FBARs and Form 8938

Back in March 2014, I first wrote about FBARshttps://htj.tax/dont-forget-those-fbars-aka-fincen-114

But my recent interaction with clients suggests that I need to revisit the topic.

Each U.S. citizen and permanent resident must report worldwide income
to the IRS even when paying taxes elsewhere. Moreover, you must file an annual FBAR(now called FinCEN Form 114) disclosing your foreign bank accounts if their aggregate value exceeds $10,000 at any point during the year. The penalties for either failure are big, potentially even criminal. FBAR penalties are even worse than tax evasion.

According to the FBAR instructions, U.S. persons include U.S. citizens and U.S. residents. Similarly, the FBAR regulations state that a U.S. person is a citizen of the United States or a resident of the United States, meaning “an individual who is a resident alien under 26 USC 7701(b) and the regulations thereunder.”

In the minds of so many people, FBARsare tied to FATCA.  Nothing could be further from the truth.  Way back before I was born, (we’re talking about 1970 now), Congress enacted the Bank Secrecy Act, which is codified in
Title 31 (Money and Finance) of the U.S. Code.  The purpose of the Bank Secrecy Act was to require the filing of reports and the retention of records where doing so would be helpful to the U.S. government in carrying out criminal, tax and regulatory investigations. One of the most important provisions of the Bank Secrecy Act was
Section 5314(a), which provides that:

[T]he 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.

A careful reading of the statute, along with a review of the applicable regulations, reveals that Section 5314 actually has two distinct requirements: filing FBARsand retaining certain records related to foreign accounts. With regard to the former, the relevant regulation (i.e., 31 C.F.R. §103.24) mandates the following:

Each person subject to the jurisdiction of the United States (except a foreign subsidiary of a U.S. person) having a financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country shall report such relationship to the [IRS] for each year in which such relationship exists, and shall provide such information as shall be specified in a reporting form prescribed by the Secretary to be filed by such persons. With regard to the latter, the regulations contain considerable detail concerning exactly who must retain records, what these records must contain, when these records may be discarded, and where the records must be kept.  In particular, the pertinent regulation states that:

Records of accounts required by § 103.24 to be reported to the [IRS] shall be retained by each person having a financial interest in or signature or other authority over any such account.  Such records shall contain the name in which each such account is maintained, the number or other designation of such account, the name and address of  maximum value of each such account during the reporting period.  Such records shall be retained for a period of 5 years and shall be kept at all times available for the inspection as authorized by law.

Now let’s talk about the penalties a bit.  An FBAR violation that is non-willful is $10,000 per account per  year.  Willful—but still civil—violations can be up to 50% of the value in a foreign account, again, per year. In a recent Florida case, one man had to pay penalties of 150% of his offshore account. An FBAR violation that is criminal is even worse, carrying up to 10 years in prison. You have to file FBARs even if you are only a signatory but  beneficial owner.

Each U.S. citizen and permanent resident must report worldwide income to the IRS even when paying taxes elsewhere. Moreover, you must file an annual FBAR(now called FinCEN Form 114) disclosing your foreign bank accounts if their aggregate value exceeds $10,000 at any point during the year. The penalties for either failure are big, potentially even criminal. FBAR penalties are even worse than tax evasion.

According to the FBAR instructions, U.S. persons include U.S. citizens and U.S. residents. Similarly, the FBAR regulations state that a U.S. person is a citizen of the United States or a resident of the United States, meaning “an individual who is a resident alien under 26 USC 7701(b) and the regulations thereunder.”

In the minds of so many people, FBARsare tied to FATCA.  Nothing could be further from the truth.  Way back before I was born, (we’re talking about 1970 now), Congress enacted the Bank Secrecy Act, which is codified in
Title 31 (Money and Finance) of the U.S. Code.  The purpose of the Bank Secrecy Act was to require the filing of reports and the retention of records where doing so would be helpful to the U.S. government in carrying out criminal, tax and regulatory investigations.

One of the most important provisions of the Bank Secrecy Act was Section 5314(a), which provides that:

[T]he 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.

A careful reading of the statute, along with a review of the applicable regulations, reveals that Section 5314 actually has two distinct requirements: filing FBARsand retaining certain records related to foreign accounts. With regard to the former, the relevant regulation (i.e., 31 C.F.R. §103.24) mandates the
following:

Each person subject to the jurisdiction of the United States (except a foreign subsidiary of a U.S. person) having a financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country shall report such relationship to the [IRS] for each year in which such relationship exists, and shall provide such information as shall be specified in a reporting form prescribed by the Secretary to be filed by such persons.

With regard to the latter, the regulations contain considerable detail concerning exactly who must retain records, what these records must contain, when these records may be discarded, and where the records must be kept.  In particular, the pertinent regulation states that:

Records of accounts required by § 103.24 to be reported to the [IRS] shall be retained by each person having a financial interest in or signature or other authority over any such account.  Such records shall contain the name in which each such account is maintained, the number or other designation of such account, the name and address of the foreign bank or other person with whom such account is maintained, the type of such account, and the maximum value of each such account during the reporting period.  Such records shall be retained
for a period of 5 years and shall be kept at all times available for the inspection as authorized by law.

Now let’s talk about the penalties a bit.  An FBAR violation that is non-willful is $10,000 per account per year.  Willful—but still civil—violations can be up to 50% of the value in a foreign account, again, per year. In a recent Florida case, one man had to pay penalties of 150% of his offshore account. An FBAR violation that is criminal is even worse, carrying up to 10 years in prison. You have to file FBARs even if you are only a signatory but not a beneficial owner.

 

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