Treasury Attempts to Clarify FBAR Filing Obligations and IRS Issues 2009 FBAR Filing Exemptions

Kevin E. Packman is a partner in our Miami office

W.C. Fields once said, "if at first you don't succeed, try, try again. Then quit. There's no point in being a damn fool about it."

Fortunately for tax professionals and taxpayers, the U.S. Department of the Treasury has greater fortitude than Fields, and has continued to try to clarify the Report of Foreign Bank and Financial Accounts (FBAR) filing obligation.

On February 26, 2010, the Treasury Department's Financial Crimes Enforcement Network (FinCen) issued Proposed Regulations to amend the Bank Secrecy Act (BSA)1 provisions that apply to the FBAR. The Proposed Regulations are intended to bring much needed clarity to the annual filing obligation. Comments are requested no later than April 27, 2010. Because the Proposed Regulations are not effective until they are finalized, also on February 26, the Internal Revenue Service (IRS) released Announcement 2010-16 and Notice 2010-23, which provide timely administrative relief and exempt certain taxpayers from having to file 2009 FBARs. There would likely be much less interest in these issues were it not for the severity of the penalties associated with a failure to file an FBAR.

FBAR Background

It is important to remember that the FBAR is an informational return – not a tax return. It is a byproduct of the BSA, which was first enacted in 1970 out of concern that financial institutions in tax haven jurisdictions were being used by U.S. persons to hide the proceeds of their illegal activities, evade tax, and engage in other criminal activities. The BSA specifically imposed responsibility on the Secretary of the Treasury to promulgate regulations that would promote compliance; be useful in criminal, tax, regulatory, intelligence and counter-terrorism matters; and counter money laundering.

Originally, the Secretary delegated authority to investigate possible FBAR compliance issues to the IRS, and the authority for civil enforcement of FBAR violations to FinCen – an arm of the Treasury Department that has responsibility for overseeing and implementing policies to detect and prevent money laundering and terrorist financing. On April 10, 2003, FinCen delegated its enforcement authority for FBARs to the IRS. Since then, the IRS has had the ability to investigate noncompliance with the FBAR, assess and collect civil penalties associated with such noncompliance, and use the full investigative arsenal available to the Service. Nevertheless, the sole authority to clarify the FBAR filing obligations remains with FinCen.

Who Is Required to File an FBAR?

Generally, a U.S. person with a financial interest, signature authority or other authority over foreign financial accounts has to file an FBAR if at any point during the calendar year the aggregate value of all such foreign accounts equals or exceeds $10,000, even if for one day.

Prior to the revised FBAR being introduced in the fall of 2008, a U.S. person was defined to include a U.S. citizen or resident, and a domestic corporation, partnership, estate or trust. The Proposed Regulations define the term "United States person" in much the same way: it includes citizens and residents of the United States, as well as any domestic entity. The term "resident" is defined by reference to section 7701(b) and the regulations thereunder. Consequently, even though a nonresident alien never had to worry about filing an FBAR to report whether he/she was "in and doing business in the U.S.," as a result of the relief provided in Announcement 2010-16 and Notice 2010-23, if a nonresident alien classifies as an income tax resident under the substantial presence test, such individual will have to file an FBAR to report their worldwide accounts. In many jurisdictions, individuals go through significant expense to obtain privacy for purely personal safety reasons, and not for money laundering or any financial criminal enterprise. Resorting to the use of the income tax test for residency alleviates the government from providing effective guidance as to what qualifies as "in and doing business," but the number of persons who could be affected increases tremendously. The Proposed Regulations indicate that the estimated number of affected individuals and entities is 400,000, and that a great majority will likely come from this group.

Limited liability companies are included within the definition of a "domestic entity." Interestingly, an entity will have to file whether or not it has made an election to be disregarded. The consequence is that a nonresident alien owner of a disregarded entity may have to file an FBAR regardless of whether such person qualifies as a U.S. income tax resident.

The...

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