in which the account is maintained;
B. Number or other designation of the account;
C. Name and address of the foreign bank or other person with whom the account is maintained;
D. Type of account; and,
E. Maximum value of each account during the reporting period.
2. Retaining a copy of the FBAR is not required. However, a copy of the current FBAR form contains most of the required information. Additional records that must be retained include the address of the foreign financial institution where the account is maintained and its maximum value (not just a range of values) during the year reported.
3. The records must be kept for five years and be available at all times for inspection as provided by law. In the computation of the five years, disregard any period beginning with a date on which the taxpayer is indicted or information filed on account of the filing of a false or fraudulent Federal income tax return or failing to file a Federal income tax return, and ending with the date on which final disposition is made of the criminal proceeding.
Are there penalties involved with the late filing of the FBAR?
1. The IRS has been delegated authority to assess FBAR civil penalties.
2. There are civil penalties for:
B. pattern of negligence,
C. non-willful, and
D. willful violations.
3. Whenever there is an FBAR violation, the examiner will either issue the FBAR warning letter, Letter 3800, or determine a penalty.
4. Penalties should be asserted only to promote compliance with the FBAR reporting and recordkeeping requirements. In exercising their discretion, examiners should consider whether the issuance of a warning letter and the securing of delinquent FBARs, rather than the assertion of a penalty, will achieve the desired result of improving compliance in the future.
5. FBAR civil penalties have varying upper limits, but no floor. The examiner has discretion in determining the amount of the penalty, if any. Examiner discretion is necessary because the total amount of penalties that can be applied under the statute can greatly exceed an amount that would be appropriate in view of the violation.
6. Examiners are expected to exercise discretion, taking into account the facts and circumstances of each case, in determining whether penalties should be asserted and the total amount of penalties to be asserted. Because FBAR penalties do not have a set amount, IRS has developed penalty mitigation guidelines to assist examiners in the exercise of their discretion in applying these penalties. The mitigation guidelines are only intended to serve as an aid for the examiner in determining an appropriate penalty amount. The examiner must still consider whether a warning letter or a penalty amount that is less than what would be called for under the mitigation guidelines would be more appropriate given the facts and circumstances of a particular case.
If an individual failed to report the existence of five small foreign accounts with a combined balance of $20,000 for all five accounts but the income from each account was properly reported and the taxpayer made no effort to conceal the existence of the account, it may be more appropriate to issue a warning letter rather than assert penalties under the mitigation guidelines.
7. FBAR penalties are determined per account, not per unfiled FBAR, for each person required to file. Penalties apply for each year of each violation. As noted above, however, examiners are expected to exercise discretion, taking into account the facts and circumstances of each case, in determining whether penalties should be asserted and the total amount of penalties to be asserted.
8. There may be multiple FBAR civil penalty assessments arising from one account. FBAR civil penalties can apply to each person with a financial interest in, or signature or other authority over, the foreign financial account. Thus there may be multiple penalty assessments if there is more than one account owner or if a person other than the account owner has signature or other authority over the foreign account. Each person can be liable for the full amount of the penalty.
Tell me more about the penalties and whether they can be civil, criminal or both.
1. A civil money penalty may be imposed for an FBAR violation even if a criminal penalty is imposed for the same violation.
2. There are two negligence penalties which apply.
A. A negligence penalty up to $500 may be assessed against a business for any negligent violation.
B. An additional penalty up to $50,000 may be assessed for a pattern of negligent violations.
3. Generally, these two negligence penalties only apply to trades or businesses, not to individuals.
4. For violations occurring after October 22, 2004, a new penalty applies to individuals as well as businesses. 31 U.S.C. § 5321(a)(5)(A). A penalty, not to exceed $10,000, may be imposed on any person who violates or causes any violation of the FBAR filing and recordkeeping requirements.
5. The penalty should not be imposed if:
A. The violation was due to reasonable cause, and
B. The balance in the account was properly reported on an FBAR. This means that the examiner must receive the delinquent FBARs from the nonfiler in order to avoid application of the non-willfulness penalty.
6. The ceiling allows the examiner discretion in determining the penalty. Mitigation guidelines have been developed as a guide to examiners in asserting the appropriate non-willfulness penalty amount. As with the FBAR penalty for willful violations, examiners are to use discretion, taking into account the facts and circumstances of each case, in determining whether a warning letter or penalties that are less than the total amounts provided for in the mitigation guidelines are appropriate. The sole purpose for the FBAR penalties is to serve as a tool to promote compliance with respect to the FBAR reporting and recordkeeping requirements.
7. A filing violation occurs on June 30th of the year following the calendar year to be reported (that is, on the due date for filing the FBAR).
8. A recordkeeping violation occurs on the date when the records are requested by the IRS examiner if the records are not later provided.
Are there willful penalties for an individual and who bears the burden of proof?
1. A civil money penalty may be imposed on any person who willfully violates or causes any violation of any provision of section 5314 (the FBAR requirements).
2. The ceiling applicable for violations occurring before October 23, 2004 is the greater of an amount (not to exceed $100,000) equal to the balance in the account at the time of the violation or $25,000.
3. For violations occurring after October 22, 2004 the ceiling is the greater of $100,000 or 50% of the balance in the account at the time of the violation.
4. The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.
5. A finding of willfulness must be supported by evidence of willfulness.
6. The burden of establishing willfulness is on the Service.
7. If it is determined that the violation was due to reasonable cause, the willfulness penalty should not be asserted.
8. Willfulness is shown by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements. In the FBAR situation, the only thing that a person need know is that he has a reporting requirement. If a person has that knowledge, the only intent needed to constitute a willful violation of the requirement is a conscious choice not to file the FBAR.
9. Under the concept of “willful blindness,” willfulness may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements. An example that might involve willful blindness would be a person who admits knowledge of and fails to answer a question concerning signature authority at foreign banks on Schedule B of his income tax return. This section of the return refers taxpayers to the instructions for Schedule B that provides further guidance on their responsibilities for reporting foreign bank accounts and discusses the duty to file Form 90-22.1. These resources indicate that the person could have learned of the filing and recordkeeping requirements quite easily. It is reasonable to assume that a person who has foreign bank accounts should read the information specified by the government in tax forms. The failure to follow-up on this knowledge and learn of the further reporting requirement as suggested on Schedule B may provide some evidence of willful blindness on the part of the person.
For example, the failure to learn of the filing requirements coupled with other factors, such as the efforts taken to conceal the existence of the accounts and the amounts involved may lead to a conclusion that the violation was due to willful blindness. The mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, by itself, to establish that the FBAR violation was attributable to willful blindness.
10. Willfulness can rarely be proven by direct evidence, since it is a state of mind. It is usually established by drawing a reasonable inference from the available facts. The government may base a determination of willfulness in the failure to file the FBAR on inference from conduct meant to conceal sources of income or other financial information. For FBAR purposes, this could include concealing signature authority, interests in various transactions, and interests in entities transferring cash to foreign banks.
Are there any examples available for me to gain a better understanding?
1. The following examples illustrate situations in which willfulness may be present:
A. A person admits knowledge of, and fails to answer, a question concerning signature authority over foreign bank accounts on Schedule B of his income tax return. When asked, the person does not provide a reasonable explanation for failing to answer the Schedule B question and for failing to file the FBAR. A determination that the violation was willful likely would be appropriate in this case.
B. A person files the FBAR, but omits one of three foreign bank accounts. The person had closed the omitted account at the time of filing the FBAR. The person explains that the omission was due to unintentional oversight. During the examination, the person provides all information requested with respect to the omitted account. The information provided does not disclose anything suspicious about the account, and the person reported all income associated with the account on his tax return. The willfulness penalty should not apply absent other evidence that may indicate willfulness.
C. A person filed the FBAR in earlier years but failed to file the FBAR in subsequent years when required to do so. When asked, the person does not provide a reasonable explanation for failing to file the FBAR. In addition, the person may have failed to report income associated with foreign bank accounts for the years that FBARs were not filed. As with example a. above, a determination that the violation was willful likely would be appropriate in this case.
D. A person received a warning letter informing him of the FBAR filing requirement, but the person continues to fail to file the FBAR in subsequent years. When asked, the person does not provide a reasonable explanation for failing to file the FBAR. In addition, the person may have failed to report income associated with the foreign bank accounts. As with examples a. and c. above, a determination that the violation was willful likely would be appropriate in this case.
If the IRS has the burden of proof, what documents can they actually obtain against me?
1. Documents that the IRS can obtain in establishing willfulness include:
A. Copies of documents from the administrative case file (including the Revenue Agent Report) for the income tax examination that show income related to funds in a foreign bank account was not reported.
B. A copy of the signed income tax return with Schedule B attached (showing whether or not the box pertaining to foreign accounts is checked or unchecked).
C. Copies of statements for the foreign bank account obtained by Summons.
D. Notes of the examiner’s interview with the foreign account holder/taxpayer about the foreign account, obtained in an Amnesty Filing or tax return examination.
E. Correspondence with the account holder’s tax preparer that may address the FBAR filing requirement. (Did you think that there was Privilege between you and your Preparer?)
F. Documents showing criminal activity related to the non-filing of the FBAR.
G. Promotional material (from the promoter or offshore bank).
H. Statements for debit or credit cards from the offshore bank (which could show if the account holder was using funds from the offshore account to cover everyday living expenses in a manner that would conceal the source of the funds).
I. Copies of any FBARs that were previously filed by the account holder.
J. Copies of tax returns for at least three years prior to the opening of the offshore account and for all years after the account was opened. (To show any significant drop in reportable income after the account was opened, three years prior to the opening of the account would be requested in order to give the examiner a better idea of what the account holder typically would have reported as income prior to opening the foreign account).
K. Copies of Information Document Requests obtained during a tax examination with items that were not provided by the account holder highlighted and explanations given as to why the requested information was not provided.
L. Copies of debit or credit card agreements and fee schedules with the foreign bank (which may show a significantly higher cost than typically associated with cards from domestic banks). These statements are easily obtained by a Summons issued from the IRS to the banks.
M. Copies of debit and credit card statements prior to the opening of the foreign account (to show that the account holder did or did not routinely use such cards for everyday living expenses, keeping in mind these statements may be difficult to obtain if the foreign account was opened many years ago). Again, a Summons from the IRS to the credit card companies will quickly yield the statements to be sent directly to the IRS.
N. Copies of any investment management or broker’s agreement and fee schedules with the foreign bank (which may show significantly higher costs than costs associated with domestic investment management firms or brokers), obtained by IRS Summons.
O. The account holder’s written explanation of why the FBAR was not filed (if the account holder wishes to provide such a statement). Otherwise, note in the workpapers whether the account holder was given an opportunity to provide such a statement.
P. Copies of any previous warning letters issued to the account holder.
Q. Copies of any prior Revenue Agent Reports that may show a history of noncompliance.
R. An explanation, in the work papers, as to why the examiner believes that the account holder’s failure to file the FBAR was willful.
S. Two sets of cash Ts (a reconciliation of the taxpayer’s sources and uses of funds) with one set showing any unreported income in foreign accounts that was identified during the examination and the second set excluding the unreported income in foreign accounts.
What amount of penalties can be asserted against me for willfulness violations? 1. For violations occurring prior to October 23, 2004, a penalty up to the greater of $25,000 or the amount in the account (up to $100,000) may be asserted for willfully violating the FBAR requirements.
2. For violations occurring after October 22, 2004, a willfulness penalty may be imposed up to the greater of $100,000 or 50% of the amount in the account at the time of the violation.
3. There may be both a reporting and a recordkeeping violation regarding each account. The amount of the penalty is calculated per account and per violation. There is no reduction in the amount of the account due to multiple financial interests in the account.
For example, the entire balance of an account owned by two persons is the amount used to calculate the amount of the penalty for each. The value of the account is not reduced by half because there are two owners.
4. The date of a filing violation is June 30th of the year following the calendar year for which the accounts are being reported. This date is the last possible day for filing the FBAR so that the close of the day with no filed FBAR represents the first time that a violation has occurred. The amount [balance] in the account at the close of June 30th is the amount to use in calculating the filing violation.
5. The date that the examiner first requests records is the date of the violation for failure to keep records. The date of the violation should be tied to the date of the request, and not a later date to avoid the taxpayer manipulating the amount in the account after receiving a request for records. The balance in the account at the close of the day on which the records are first requested is the amount to use in calculating the recordkeeping penalty violation.
There are a whole host of traps and penalties involved with this FBAR filing requirement and an even bigger are of untested mitigation for these penalties which is too extensive for this article to cover. If you are considering the possibility that you may have been required to file a FBAR, please see competent legal tax counsel provide guidance before you proceed. Remember, you can not unring the bell. In other words, any statement or filing in an attempt to approach the IRS or make a delinquent filing cannot be taken back, too late. The IRS can and will use any statement or form that you signed to determine guilt and liability.