Not Interested in Foreign Accounts : The IRS has recently been aggressive in pursuing tax frauds that have hidden assets in offshore accounts. The penalties for not reporting the existence of foreign accounts are severe, affecting even honest businesses and individuals who are unsure about their filing obligations.
Generally, US taxpayers with financial interests in foreign financial accounts are required to file Form TD F 90-22.1, Foreign Bank Statements and Account Financing (often referred to as “FBAR”), when the aggregate value of the accounts exceeds $10,000 at any time during one year. calendar.
Such accounts include, but are not limited to, demand deposits, savings, securities, brokerage, mutual funds and other mutual investment accounts held outside the United States. Individuals with top signature authority, but no financial interest, one or more accounts with the same qualifications must apply for FBAR as well. This latter requirement has caused much confusion and concern among executives with a certain degree of discretion over their employers’ foreign financial accounts.
Last February, the Treasury Department published a final amendment to the FBAR regulations to clarify filing obligations. This regulation came into force on March 28 and applies to FBAR filings reporting foreign financial accounts managed in the 2010 calendar year and for subsequent years.
The new regulation also specifically applies to persons who only have signature authority over foreign financial accounts and who reasonably defer their FBAR filing obligations for calendar year 2009 and earlier. The deadline for these individuals to apply for an FBAR was extended to November 1, 2011.
The IRS also ended its overseas voluntary disclosure initiative on September 9. During this initiative, the IRS offered a uniform penalty structure for taxpayers reporting previously undisclosed foreign accounts, as well as unreported income generated or held in those accounts. , during the 2003 to 2010 tax years. Although the window for participating in the program has closed, the initiative’s FAQ explains that those with only signature authority on foreign accounts must still file a report of arrears to FBAR.
Signature Authority Exception
What does signature (or other) authority mean, as far as the IRS is concerned? The final rule defines a signature or other power as follows:
“Signature or other authority means the authority of a person (alone or jointly with another person) to control the disposition of money, funds or other assets held in a financial account through direct communication (whether in writing or otherwise) to the person with whom the financial account maintained. .”
According to this definition, executives and other employees do not need to file an FBAR simply because they have authority over the foreign financial accounts of their business. Under the latest regulation, the Financial Crimes Enforcement Network (FinCEN) provides relief from the obligation to report signatures or other authorities over foreign financial accounts to officials and employees of five categories of entities that are subject to certain types of Federal regulations.
Among these categories are publicly traded companies listed on the US national stock exchange, and companies with more than 500 shareholders and assets of more than $10 million. For public companies, officers and employees of U.S. subsidiaries. there may also be no need to hand over FBAR, as long as the U.S. parent company. file a consolidated FBAR report that includes subsidiaries. This exception only applies if the employee or officer does not have a financial interest in the account in question.
However, the regulation stipulates that reporting exceptions are limited to foreign financial accounts that are directly owned by entities that employ officials or employees who have the authority to sign. The exception does not apply if the individual is employed by the parent company, but has signature authority over the foreign accounts of the company’s domestic subsidiary. Further, foreign accounts held by foreign subsidiaries of US companies are not eligible for this reporting exception.
For example, if Acme Corp. have foreign financial accounts, executives with signature authority over those accounts must also be Acme Corp employees. to qualify for an exception. If the US subsidiary of Acme Corp. own the account, the executive with signature authority over the account must be employed by the subsidiary (not Acme Corp. directly), and Acme Corp. must file a consolidated FBAR that includes subsidiaries for an exception to apply.
Determining Signature Authority
Even if a company officer or executive does not qualify for a signature authority exemption, there is still a chance that they will not be required to apply. According to the last rule:
“The test to determine whether a person has a signature or other authority over an account is whether a foreign financial institution will act on the person’s direct communication regarding the disposition of assets in that account. The phrase “together with other people” is intended to address situations where a financial institution Foreigners require direct communication from more than one individual regarding the disposition of assets in the account.”
An executive who only participates in decisions to allocate assets, or who has the ability to instruct others with signature authority over reportable accounts, is not considered to have signature authority of his own, unless the foreign financial institution will receive instructions from it. executives in connection with the disposal of account assets. If the person in question is only giving advice or supervising the direction of the account, he or she may not need to apply.
Penalty for Not Reporting
According to the FBAR filing instructions, a person who is required to file an FBAR can be subject to civil penalties of up to $10,000 if he or she fails to file properly. If there is a reasonable cause for the failure and the account balance is properly reported, no penalty will be imposed.
Although not defined in the final rules or FBAR filing instructions, it appears that the Treasury will follow the fair cause standards specified in the Internal Revenue Code (Sections 6664 and 6724) and the Treasury Regulations (Sections 1.6664-4 and 301.6724-1). Generally, these are circumstances beyond the control of the taxpayer or the entity. Note that the IRS does not consider not knowing the FBAR filing requirements a reasonable cause.
Determining whether “account balance has been properly reported” is less clear. Individuals report their interest and dividend income on Schedule B of their income tax returns. Part III of Schedule B deals with foreign accounts and trusts. Checking “yes” in this section to indicate a financial interest or signature authority over a financial account in a foreign country may or may not be sufficient to meet the “properly reported” standard.
Reporting all income generated by offshore accounts may or may not be sufficient. According to a reader of the blog Current Commentary Palisades Hudson, the latter does not meet the requirements to avoid punishment. Readers are US citizens living in New Zealand and married to a non-resident foreigner. He mentions that he reports all of his income from foreign financial accounts on U.S. individual income tax returns, but has assessed his penalty because he did not file an FBAR.
The penalties are harsher, of course, for someone who knowingly fails to report an account or account-identifying information. The person may be subject to a civil monetary penalty equivalent to the greater of $100,000, or 50 percent of the balance in a foreign financial account at the time of the offence, as well as possible criminal penalties. Reasonable cause exclusions do not apply to willful infringement.
In order to research this topic, I contacted the IRS Bank Secrecy Act Telephone Helpline to gain a better understanding of penalties for employees with signature authority over, but not having a financial interest in, an employer’s foreign financial account.
According to the representatives I spoke to, penalties will not be imposed on employees for only having signature authority over assets that do not benefit them. Representatives have not seen any instances where the employee was assessed a penalty for not filing an FBAR in these circumstances.
The IRS representative also noted that the IRS is very lenient with such whistleblowers. If anything, he said, penalties would be imposed on the employer, if the business did not report the account and the income generated in the account.
If it is determined that the executive has filing requirements, the representative says that the executive must file an FBAR by completing Parts I (Filer Information) and IV (Information on Financial Accounts Where the Filer has Signature Authority but No Financial Interest in the Account, along with attachments that explains why this is the first time the executive has filed an FBAR.
If it is still unclear whether an employee qualifies for a signature authority exemption and it appears that the employee has discretion over the business’ foreign financial accounts, we recommend filing an FBAR. Forms generally don’t take much time to prepare, and the potential costs of not doing so are too high to justify the risk.
Executives who set up – or hire an accountant to prepare – FBAR for business accounts in which they have signature authority must also report any personal foreign financial accounts in which they have a financial interest or signature authority (regardless of balances in those accounts). The filing requirements mandate that all foreign financial accounts be reported if the aggregate value of foreign accounts exceeds $10,000 at any time during the calendar year.
While foreign financial accounts have become a favorite IRS target, executives and the companies that employ them generally have nothing to worry about. Awareness of the rules and attention to accounts will ensure tax compliance and avoid unnecessary penalties.