The U.S. Foreign Bank and Financial Accounts form (FBAR) has garnered much attention in recent years due to the enormous potential penalties associated with filing the form late. The FBAR has also been a target of the IRS. In 2009, then Commissioner of the IRS, Douglas Shulman, stated, “If you are a U.S. individual holding overseas assets, you must report and pay your taxes or we will be increasingly focused on finding you.”
For those not familiar with this filing requirement, U.S. citizens, residents and certain other U.S. persons must annually report their direct or indirect financial interest in, or signature authority over, a financial account that is maintained with a financial institution located in a foreign country (i.e. outside of the U.S.). This reporting is required if, for any calendar year, the aggregate value of all foreign accounts exceeded USD $10,000 at any time during the year. The reporting is done on Form 114 (formerly Form TD F 90-22.1) and is often referred to as the “foreign bank account report,” or FBAR. The FBAR must be received by the Department of Treasury on or before June 30 of the year following the calendar reporting year in question.
Generally speaking, in non-willful violation cases, a late-filing or failure-to-file penalty of up to $10,000 can be assessed for each account. In more severe cases of willful violation, civil penalties can reach the greater of $100,000 or 50% of the account value. Criminal penalties may also be assessed, with fines of $250,000 and up to five years in prison.
In our experience, most taxpayers are completely unaware of the FBAR filing requirements, and the IRS generally has allowed them to file delinquent FBAR forms (through various IRS programs) without having any penalties imposed. However, as recently as January 2013, the IRS and the Department of Justice penalized a 79-year-old woman over $21 million plus prison time for failing to report the income earned from Swiss bank accounts, and failing to disclose the accounts themselves on an FBAR form. The sentencing judge ultimately showed compassion for the elderly woman, who paid the $21 million penalty; he did not sentence her to any jail time but instead sentenced her to five seconds of probation.
E-filing requirement and changes
The Financial Crimes Enforcement Network (FinCEN), the government body responsible for the administration of the FBAR, implemented a substantial change in the FBAR filing process by imposing mandatory e-filing as of July 1, 2013. FinCEN developed an electronic filing system that accepted electronic FBAR forms in 2011, but the e-filing was not mandated until very recently. FinCEN claims that e-filing the form is quicker, more secure, free, and provides an instant confirmation of successful filing. FinCEN also threatens a $500 civil penalty for filing a paper form rather than e-filing.
The FBAR form is prepared and e-filed using the BSA (Bank Secrecy Act) e-filing website at http://bsaefiling.fincen.treas.gov/main.html. Attorneys, CPAs, and enrolled agents are permitted to prepare and e-file the form on behalf of taxpayers. A “Record of Authorization to Electronically File FBARs” (Form 114a) must be signed by the taxpayer (and the preparer) and kept by the preparer in the event it is requested by FinCEN. This e-file authorization form is much like the Canadian version for authorizing a third party to e-file a personal tax return (Form T183), though more information is required for the FBAR form.
Shortly after the e-filing rules were enacted, we contacted FinCEN to inquire about the potential for exemptions from the requirement to e-file the FBAR form (allowing paper filing instead). FinCEN indicated that exemptions were not possible for individuals who engage professionals to prepare their FBAR forms. Only individuals who prepare and file their own forms may request an exemption. However, it is still unclear how the individual will paper file Form 114 since a paper version of the form currently does not exist and the former form TDF 90-22.1 is considered obsolete. Furthermore, it is our understanding that each taxpayer will qualify for the e-file exemption only once and only for one year. We expect more flexibility to be offered in the future as FinCEN begins to better understand specific taxpayer concerns, such as limited access to technology, poor computer literacy, and confidentiality concerns, to name just a few.
On the positive side, the electronic FBAR form does offer one interesting new feature. It provides the ability to pull from a list of “reasons” why an FBAR form is being filed late, if applicable. Each option provides a very short reason for late filing, such as “forgot to file” or “did not know that I had to file.” There is also an option to choose “other” and provide an explanation. At this time, there is no indication of how the IRS will view and respond to these reasons.
For those who were required to file the FBAR form but were not aware of these requirements, the IRS has issued specific procedures to come forward voluntarily and potentially avoid or reduce the penalties. Individuals in this situation should seek accounting and legal advice before filing late FBAR forms.
Kevin Tippett, CPA (CO, USA), is a Manager of Tax Services in the Ottawa office of Collins Barrow.
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