The IRS Large Business and International (LB&I) division last week publicly released a “practice unit” that…
New IRS FBAR Practice Unit
The IRS LB&I recently issued its Practice Unit on FBARs. Practice Units are “job aids” and training materials intended to describe for IRS agents helpful practices about tax concepts in general and specific types of tax reporting forms.
The FBAR Practice Unit provides a useful summary of the FBAR reporting rules. More importantly, it provides important insights into how the IRS (and its agents) interpret these rules. To help taxpayers and tax advisors, this article provides a summary of the FBAR Practice Unit.
The Bank Secrecy Act (“BSA”) requires United States persons (“USPs”) to file FinCEN Forms 114, Report of Foreign Bank and Financial Accounts (“FBARs”), for each calendar year in which the aggregate amount(s) in certain foreign account(s) exceed $10,000. Although the purpose of the FBAR reporting requirements is to help the government identify and trace funds used for illegal purposes or help identify unreported income maintained or generated overseas, even lawful USPs often run afoul of the technical and complex FBAR reporting requirements.
FBAR Filing Deadline:
How Long Does the IRS Have to Impose Civil Penalty Assessments for Late-Filed FBARs? Under the BSA, the IRS can assess civil penalties if a USP has an FBAR reporting obligation and fails to timely file a complete and accurate FBAR. Unlike other federal income tax penalties, the IRS is limited to making an assessment of FBAR penalties up to six (6) years from the date of the FBAR reporting deadline.
Example: For his 2019 calendar year, USP has an FBAR reporting obligation. USP fails to file an FBAR by October 15, 2020. The IRS has until October 15, 2026, to assess an FBAR civil penalty against USP. This same six-year assessment period applies whether USP files an FBAR or not.
What is a Financial Account?
Financial accounts include bank accounts and securities accounts. In addition, financial account is interpreted more broadly to include: (1) commodity futures or options accounts; (2) insurance or annuity policies with a cash value; and (3) mutual funds or similarly-pooled funds.
Financial accounts do not include: (1) stocks and bonds held directly by a USP; (2) real estate or certain accounts holding solely real estate (e.g., a Mexican fideicomiso); (3) precious metals/stones or other jewels held directly by a USP; and (4) in most instances, a safety deposit box.
What is a Financial Interest, Signature or Other Authority?
USPs can have either direct or indirect financial interests that are reportable on FBARs. For example, if a USP is an owner of record or has legal title of the foreign account, the USP has a direct and reportable interest, provided the other FBAR reporting requirements are met. In addition to a direct interest, a USP can have a reportable indirect interest in the foreign account at issue.
USPs who have signature or “other authority” over foreign accounts also may have reportable foreign accounts. Generally, the IRS deems a USP to have signature or other authority if that USP (either alone or in conjunction with another) can control the disposition of money, funds, or other assets held in a financial account by direction communication to the person with whom the financial account is maintained.
Example: Corporation A is the owner of a foreign account in Switzerland. USP owns 75% of Corporation A (both vote and value). USP has a reportable indirect interest in the foreign account, provided the other FBAR reporting requirements are met. Similar rules apply to partnerships and trusts.
Although the Practice Unit provides an excellent overview of the relevant statutes and regulations, it fails to provide methods to correct noncompliance. For some options, see our firm’s prior articles on the IRS DFSP or Streamline Filing Compliance Procedures.
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