Dear Clients and Friends,

Very truly yours,

Suzanne LoBiondo and Christopher Cheeseman 

Foreign Bank Account Reporting

The Bank Secrecy Act requires each United States person with a financial interest in, or signature authority over, any financial accounts with an aggregate value of more than $10,000 at any time during the calendar year, including bank, securities or other types of financial accounts in a foreign country, to report that relationship by filing an FBAR. The term "United States person" means a citizen or resident of the United States, a domestic partnership, a domestic corporation, or a domestic estate or trust.

The FBAR must be received by the IRS on or before June 30 of the year following the calendar year being reported. The FBAR is not filed with the taxpayer's federal income tax return. Instead, it is mailed to the Treasury Department or filed electronically with the Treasury Department.

One frequently asked question is what is "signature or other authority." The Treasury Department explained in the final rules that signature or other authority means the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained. The Treasury Department further explained that the test for determining whether an individual has signature or other authority over an account is whether the foreign financial institution will act upon a direct communication from that individual regarding the disposition of assets in that account.

Generally, the Treasury Department has defined the term ''bank  account'' to mean a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking.  The term ''securities account'' means an account with a person engaged in the business of buying, selling, holding or trading stock or other securities. The term ''other financial account'' means (i)  an account with a person that is in the business of accepting deposits as a financial agency; (ii) an account that is an insurance or annuity policy with a cash value; (iii) an account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or (iv) an account with a mutual fund or similar pooled fund or other investment fund. 

Failure to file an FBAR when required can result in significant civil and possibly criminal penalties.

In January 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. This program will be open for an indefinite period until otherwise announced.

For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

If you feel you may have an FBAR filing requirement, or have any questions, please contact us.