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Business Law Today

The Report of Foreign Bank and Financial Accounts
So what's all the fuss about?
By Brian D. Harvel
With all the attention that the Report of Foreign Bank and Financial Accounts, better known as the FBAR, is getting in the news as an outgrowth of the tax scandals in Liechtenstein and at the Swiss-based bank, UBS, you may be asking yourself, do my clients, or, in some cases, I, need to file the FBAR? The answer to that question may be easier than you may think, and it may come as a surprise to many that the FBAR needs to be filed in many, if not most, situations where a foreign financial account is involved.

General FBAR Background
It may help to provide some background about the FBAR and its intended purpose. The origins of the FBAR go back to the Bank Secrecy Act of 1970 (BSA), in which Congress was concerned with the detection of schemes by United States persons to hide criminal proceeds, evade tax, or conduct other criminal activities through the use of foreign accounts. The scope of the BSA, and thus the FBAR, was broadened with new legislation in 2001 because the FBAR was seen as crucial to the U.S. government efforts to carry out criminal and tax investigations and to conduct intelligence and gather information to prevent international terrorism.

The next major event in the increased enforcement of the FBAR occurred in 2008 when the German government allegedly began to share information with other tax authorities, including the Internal Revenue Service (IRS), regarding the billions held in secret Liechtenstein accounts at Liechtenstein Global Trust Group. Supposedly, the German government came into possession of the account information by purchasing it from a former Liechtenstein Global Trust Group employee who allegedly stole the information from the bank. According to some reports, there were as many as 100 U.S. taxpayers using the bank to hide assets, and, more importantly, income, from the IRS.

Shortly after this scandal broke in Liechtenstein, a senior UBS banker signed a court statement detailing how he assisted clients with their efforts to evade U.S. taxes by creating offshore trusts and other entities that concealed the identity of the U.S. owners. UBS issued a statement saying that it would fully cooperate with all authorities and was faced with the possibility of providing the details of its approximately 20,000 U.S. clients, although the IRS and the Department of Justice believe the number is closer to 52,000. As a result of the investigation, the IRS and UBS entered into a deferred prosecution agreement that required UBS to pay the IRS a total of $780 million in fines, interest, and restitution and to provide the IRS the names of 250 clients who banked with UBS. Not satisfied and smelling blood in the water, the Justice Department filed a civil suit the day after the agreement was signed seeking the records of the 52,000 U.S. clients it believes used the schemes promoted by UBS to hide assets. To date, only a handful of U.S. citizens have been convicted of tax evasion for using UBS accounts, but the number is sure to grow as it is believed that the Department of Justice and the IRS are working on approximately 100 criminal suits.

FBAR Reporting Requirements
As currently in force, the FBAR, or, if you want to be exact, Form TD F 90-22.1, requires that
each United States person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing [the FBAR] . . . on or before June 30, of the succeeding year.
The FBAR must be filed annually with the Department of the Treasury (Treasury). Importantly, officers and employees of most U.S. banks do not have to file the FBAR for accounts unless the officer or employee has a personal "financial interest" in the "financial account." A similar exception allows the officers and employees of public U.S. corporations and large (i.e., having more than $10 million in assets) nonpublic corporations to avoid filing the FBAR as long as the officer or employee does not have a personal "financial interest" in the account.

Having stated the general reporting requirement, let's take a look at some of the specifics:

(1) A "United States person" is a citizen or resident of the United States or a person in and doing business in the United States. Whether a person is considered to be "in and doing business in" the United States is based on an analysis of the facts and circumstances of each case. Generally, for these purposes, a person is not considered to be in and doing business in the United States unless that person is conducting business within the United States on a regular and continuous basis. As a result, a person who merely visits the United States is not in and doing business in the United States for FBAR reporting purposes. In addition, a person who has irregular or sporadic business contacts is not in and doing business in the United States. As further guidance, the IRS has provided examples of persons who are not considered to be in and doing business in the United States as follows:
(a) Persons who are not citizens or residents and who are engaged in a business but who only occasionally visit the United States to meet customers or business associates;

(b) Artists, athletes, and entertainers who are not citizens or residents of the United States and who only occasionally come to the United States to participate in exhibits, sporting events, or performances; and

(c) A person who is not a U.S. citizen or resident and who visits the United States to manage his personal investments, such as rental property, and conducts no other business.
The IRS updated the definition of "United States person" to include "a person in and doing business in the United States" in October 2008. After changing the definition, the IRS received several comments and questions regarding the term "in and doing business in the United States" and has since notified taxpayers that they may rely on the previous definition of "United States person" in the FBAR instructions for filings due for the 2008 calendar year, i.e., for FBARs that were due in 2009. It remains to be seen whether the IRS will make any further changes to the definition of "United States person" in light of the taxpayer comments.

(2) A "financial account" is any bank, securities, securities derivatives, or other financial instruments accounts and any savings, demand, checking, deposit, time deposit, or any other account (including debit card and prepaid credit card accounts) maintained with a financial institution. Individual bonds, notes, or stock certificates held by a person are not a "financial account," and neither is an unsecured loan to a foreign trade or business that is not a financial institution.

(3) A United States person has a "financial interest" in a financial account if the United States person is the owner of record or has legal title in the financial account or the United States person owns, directly or indirectly, more than 50 percent of the value or voting power of a corporation that is the owner of record or holder of legal title in the financial account.

(4) A United States person has "signature authority" over a financial account if such person can control the disposition of money or other property in such account by delivery of a document containing his or her signature (or his or her signature and the signature of one or more other persons) to the bank or financial institution.

(5) Contrasted with signature authority, which is a fairly straightforward concept, "other authority" is a more amorphous term. While the FBAR itself does not provide a definition of "other authority," the IRS has provided informal guidance in response to Frequently Asked Taxpayer Questions that "other authority" should be thought of as comparable to signature authority in that a person exercises "other authority" when that person can control distributions from the "foreign account" through direct communications to the bank or financial institution. In providing its guidance regarding the definition of "other authority," the IRS has noted that there is a distinction between having other authority over a "financial account" of a nonbank foreign agent and having authority over a foreign agent who owns a foreign financial account. Having other authority over the "financial account" will result in an FBAR filing obligation, while having authority over the foreign agent does not. Additionally, the ability to make investment decisions alone should not be sufficient to require FBAR reporting.

(6) To determine whether the account value exceeds $10,000, a person looks to the largest amount of currency and nonmonetary assets that appear on any quarterly or more frequent account statements issued for the applicable year. If periodic account statements are not issued, the account value is the largest amount of currency or nonmonetary assets in the account at any time during the year. Any amounts held in a foreign currency are converted to United States dollars based on the official exchange rate at the end of the year. Finally, the value of stock, other securities, or other nonmonetary assets in an account is the fair market value at the end of the calendar year, unless the asset is withdrawn from the account, in which case the value is the fair market value at the time of the withdrawal.

Other Reporting Aspects
Another commonly overlooked aspect of the reporting requirements relating to interests in foreign accounts is the fact that a United States person also must complete boxes 7a and 7b on Form 1040 Schedule B, which disclose the existence of a foreign bank account.

Failure to File in a Timely Manner
Normally, the IRS will grant an extension for most IRS forms and other filings, many times with no questions asked, as long as the taxpayer timely requests the extension. Unfortunately, the FBAR is one of the few forms for which the IRS will not grant an extension to file. This refusal means that if a United States person misses the deadline to file the FBAR, that person may be subject to penalties. As of October 22, 2004, the maximum civil penalty for the willful failure to file an FBAR is $100,000 or 50 percent of the total balance of the foreign financial accounts at the time of the violation. In addition, the IRS can recommend criminal prosecution by the Department of Justice that can result in an additional fine and/or up to five years in prison. Nonwillful violations are subject to a civil penalty of not more than $10,000. These penalties can be assessed up to six years after the filing deadline for the FBAR.

IRS Voluntary Disclosure Initiative
In an effort to bring United States persons back into compliance with the U.S. tax laws, the IRS has recently completed what was in effect a settlement for those United States persons who voluntarily, timely, completely, and accurately disclose previously unreported offshore income from either an offshore entity or an offshore account. As part of the offer, the United States persons were required to pay back taxes and interest for six years, a 20 percent accuracy-related penalty or a 25 percent delinquency penalty on the increase in taxes during these six years, and an additional penalty equal to 20 percent of the amount in the foreign financial account or offshore entity in the year with highest aggregate account or asset value. In exchange, the United States person avoided the imposition of more substantial annual civil penalties, and the IRS would not recommend criminal prosecution of such person to the Department of Justice. This offer existed for United States persons who fully cooperated with the IRS between March 23, 2009, and September 23, 2009. After this period, the IRS has stated that any noncompliant United States persons will be subject to more substantial penalties. Just what those penalties will be is not known as of the time of writing this article.

The Administration's 2010 Proposals
Under the General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals, as released on May 11, 2009, the Obama administration has proposed four new items relating to the FBAR. Two proposals create additional reporting obligations and a presumption against U.S. taxpayers, while the other two create new reporting requirements and a presumption against financial intermediaries.

New Proposals for U.S. Taxpayers. The first proposal for U.S. taxpayers seeks to require them to include a schedule of certain information with their annual income tax return. This schedule would be consistent with the information that is required to be filed on the FBAR itself, but it would not replace the obligation to file the FBAR with the Treasury. The stated purpose of this proposal is to provide more detailed information disclosure regarding foreign accounts on a United States person's tax return because, among other things, the Obama administration believes that the current requirements of providing the information to the Treasury does not allow the IRS to review FBAR compliance. However, the IRS also has pushed for separate reporting requirements because the Treasury can share such information with other federal, state, or local agencies without those agencies requesting to receive such information, or additional information, from the IRS. Purportedly, the IRS does not want to start going down the road of providing taxpayer information to other governmental agencies. Further, a noncompliant United States person would be subject to penalties and other consequences under the Internal Revenue Code of 1986, as amended, in addition to the penalties discussed above for failure to file the FBAR in a timely manner.

The second proposal for U.S. taxpayers would create a rebuttable evidentiary presumption that would apply in a civil administrative or judicial proceeding. This presumption would provide that any foreign bank, brokerage, or other financial account that a citizen or resident of the United States or a person in and doing business in the United States has a financial interest in or signature or other authority over contains enough funds to require the filing of the FBAR. The stated purpose is to assist the IRS in obtaining additional information in situations where it is aware of the existence of an unreported foreign financial account but does not have information regarding its balance, and it is intended to result in the voluntary disclosure of account information.

New Proposals for Financial Intermediaries. The first proposal for financial intermediaries seeks to place an additional reporting obligation on any U.S. financial intermediary and any qualified intermediary (collectively, an "intermediary") that transfers money or property with a value of more than $10,000 to, or receives money or property with a value of more than $10,000 from, a foreign bank, brokerage, or other financial account on behalf of a United States person (or on behalf of an entity of which a United States person owns, actually or constructively, more than 50 percent of the ownership interests). Additionally, an intermediary that opens a foreign bank, brokerage account, or other financial account on behalf of a United States person (or on behalf of an entity of which a United States person owns, actually or constructively, more than 50 percent of the ownership interests) also would have a new reporting obligation. The proposal also includes exceptions to the reporting requirement for (1) accounts opened and amounts transferred to, from, or on behalf of publicly traded companies and their subsidiaries; (2) accounts opened at and transfers made to qualified intermediaries on behalf of a United States person (or on behalf of any entity of which a United States person owns, actually or constructively, more than 50 percent of the ownership interest); and (3) transfers received by or on behalf of a United States person (or on behalf of any entity of which a United States person owns, actually or constructively, more than 50 percent of the ownership interest) from accounts held by a United States person at a qualified intermediary. The stated purpose of this proposal is to improve the disclosure of foreign financial accounts held by U.S. taxpayers and to decrease the evasion of U.S. taxation.

The second proposal for financial intermediaries would create a rebuttable evidentiary presumption that would be applicable in a civil administrative or judicial proceeding, but not in criminal proceedings. This presumption would provide that the 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. The proposal includes an exception, similar to the one provided for FBAR filing, for accounts in which the United States person has signature or other authority by virtue of being an officer or employee of a corporation and has no more than a de minimis financial interest in that corporation. The stated purpose of this proposal is to encourage the voluntary disclosure of foreign financial accounts at nonqualified intermediaries, which should assist the IRS in its enforcement efforts and reduce the possibility for U.S. taxpayers to evade U.S. taxation.

Conclusion
Even before the Obama administration outlined its proposals to increase tax reporting and compliance with the FBAR, the IRS was increasing its efforts to close the tax gap and bring United States persons back into the system. With the close of the Voluntary Disclosure Initiative, it will be interesting to see how the IRS will treat taxpayers who are found to have unreported offshore accounts and entities. Further, what may be more interesting and also remains to be seen in all of these efforts is how the financial intermediaries will react to the proposed increased reporting requirements and what will happen to the relationship between these financial intermediaries and their U.S. customers.

Harvel is an associate at Alston & Bird LLP in Atlanta. His e-mail is brian.harvel@alston.com

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