VIEWpoint Issue 1 | 2023
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VIEWpoint Issue 2 | 2022
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SBA Releases Updated Standard Operating Procedures
by Bill Leary, International Tax Director, Doeren Mayhew
U.S. citizens who have an interest in, or signature authority over, a financial account are required to disclose the existence of such account on Schedule B, Part III of their individual income tax return. Additionally, they must file a Report of Foreign Bank and Financial Accounts (FBAR) with the U.S. Treasury by June 30, 2014, disclosing any financial account in a foreign country with assets in excess of $10,000 in which they have a financial interest, or over which they have signatory or other authority. Those who willfully fail to comply with foreign bank account reporting in a timely manner can be liable for significant penalties.
The international tax accountants at Doeren Mayhew provide details on who should file an FBAR, the high cost of foreign bank account reporting non-compliance and a new compliance requirement affecting this year’s filing deadline.
At the end of May, a jury found Carl R. Zwerner responsible for civil penalties for willfully failing to file required FBARs for tax years 2004 through 2006 with respect to a secret Swiss bank account he controlled. The balance of the bank account during each of the years at issue exceeded $1.4 million, and the jury found Zwerner should be liable for penalties for 2004 through 2006. He faces a maximum 50 percent penalty of the balance in his unreported bank account for each of the three years. (The cumulative penalty under the statute seems draconian.)
Even though he completed a tax organizer provided by his accountant every year, Zwerner answered “no” to questions asking whether “you have an interest in or signature authority over a financial account in a foreign country, such as a bank account, securities account or other financial account” and whether “you have any foreign income or pay any foreign taxes.”
Even failing to disclose a foreign account on one’s tax return can create problems. A jury convicted James A. Simon, a CPA and a professor of accounting who was the managing director of three foreign corporations with signature authority over the corporations’ foreign bank accounts, of four counts of filing false income tax returns because he failed to check the “yes” box on his Forms 1040, Schedule B, Part III. Simon was also convicted of three counts of failing to file FBARs. The charges against Simon carried a six-year prison sentence.
On Sept. 30, 2013, the Financial Crimes Enforcement Network (FinCEN) announced the release of its FBAR, FinCEN 114, which replaces Treasury Form 90.22-1. For individual filings due on or before June 30, 2014, the form must be filed electronically through FinCEN’s BSA E-Filing System. An FBAR filer is considered an individual when he/she personally owns (or jointly owns with a spouse) a reportable foreign financial account that requires the filing of an FBAR for the reportable year. A non-individual FBAR filer, such as an attorney, CPA or an enrolled agent filing the FBAR on behalf of a client, must register to become a BSA E-Filer and file as an institution rather than an individual. Unfortunately, the instructions to the new form do not provide detailed guidance. View regulations discussing the rules. (FinCEN’s discussion of the rules can be found at the Federal Register for Feb. 24, 2011.)
The FBAR must be filed by U.S. persons (individuals and legal entities) with certain financial interests in foreign financial accounts. U.S. persons include U.S. citizens, U.S. residents (persons taxable in the United States on worldwide income, without considering income tax treaties), legal entities formed in the United States or under its laws, and trusts and estates formed under the laws of the United States. Merely earning income from U.S. sources does not mandate FBAR filing.
A financial account includes securities, brokerage, savings, demand, checking, deposit, time deposit or other accounts maintained with a financial institution. This also includes a commodity, futures or options account, an insurance account with a cash value, an annuity policy with a cash value and shares in a foreign mutual fund.
Accounts are treated as foreign financial accounts if they are located outside the United States, including accounts maintained with a foreign branch of a U.S. bank. A financial account maintained by a U.S. branch of a foreign bank is not a foreign financial account.
A U.S. person has a financial interest in a foreign financial account if they own or hold legal title of the account, regardless of for whom the account is maintained. Most people underestimate how inclusive the term “financial interest” is. You may be holding the account as an agent or indirectly because of ownership of a foreign business and have a reporting obligation. Many people overlook the fact that a controlling interest in a foreign subsidiary with a bank account causes a reporting obligation for the U.S. shareholder.
Signature authority is the authority of an individual to control the disposition of assets held in a foreign financial account by direct communication to the financial institution that maintains the account. This authority may exist with an individual alone or in conjunction with other individuals. Several exceptions exist for officers and employees of banks that have signature authority. Specifically, individuals who have signature authority over, but no financial interest in, a foreign financial account are not required to file an FBAR with regards to such account in certain situations.
FinCEN Notice 2013-1 has extended the filing date to June 30, 2015, for certain individuals who have signature authority over, but no financial interest in, certain foreign financial accounts. The extension applies to the reporting of signature authority held during the years covered by prior notices as well.
There are several limited exceptions to the FBAR reporting requirements applicable to:
For assistance foreign bank account reporting, contact Doeren Mayhew’s international tax accountants in Michigan, Houston or Ft. Lauderdale.
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