Many corporate treasury employees have learned in recent
months that they may be subject to foreign bank account reporting (FBAR) requirements.
The rules establish a reporting responsibility on all accounts that a U.S.
citizen has signatory or other authorization even if the person does not have a
financial interest in an account. Thus, the requirements could have an impact
on treasury employees that are authorized signors or initiators of wires at
There are also foreign bank account reporting rules for
expatriates and persons with dual citizenship living in other countries, including
Americans living and working in Canada, and who maintain bank accounts in the countries
in which they work and reside. FBAR and other IRS rules are very clear that you
must report account balances held in foreign accounts if the aggregate of all
your foreign account balances exceeds $10,000. Additionally, expats and dual
citizens have a reporting requirement for all monies earned outside the U.S.
Whether the filing delinquency is due to an expatriate situation
or failure to file an FBAR, unfortunately the reporting requirements have been
in existence since early 2000’s, when the Bank Secrecy Act and the Foreign Tax
Compliance Act (FATCA) were written. This was not a focal area for the IRS at
the time, and thus, not highly scrutinized. As the focus shifted in recent
years by the IRS and the Financial Crimes Enforcement Network (FinCEN), some treasury
employees and expatriates are now learning that they may have been in
noncompliance for years.
The penalties for reporting noncompliance are harsh. If you
fail to file an FBAR, in the absence of reasonable cause, you can be subject either
to a willful or non-willful civil penalty. The civil penalty for willfully
failing to file FBAR can be up to the greater of $100,000 or 50 percent of the
total balance in the foreign account at the time of the violation. This could
be catastrophic for a treasury employee that have with signatory authority
over, but no financial interest in, millions of dollars held in these foreign
bank accounts who has not been compliant for years.
There are similar penalties for expatriates failing to
report income earned outside the U.S. For expatriates and persons having dual
citizenship, the penalty that can be imposed is 5 percent of the amount of tax that
would have been owed to Treasury. If the failure lasted more than one month, an
additional 5 percent penalty can be imposed for each month, or fraction thereof,
as long as the failure continues. However, the total failure to file penalty
cannot exceed 25 percent. The IRS offered the Offshore Voluntary Disclosure
Initiative earlier this year to help non-compliers get current. Yet, many people
did not take advantage of the program because there are still many filers just becoming
aware of their filing delinquency.
The IRS recently met with the U.S. Ambassador to Canada and
Canadian officials to address their concerns about these harsh penalties for
failure to file timely reports. As a result, the IRS issued a fact sheet that clarifies
when a person would be subject to the penalties. The fact sheet provides
examples for what the IRS considers “reasonable cause.” Generally, the fact
sheet states that reasonable cause is granted when you can demonstrate that you
exercised ordinary care and prudence in meeting your tax obligations but
nevertheless failed to meet them. Sounds confusing?
The IRS went further to say that they consider all available
information to include:
- The reasons given for not meeting your tax
- Tax compliance history;
- The length of time between your failure to meet
the obligation and your subsequent compliance; and
- Any circumstances beyond your control.
In addition, the IRS also looks at a person’s age, recent changes in the tax forms or law that you could not reasonably be expected to know, and the level of complexity of the compliance issue.
One example given that is generally applicable to our
members is the case where a taxpayer, after reading recent press and learning
about his filing requirements, filed delinquent FBARs, reported his foreign
accounts and attached to the FBARs statements explaining that he was previously
unaware of his obligation to report the accounts on an FBAR. The taxpayer was
compliant with his federal income tax returns so was granted no penalties as it
was determined reasonable cause.
The moral of the story: Expatriates, dual citizenship
holders and treasury folks that are subject to FBAR or other tax reporting
rules may want to come clean and file their unreported FBARs and tax returns with
explanation. The longer you wait after you have been informed the less your
case for good cause becomes. Also, if you were an unrelated delinquent
taxpayer, your past action may come back to haunt you. Thus, make sure you file
timely! When in doubt fill it out…with the explanatory statement.
A copy of the fact
sheet can be found here.