So far court decisions have only confirmed the plain wording of the FBAR statute which says that no FBAR penalty will be imposed if there is "reasonable cause" and the balance in the offending account was properly reported. We are still left with the "fact specific interpretation" of what constitutes precisely "reasonable cause".
What is deemed wilful has very nicely been documented in released FOIA docs:
https://www.bragertaxlaw.com/previously-unreleased-irs-guidelines-for-fbar-audits.html
It Begins in the 1970s:
The historical roots of the FBAR may be found in the Bank Secrecy Act which was enacted in 1970. Here is what it says:
“1970 CONGRESS ENACTS THE BANK SECRECY ACT (or BSA, or otherwise known as the Currency and Foreign Transactions Reporting Act) which requires American financial institutions to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments and file reports of cash purchases of these negotiable instruments of $3,000 or more (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. (Bank Secrecy Act of 1970).”THE BSA REGULATIONS NOW REQUIRE ALL FINANCIAL INSTITUTIONS to submit five types of reports to the government including:
FBAR: Department of the Treasury Form 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR): Each person (including a bank) subject to the jurisdiction of the United States having an interest in, signature or other authority over, one or more bank, securities, or other financial accounts in a foreign country must file an FBAR if the aggregate value of such accounts at any point in a calendar year exceeds $5,000. (31 CFR 103.24)
The FBAR Has Been Asleep For A Long Time - But FBAR Consciousness Has Been Renewed and Is Moving Closer To Many Borders.
Leaving aside the history, the FBAR has laid dormant, like a potentially cancerous tumor. It was almost never enforced. Compliance was almost (and continues to be) very low. In fact, according to Accounting Today:
While the Association of Americans Resident Overseas estimates that some 6.32 million Americans live abroad, the Treasury Inspector General for Tax Administration reports that only a little more than 534,000 FBARs were filed in 2009.Major changes occurred after 911. There were three important events leading to the renewal of FBAR consciousness:
- FBAR was referred to as part of the deliberations leading to the Patriot Act. The FBAR is thought to be important to the war on terror. Of course, the FBAR applies to only U.S. citizens and residents. It cannot apply to “foreign citizens living outside the U.S. Therefore, it should be understood as being of assistance only in relation to U.S. citizen terrorists.
- The “Jobs Act” of 2004 amended the relevant FBAR statute. The effect was to strengthen the penalties for a “willful failure” to file the FBAR. In addition, a non-willful penalty of up to $10,000 per violation was authorized. Note that there is no minimum penalty but the maximum penalty for a non-willful violation was capped at $10,000 per violation.
- FBAR Enforcement – It was turned over to the IRS giving them an easy way to raise money. As was noted by an FBAR Lawyer, “Compliance failure leaves a fertile and rewarding ground for IRS enforcement, as FBAR’s received even one day late can generate a $10,000 penalty for non-willful violations”.
- neither the IRS nor the U.S. Treasury has made any effort to educate people about FBAR (Example the website of the U.S. embassy in London as of the date of this post, makes no reference to FBAR in its tax information section)
- U.S. consulates and Embassies have not made a coordinated proactive effort to educate U.S. citizens about FBAR (We pay taxes, we want services)
- U.S. citizens who have been filing tax returns that clearly indicated that an FBAR should be filed have not been “flagged” by the IRS for “remedial education” (how about just sending a letter)
- U.S. passports contain information about the obligation to file tax returns but not information about the obligation to file FBARs
- The rules and legal obligations surrounding FBAR are NOT found in one place
- there is speculation that it may have been related to the resignation of an influential banker in Switzerland
The effect of all this has been to destroy and steal the lives of a large number of hard working honest U.S. citizens living outside the U.S.
Mr. FBAR is even a “Party Crasher” – the “Republican Party” to be precise. Mitt Romney’s tax returns indicate that he has foreign bank accounts. This has prompted the question of whether Mr. Romney has filed his FBARs. Given the prominence of FBAR, shouldn’t Mr. Romney (and every other public figure) be required to release his FBARs? In fact, one article has suggested, that if he hasn’t, that Mitt Romney might be a candidate for OVDI. Mr. Romney has the money to pay for the best in the world of tax professionals. Therefore, I suspect that he is in full compliance with the law. But, the fact that this is discussed at all underscores the importance and prominence of Mr. FBAR.
It is difficult (without paying a lawyer) to understand the FBAR. Unless you are dealing with an “FBAR Lawyer”, well, good luck to you. Researchers have difficulty finding the “FBAR statute”. Everybody is learning that the failure to meet the FBAR filing requirement (even though you didn’t know about the requirement) means that the IRS may confiscate your money. Although, this is NOT necessarily the case, this is what people understand.
The purpose of this post is to explain where the FBAR rules are found and what they say. This is in no way intended to be legal advice. (I do recommend that you get legal advice.) But, then the problem becomes: where do you find an FBAR lawyer that you can trust and that you can afford? But, that is the subject of another post.
Looing for Mr. FBAR is like participating in a treasure hunt – he can’t be found in one place and he is a “moving target”
The “FBAR law” really is a compilation from three distinct sources. Mr. FBAR can be understood only once these three sources have been understood. These sources include:
- The Enabling Legislation
- The Regulations Made Under The Enabling Legislation
- The Instructions on the FBAR form
- The Enabling FBAR Legislation as it stands today
SUBCHAPTER II—RECORDS AND REPORTS ON MONETARY INSTRUMENTS TRANSACTIONS
How Current is This?
- § 5311. Declaration of purpose
- § 5312. Definitions and application
- § 5313. Reports on domestic coins and currency transactions
- § 5314. Records and reports on foreign financial agency transactions
- § 5315. Reports on foreign currency transactions
- § 5316. Reports on exporting and importing monetary instruments
- § 5317. Search and forfeiture of monetary instruments
- § 5318. Compliance, exemptions, and summons authority
- § 5318A. Special measures for jurisdictions, financial institutions, international transactions, or types of accounts of primary money laundering concern
- § 5319. Availability of reports
- § 5320. Injunctions
- § 5321. Civil penalties
- § 5322. Criminal penalties
- § 5323. Rewards for informants
- § 5324. Structuring transactions to evade reporting requirement prohibited
- § 5325. Identification required to purchase certain monetary instruments
- § 5326. Records of certain domestic coin and currency transactions
- [§ 5327. Repealed.]
- § 5328. Whistleblower protections
- § 5329. Staff commentaries
- § 5330. Registration of money transmitting businesses
- § 5331. Reports relating to coins and currency received in nonfinancial trade or business
- § 5332. Bulk cash smuggling into or out of the United States
Now, let’s look specifically for the FBAR section. It is found in S. 5314 which is titled “Records and reports on foreign financial agency transactions”. Okay, it’s time to read it carefully:§ 5311. Declaration of purpose
How Current is This?
“It is the purpose of this subchapter (except section 5315) to require certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism.”
You will note that most of the “purpose” is not related to “tax”.
Commentary: Both section (a) and section (b) have interesting components.§ 5314. Records and reports on foreign financial agency transactions
How Current is This?
(a) Considering the need to avoid impeding or controlling the export or import of monetary instruments and the need to avoid burdening unreasonably a person making a transaction with a foreign financial agency, the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency. The records and reports shall contain the following information in the way and to the extent the Secretary prescribes:
(1) the identity and address of participants in a transaction or relationship.
(2) the legal capacity in which a participant is acting.
(3) the identity of real parties in interest.
(4) a description of the transaction.
(b) The Secretary may prescribe—
(1) a reasonable classification of persons subject to or exempt from a requirement under this section or a regulation under this section;
(2) a foreign country to which a requirement or a regulation under this section applies if the Secretary decides applying the requirement or regulation to all foreign countries is unnecessary or undesirable;
(3) the magnitude of transactions subject to a requirement or a regulation under this section;
(4) the kind of transaction subject to or exempt from a requirement or a regulation under this section; and
(5) other matters the Secretary considers necessary to carry out this section or a regulation under this section.
(c) A person shall be required to disclose a record required to be kept under this section or under a regulation under this section only as required by law.
Section (a)
Section (a) focuses on three broad areas.
- The type of interaction that triggers FBAR responsibility
- Making a transaction – Strictly speaking this would catch even the most trivial transaction. An IRS using the FBAR as a rule for the purpose of “revenue raising” and “oppression” could interpret this to include the most trivial transactions imaginable. Examples of trivial transactions could include: making an income tax payment at a bank you do NOT have an account with; purchasing a temporary travel insurance policy at a bank, converting five twenty dollar bills into one hundred bill, etc., applying for a credit card, being issued a credit card, etc.
- Maintaining a relationship – obviously this would include any kind of financial account. I will repeat: ANY kind of financial account. As many Canadians know, this includes your RRSPs,TFSAs, children’s bank account, etc. If in doubt: assume it is a relationship with a financial institution. (And you thought you were just trying to live your life.)
The FBAR statute requires you to:
- Keep records
- File reports
- Keep records and file reports
What the records must contain:
“The records and reports shall contain the following information in the way and to the extent the Secretary prescribes:
(1) the identity and address of participants in a transaction or relationship.
(2) the legal capacity in which a participant is acting.
(3) the identity of real parties in interest.
(4) a description of the transaction.”
Note that the Secretary will prescribe regulations describing how this works.
Section (b) – U.S. citizens living in certain countries and certain kinds of accounts can be exempted!
Section (b) is very interesting. It allows or the Secretary to exempt certain kinds of people (how about U.S. citizens living outside the U.S.), certain countries (how about high tax jurisdictions like Canada), certain kinds of transactions (how about RRSPs, TFSAs, etc)., the amount of the transaction (FBAR has been $10,000 since 1970, isn’t it time to raise the amount)?
To put it simply: section (b) provides the legislative tool to pressure the Treasury Secretary to exempt U.S. citizens who really live outside the United States? Calling American Citizens Abroad!!
5321 Civil Penalties – Horrifying, Frightening and Unreasonable
Since I am writing this for the benefit of the average person, who just didn’t know about FBAR, I am going to ignore the “Willful” penalties. If you see what the “Willful penalties are, you might have a “heart attack” and be unable to read on.
Here we go – it’s in 5321 (5) which reads as follows:
(5) Foreign financial agency transaction violation.—Commentary:
(A) Penalty authorized.— The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.
(B) Amount of penalty.—
(i) In general.— Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.
(ii) Reasonable cause exception.— No penalty shall be imposed under subparagraph (A) with respect to any violation if—
(I) such violation was due to reasonable cause, and
(II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.
- There is no required penalty (“may impose”)
- The maximum non-willful penalty is $10,000
- Reasonable cause exception: No penalty SHALL be imposed if there is “reasonable cause” and you file the delinquent reports
All parties (both the taxpayer and the government are bound by this statute.
But, that’s not all – You must also consider the Regulations and the FBAR form itself
That said, there are two additional places to look in trying to understand your FBAR obligations. These are: the regulations enacted under this section (see the Appendix below) and the instructions on the FBAR form.
In closing, if you want to be a true “FBAR Historian“, I would settle in for an evening to read the following article: “The Evolution of The FBAR” by Hale Sheppard.
Appendix – The Regulations Made Pursuant To The Enabling Statute:
Here are what I believe to be the relevant regulations governing FBAR:
S. 24 which says – Report of Foreign Financial Accounts
(a) Each person subject to the jurisdiction of the United States (except a foreign subsidiary of a U.S. person) having a financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country shall report such relationship to the Commissioner of the Internal Revenue for each year in which such relationship exists, and shall provide such information as shall be specified in a reporting form prescribed by the Secretary to be filed by such persons. Persons having a financial interest in 25 or more foreign financial accounts need only note that fact on the form. Such persons will be required to provide detailed information concerning each account when so requested by the Secretary or his delegate.S. 25 refers to: “Reports of Transactions With Foreign Financial Agencies” – the “transaction”
[42 FR 63774, Dec. 20, 1977, as amended at 52 FR 11443, Apr. 8, 1987; 52 FR 12641, Apr. 17, 1987]
Suffice it so say that this section really exists. It is long and complicated and appears to apply only to “financial institutions”. Hence, it is beyond the scope of this short information piece.
The FBAR Statute requires also that “records be maintained” and there are regulations governing this.
Specifically 103.32 which refers to the “Records to be MADE and RETAINED” having financial interests in foreign financial accounts” The section reads as follows:
Records of accounts required by § 103.24 to be reported to the Commissioner of Internal Revenue shall be retained by each person having a financial interest in or signature or other authority over any such account. Such records shall contain the name in which each such account is maintained, the number or other designation of such account, the name and address of the foreign bank or other person with whom such account is maintained, the type of such account, and the maximum value of each such account during the reporting period. Such records shall be retained for a period of 5 years and shall be kept at all times available for inspection as authorized by law. In the computation of the period of 5 years, there shall be disregarded any period beginning with a date on which the taxpayer is indicted or information instituted 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.
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.