Tax Law Center Blog

By Parag P. Patel, Esq. | Updated September 29, 2013

Responding to the needs of many filers who submit Reports of Foreign Bank and Financial Accounts (FBARs) jointly with spouses, or wish to submit them via third-party preparers, the Financial Crimes Enforcement Network (FinCEN) today introduced FinCEN Form 114(a), Record of Authorization to Electronically File FBARs. A copy of this form would be maintained by the filer and the account owner, but not submitted to FinCEN. The form would be made available upon request by FinCEN or the Internal Revenue Service (IRS).

FinCEN is also making technical adjustments to ease FBAR filing and allow for enhancements such as introducing new space on the form for filers to provide reasons for late filing as well as the addition of third party preparer information. In addition, an FBAR batch filing capability is now available for testing.

An FBAR is required to be filed by US persons who have a financial interest in or signature or other authority over a foreign financial account. While the FBAR is required under the Bank Secrecy Act (BSA), which is mostly administered by FinCEN, the Internal Revenue Service (IRS) has administrative authority to enforce FBAR compliance, as the misuse of foreign bank accounts is often linked to income tax evasion.

Mandatory e-filing limitations Mandatory e-filing is required for all FBARs filed after June 30, 2013. The web-based BSA e-filing system used by FinCEN is the only means available to file an FBAR regardless of whether or not the FBAR is filed timely. Prior to the recent process changes, the BSA efiling system contained the following limitations that impacted FBAR filers:  A user name and password were required to establish the profile of each FBAR filer. They were also used as the means to electronically sign the submitted FBARs. This required an FBAR filer to provide the username and password to any other person, such as a representative or spouse, who would file the form on the filer’s behalf.  Additional documents could not be uploaded. FinCEN has long discouraged the use of ‘white paper’ attachments to the FBAR as a means to submit additional information. However, in some cases, such as when a reasonable cause statement was needed to explain a delinquent FBAR filing, filers were required to attach supporting addenda. FinCEN recently addressed these limitations with new documentation and filing procedures. New changes to e-filing procedures

Delinquent FBARs

The IRS on July 24, 2013 updated its Frequently Asked Questions (FAQs) for its Offshore Voluntary Disclosure Program (OVDP). Under the OVDP’s 2012 announcement, the IRS provided a means for taxpayers and others who had not met all FBAR filing requirements to file late original or amended FBARs with penalty protection. Specifically, FAQ #17 allows an FBAR filer who does not have any outstanding tax liability relating to the ownership or signatory authority over the foreign bank accounts to file a delinquent FBAR without incurring a penalty if the filer includes a statement explaining why the FBAR was not timely filed. Prior to mandatory efiling, such explanatory statements were attached to the FBARs filed on paper forms – a process not feasible under the present e-filing system. FAQ #17 has been updated to address this limitation. The FAQ now instructs delinquent filers to e-file the FBAR and retain the explanatory statement in their files. The IRS reserves the right to request the statement at any time. Spouse and third party authorizations FinCEN also released a new form, FinCEN Form 114(a), on July 29, 2013 to allow any individual or entity with an FBAR filing obligation to authorize their spouse or third parties, such as representatives or preparers, to e-file the FBAR on their behalf. The authorized individual or entity must be registered in the BSA e-filing system. Once the authorization is in place, the authorized individual or entity can then file FBARs, receive other information related to the FBARs, answer inquiries from FinCEN, and resolve issues relating the submitted FBARs. The Form 114(a) does not have to be filed with FinCEN, but is instead simply retained in the records of both the FBAR filer and the authorized third party. The form can be requested by FinCEN at any time. New information fields coming In addition, FinCEN announced several other prospective changes to the BSA e-filing system that will address concerns of FBAR filers. FinCEN has committed to changing the electronic version of the TD F 90- 22.1 to include an area for providing an explanation for late filings. The new form will also include third party preparer information. The new electronic version of the form is scheduled to be released by September 30, 2013.

There are two types of penalties applicable to FinCEN  Form 114 (Report of Foreign Bank and Financial Accounts) (FBARs):  (1) Non-Willful and (2) Willful.  The penalties are theoretically assessed per account and not per FBAR; however, in practice, our firm has seen application on a per FBAR filing.  Additionally, the penalties are assessed for each year there is a violation.

The penalty regime can be summarized as follows:

Non-Willful Penalty

•     Up to $10,000 for each negligent violation

•     No Criminal Penalties Assessed

Willful Penalty

•     Up to the greater of $100,000 or 50% of the amount in the account at the time of the violation

•     Criminal Penalties of up to $250,000 or 5 years in jail or both

Willful Penalty While Violating Certain Other Laws

•     Up to the greater of $100,000 or 50% of the amount in the account at the time of the violation

•     Criminal Penalties of up to $500,000 or 10 years in jail or both

While the penalties can be overwhelmingly high, there have been a host of Voluntary Disclosure Programs offered by the IRS that can potentially reduce or even eliminate the penalties noted above.

About the Author

Parag P. Patel, Esq. brings over three decades of experience to individuals and businesses facing complex tax problems. Holding advanced degrees from Georgetown University Law Center (J.D.) and New York University School of Law (LL.M. in Tax Law), the nation’s top tax programs, Mr. Patel delivers sophisticated and creative strategies in complicated federal and state audits, penalty abatements, and foreign asset/income reporting. His practice emphasizes international tax matters, specifically foreign financial account reporting (FBAR), voluntary disclosures, and penalty defense.

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