While the law is not concrete on the issue of filing FBARs for Bitcoin Accounts/Wallets, the reality is, under almost all circumstances if you have a Bitcoin Account you will have to report the information on a FBAR.
Many of our clients have Bitcoin, and therefore we are providing a quick summary of five important filings tips for you.
**For those of you are on extension through October 2017, please note that if you happen to live in one of the states that was impacted by the recent storms, you may have an additional extension through January, 2018 in order to file your 2017 FBAR.
Here five (5) important tips you need to know:
Prior guidance was for Prior years
A few years back, the IRS issued some guidelines indicating that individuals with Bitcoin accounts/wallets were not required to file a FBAR. It is important to note, that that information/guidelines regarding those years at issue are only applicable for those particular years only and should not relied upon for subsequent years.
As bitcoin and crypto-currency in general has become widespread and accepted, the laws, rules and regulations have changed as well. To that end, as we indicated in a prior post about Bitcoin, from the IRS’ perspective, a bitcoin wallet will presumably be considered the same as a bank. Therefore, if you have bitcoin in an electronic wallet, it is most likely presumed to be an account and therefore must be reported.
While may individuals believe that having their bitcoin in an anonymous account protects them, it actually achieves the opposite effect. In other words, by placing bitcoin into an anonymous account and not reporting it (when you already have an understanding of the FBAR in general prior to the time to filing it) the IRS will presume you are willful, and that can cause unnecessary headaches, fines and penalties.
A Bitcoin Wallet is an Account
When dealing with the IRS, it is important not to split-hairs, or try to get too cute. No matter how complicated you want to try and make it (aka layers of protection for your foreign bitcoin wallet), when boiled down to its barest, a bitcoin wallet is an account. It is used to hold, store or maintain your bitcoin, and therefore without it, you would not have accessibility to your money.
This is the same as taking the money from underneath your pillow and putting it into an account. Therefore, if you have a bitcoin wallet, you should report it just as you would report an account at a bank, or other foreign financial institution.
We understand that when it comes to bitcoin, people like to maintain anonymity. To that end, when working with your experienced offshore disclosure lawyer, there may be some wiggle room as to what specifically must be reported – and the semantics of reporting – but still be sure to report the balances as required by the FBAR (and possibly form 8938 or other reporting forms based on the facts and circumstances of your situation).
The IRS is Actively Seeking out Bitcoin Wallet owners
Apparently, the IRS is had it up to “here” with offshore tax fraud. To that end, if you have bitcoin that is being stored in a wallet offshore, you fall into the category of individuals that the IRS trying to find, audit, and penalize.
Recently, the IRS issued subpoenas to Coinbase, and chances are they will be submitting more subpoenas to more companies that provide Wallets and storage for Bitcoin in foreign countries.
The IRS is doing everything in its power to force these companies to turn over the information of the account holders so that they can determine who is a US person, who has a US reporting requirement, and who has not reported their Bitcoin on the FBAR and/or other necessary forms.
While these companies are fighting the subpoenas, it may be no use because there are other ways you can get detected.
People Suck…Meet the Whistleblowers
A whistleblower is essentially a tattle tale. We are not talking about individuals who are reporting serious crimes, or other allegations of wrongdoing against employees, women, minorities, or anybody else who is suffering harm unfairly.
We are talking about individuals who got caught with their hand in the cookie jar and are facing some serious jail or prison time. Alternatively, these individuals may be employees at certain institutions who have an axe to grind with their employer and are looking for an easy payday – their only motivation being money.
As a result, they are willing to do whatever they can to get themselves out of trouble, and this often will include “ratting out” individuals they never met with information about other account holders to the IRS in hopes of receiving a large payday.
Unfortunately, these people do not understand that the IRS whistleblower laws are stacked against the whistleblower and often times the whistleblower never even receives the payday there are hoping for. Still, the IRS has received the information, and will try to use it anyway they can to enforce it against the account holders.
To get a better idea of how this works, you can see a recent situation where the Panama papers led to the discovery of numerous individuals with illegal accounts. We are not promoting illegal accounts or hiding money offshore — we are just not big fans of individuals who try to get other individuals in trouble when it is solely money motivated (Read: not for any inherent justice or altruistic motivation , but because they got caught and want to bring everyone down with them)
Just remember, some people really suck.
Closing The Account is Not Your Best Strategy
One of the first things we learned in law school many years ago is that putting the fire out when a small is much better than letting it turn into a raging inferno. So, maybe you had some unreported accounts and are bordering on willful/reckless disregard. In other words, you would not qualify for the streamlined program.
Most individuals’ immediate reaction is to run away, close the account, and hope the IRS is none the wiser. This is not a good strategy for the simple reason that the moment you close the account and transfer the money after either you received a FATCA Letter, or otherwise came into knowledge about the reporting requirement – you are setting yourself up for intense fines and penalties.
If the IRS wants to, they can try to obtain subpoena in order to essentially investigate your electronic footprints. This may include analyzing your computers, electronic data, phone data, etc. to determine whether you had the knowledge about reporting at the time you closed the account.
If they find that you did have the knowledge about reporting, it could lead to bigger headaches and problems for you.
The IRS has made international tax compliance the key enforcement priority. That is because the IRS can issue of excessive fines and penalties against you even for non-willful violations – never mind willful violations in which the IRS believes you acted with intent or reckless disregard in failing to properly report on an FBAR.
Before making any affirmative representation, or past filing to the IRS it is important to speak with an experienced offshore disclosure where to learn the pros and cons of each different approach.