Donna (not her real name, of course) has been breaking the law for years.
The funny thing is she doesn’t look like your stereotypical criminal: she’s well dressed, well spoken and well travelled.
She hasn’t physically harmed anyone. She hasn’t stolen anything. I’m not sure she has so much as a traffic violation.
Her crime? While she has faithfully reported all of her taxable income over the years, she has failed to file a form TD F 90-22.1 (downloads as a pdf). You know that one, right? It just rolls off the tongue.
FBARs have been around for more than forty years now, though they’re just now getting a lot of press. The Report of Foreign Bank and Financial Accounts requirements (31 CFR 103.24), or the FBAR rules, are part of the Banking Secrecy Act. Under the rules, each “US person” with an interest in, signature or other authority over, one or more bank, securities, or other financial accounts in any foreign country must file an FBAR if the aggregate value of such accounts at any point in a calendar year exceeds $10,000. A “US person” generally means a citizen or resident of the United States, or a person in and doing business in the United States – it is not limited to individual taxpayers and includes partnerships and corporations.
In other words, if the total of your interests in all of the foreign accounts in which you have an interest (even if it’s authoritative rather than financial) reaches $10,000 or more at any point in the calendar year, you need to file an FBAR. That applies even if you’ve been faithfully reporting the income on your federal income tax return (like Donna) and even if you’ve never, ever repatriated a single dollar to the U.S. (also like Donna).
If the total of your interests in all of your foreign accounts reaches $10,000 or more at any point in the calendar year, you must file an FBAR by the deadline. The official deadline is June 30 following each calendar year (so, for 2010, the deadline is June 30, 2011). There are no extensions – and very few exceptions.
To file an FBAR, check the appropriate block on your federal form 1040 at Schedule B and then file form TD F 90-22.1, Report of Foreign Bank and Financial Accounts.
You don’t send your FBAR with your tax return. Instead, you file it with:
United States Department of the Treasury
P.O. Box 32621
Detroit, MI 48232-0621
Or if you’re using an express delivery service:
IRS Enterprise Computing Center
ATTN: CTR Operations Mailroom, 4th Floor
985 Michigan AvenueDetroit, MI 48226
Failure to comply can make you a criminal. Seriously. Failure to file an FBAR may, under the law, result in civil penalties, criminal penalties or both (the list of potential penalties that may apply is distressingly long). It’s all very draconian but it’s also very real. And you should take it seriously.
While the rules have been around for awhile, the IRS has been
unconcerned comatose apathetic fairly quiet when it comes to enforcement. In recent years, however, the IRS has made the monitoring foreign accounts part of their targeted enforcement strategy. That means – and they’ve made it extremely clear – they’re coming for you.
If you haven’t filed FBARs for the past few years and believe that you should have, don’t panic. The IRS is currently offering a limited amnesty program for taxpayers who are not compliant, the 2011 Offshore Voluntary Disclosure Initiative (OVDI). Commissioner Doug Shulman emphasized that the goal of the program was to assist taxpayers in understanding and meeting their reporting obligations:
As I’ve said all along, the goal is to get people back into the U.S. tax system. Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. This new disclosure initiative is the last, best chance for people to get back into the system.
It’s an interesting characterization. Folks like Donna swear they’re not “hiding assets” and I would agree in theory. She’s been reporting the income and she’s not looking to evade taxation. But under the rules, she’s as much a cheater to Shulman as those folks at UBS, HSBC and Deutsche Bank who were purposefully looking to keep assets from the IRS.
It’s also important to understand that your “last, best chance” doesn’t mean a free pass. Taxpayers who have not been reporting their foreign taxable income will be required to pay back taxes and interest, as well any accuracy-related and/or delinquency penalties. However, qualified taxpayers may be eligible for a reduced penalty scheme and will avoid criminal prosecution but only if you’ve managed to avoid detection to date. If you’ve already been targeted for enforcement by IRS, you aren’t eligible for the program.
If you’re one of those taxpayers like Donna who has been reporting income all along, but not filing your FBARs, the IRS is offering a simplified version of the OVDI. If you qualify, you can file the delinquent FBAR reports with a statement explaining why the reports are filed late and avoid the penalty for the failure to file the delinquent FBARs so long as you meet the August 31, 2011 deadline. However, the IRS stresses that FBARs for 2010 are due on June 30, 2011 and must be filed by that date even if you are participating in the initiative.
Again, that June 30, 2011 date is important. If you need to come clean, or if you’re scratching your head wondering whether you might need to file an FBAR, contact your tax professional for more details. You can also contact the IRS directly by calling 800-800-2877 and selecting option 2 or emailing FBARquestions@irs.gov (questions only to this email address, the system doesn’t accept actual FBARs).
I’ve talked about the FBAR requirements with many of my clients, like Donna and I understand the frustrations. I realize that the reporting requirements are burdensome and confusing. I also agree that they’re invasive. And I totally get that they make clients want to scream and pull out their hair. But – like it or not – they’re also the law.
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