By Stuart Lyons, Tax Senior Manager

Significant changes to the reporting requirements for foreign accounts went into effect in January 2009. The IRS published the new version of Form 90-22.1 “Foreign Bank Account Report” (FBAR) in October 2008. This new version must be used for any filings after December 31, 2008. Filings for calendar year 2008, which are due June 30, 2009, have had to use this new version of the form.

The revised form and instructions:

Extend reporting obligations to certain foreign entities doing business in the United States.

• Clarify the definition of a “financial interest” in a foreign account.

• Expand when a US person must report accounts owned by a foreign subsidiary.

• Extend the relief previously granted to officers and employees of US headed corporate groups that either are publicly traded or are widely held and have substantial assets.

• Confirm that married couples can file joint reports.

• Extend reporting to interests in foreign “mutual funds”.

• Clarify that debit cards and prepaid credit cards are foreign financial accounts, and

• Clarify the treatment of persons and accounts in US possessions.

The FBAR must be filed annually by any U.S. person with a financial interest or authority over an account in a foreign country if the total value of the account exceeds $10,000 at some point during the calendar year.

General Rule:

According to 31 U.S.C. Section 5314 (not part of the Internal Revenue Code), which has not changed in 20 years;

“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.”

As a result, the Treasury Secretary has promulgated regulations requiring a report to be filed by each person subject to U.S, jurisdiction with a “financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country”. So in addition to requiring a FBAR be filed by those falling within the standard definition of a U.S. person, the new FBAR instructions state that it must also be filed by anyone in or doing business in the United States. This goes far beyond any legal criteria of citizen or domicile, which has its own legal definitions. As a result, this expanded definition will now require the following U.S. filers to file FBAR forms for their foreign financial interests;

1. Form 1040NR

2. Form 1120F

3. Recipients of Form 8805 (Nonresident partner withholding)

Financial Interests:

What is a financial interest?

The term “financial interest” is now defined as an interest held by a U.S. person if the person is the owner of record of the interest or the U.S. person has legal title over the interest “whether the account is maintained for his or her own benefit or for the benefit of others, including non-United States persons”. So now “financial interests” can include the following:

1. Accounts at foreign financial institutions held for the benefit of minor children

2. Accounts at foreign financial institutions held by an asset protectorate trust

3. Accounts at foreign financial institutions where a son or daughter has alternative signatory authority over the account for that of a elder parent

4. Foreign financial accounts of a

1. corporation in which the United States person owns directly or indirectly more than 50% of the shares or controls more than 50% of the voting power for all the shares of stock;

2. partnership in which the United States person owns an interest in more than 50% of the profits or more than 50% of the capital;

3. trust in which the United States person has a present beneficial interest , either directly or indirectly , in more than 50% of the assets or from which such person receives more than 50% of the current income.

4. financial accounts of lower tier foreign subsidiaries and partnerships for which the 50% control test has been met.

5. Any foreign account in which the assets are held in a commingled fund, and the account holder holds an equity interest in the fund; e.g. foreign mutual fund.

6. Debit and prepaid credit cards held in the name of a foreign financial institution.

A reportable financial interest does not exist for individual bonds, notes, or stock certificates held by the filer, or an unsecured loan to a foreign trade or business that is not a financial institution.

Application to Parent-Subsidiary Corporate Relationships:

A corporation which owns directly or indirectly more than a 50 percent interest in one or more other entities required to file a FBAR will be permitted to file a consolidated report, on behalf of itself and such other entities. Each foreign account has to be listed with the corporate name, identifying number and address of the foreign financial account as shown on the books of the financial institution.

What about the corporate officer or employee with signatory authority over the foreign financial account? Is there a separate filing required for this person? Generally, yes. There is a dual filing requirement, where both the individual with signing authority must file and the company must file.

However, there is an exception for publicly held corporations whose stock is traded on a U.S. national securities exchange or corporation which has assets exceeding $10 million and has 500 or more shareholders. This exception from filing also requires that the officer or employee be notified in writing by the chief financial officer or similar responsible officer of the corporation that the corporation has filed a current report, which includes that applicable foreign account.

Specific Value Required:

In the past, reporting the value (size) of foreign accounts was in bands: you could check the box for under $10,000, $10,000 to $99,000, $100,000 to $1 million. Now you report the “maximum” value as shown on statements. What was a relatively simple approach has been made more complicated. In the past, you could make a stab at the size of the account and check one of the boxes. Now you have to review past account statements for the highest value during the year.

Joint Accounts:

For joint accounts, taxpayers are required to provide the name and address of the other joint owner (or principal joint owner if there is more than one). For spousal joint accounts, spouses may file a single FBAR.

Penalties for Not Filing:

For Minor Violations- 31 U.S.C. Section 5321(a)(5) imposes a penalty of up to $10,000 for any failure to comply with these rules, unless both (a) the violation was due to reasonable cause and (b) income from the account was properly reported on the relevant income tax return.

For Willful Violations – For willful violations, the penalty is the greater of $100,000 or 50% of the balance o the account. Criminal penalties may also apply for failure to file form TDF 90.22.1; the imposition of criminal penalties does not preclude the imposition of a civil penalty.

The change in the statute dramatically increases the exposure for willful violations and, theoretically, with a two-year failure to file, the entire account could be subject to civil penalty since one half the principal is subject to penalty each year.

Voluntary Disclosure for Previous Non- filers:

For taxpayers who reported and paid tax on all their taxable income for prior years but did not file FBARs, there is a Voluntary Disclosure Process currently available. Such delinquent FBAR reports should be prepared with a statement attached explaining why reports are filed late. Such copies of the delinquent reports, together with copies of the relevant income tax returns for the applicable years should then be sent to the IRS Philadelphia Offshore Identification Unit by September 23, 2009.

For taxpayers who have not reported income from foreign accounts in the past, there is currently available a Voluntary Compliance Initiative available for taxpayers who come forward and file the necessary paperwork by September 23, 2009. This new initiative is designed to encourage taxpayers who have been “hiding assets offshore” to come back into the system on a voluntary basis. While some may consider the price for coming back into the system steep, the penalties are not as high as they potentially could be, and most importantly, the program allows participating taxpayers to avoid criminal prosecution.

NOTE: This article is intended only to provide information to the reader and should not be relied upon for legal or financial advice.

If you have further questions or issues on this subject, please contact Stuart Lyons, BNN’s International Practice Leader, at 207.791.7140 or slyons@bnncpa.com.

IRS CIRCULAR 230 DISCLOSURE:
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