The IRS New Guidance on FBAR (LB&I Practice Unit) 2023

The IRS New Guidance on FBAR (LB&I Practice Unit) 2023

FinCEN Form 114 FBAR Practice Unit 

IRS Tax matters involving international tax law can be very complicated. Therefore, the Internal Revenue Service will oftentimes develop written presentations and guidance to help ease their own staff and taxpayers into understanding the very complex matter they may be researching. These are also referred to as practice units and one of the more recent practice units involves foreign bank and financial account reporting — otherwise, referred to as FBAR. in recent years, the Internal Revenue Service has significantly increased enforcement of foreign bank and financial account reporting compliance. In March of 2022, the IRS issued Publication 5569 which is an introductory guide to FBAR reporting. More recently, the IRS issued a practice unit guide for matters involving FBAR. let’s take a quick look at the basics of what is provided in this guide by referring to excerpts from the guide:

When is the FBAR Due?

      • For calendar years 2016 and later: The annual due date for filing an FBAR to report foreign financial accounts is April 15th.

      • For calendar years 2015 and earlier: The annual due date for filing an FBAR to report foreign financial accounts is June 30th. FinCEN grants filers failing to meet the FBAR annual due date of April 15th an automatic extension to October 15th each year.

        • Specific requests for this extension are not required.

Statute of Limitations for Assessing Civil FBAR Penalties

      •  The Service can assess civil FBAR penalties for six years from the date of the transaction. In the case of filing violations, the date of the transaction is the due date for filing the FBAR. In the case of a recordkeeping violation, the date of the transaction is the date that the examiner first requests the required records via a summons. 

Who is a US Person for FBAR?

      • A USP means: § A citizen or resident of the U.S.; 

        • An entity, including but not limited to, a corporation, partnership, trust, or limited liability corporation created, organized, or formed under the laws of the U.S., any state, the District of Columbia, any territory or possession of the U.S., or an Indian tribe;

        • To determine if the filer is a resident of the U.S., the residency tests under IRC 7701(b) must be applied, which includes the green card test (lawful permanent resident status) and the substantial presence test (numerical formula that measures days present in the U.S.); or § The U.S. includes the states, the District of Columbia, all U.S. territories (e.g., American Samoa, the Commonwealth of the Northern Mariana Islands, the Commonwealth of Puerto Rico, Guam, and the U.S. Virgin Islands), and the Indian lands as defined in the Indian Gaming Regulatory Act.

          • CAUTION: U.S. tax treaty provisions do not affect residency status for FBAR purposes. The federal tax treatment of a USP does not determine whether the person must file an FBAR. FBARs are required under the BSA provisions of Title 31 of the United States Code (USC) not under any provisions of Title 26 of the USC. Entities that are USP and are disregarded for tax purposes may be required to file an FBAR. This statement is derived from an example provided by IRM section 4.26.16.2.1(2) Example (11-06-2015).

Financial Accounts

      • A reportable financial account includes the following:

        • Bank accounts (such as savings accounts, checking accounts, and time deposits);

        • Securities accounts (such as brokerage accounts and securities derivatives or other financial instruments accounts);

        • Commodity futures or options accounts;

        • Insurance or annuity policies with a cash value (such as a whole life insurance policy);

        • Mutual funds or similar pooled funds (such as a fund that is available to the general public with a regular net asset value determination and regular redemptions); or

        • Any other accounts maintained in a foreign financial institution or other person engaged in the business of banking.

The Following are Not Considered Financial Accounts

      • Stocks, bonds, or similar financial instruments held directly by the person;

      • Real estate or an account holding solely real estate (such as Mexican “fideicomiso”);

      • Precious metals, precious stones, or jewels held directly by the person; or

      • A safety deposit box. ? A reportable account may exist where the financial institution providing the safety deposit box has access to the contents and can dispose of the contents upon instruction from, or prearrangement with, the person.

        • CAUTION: The FBAR regulations do not require the reporting of foreign hedge funds and private equity funds

Financial Account Exceptions

      • The following are not considered reportable financial accounts for FBAR purposes:

        • Correspondent/Nostro accounts; § Owned by a governmental entity;

        • Owned by an international financial institution;

        • Maintained on a U.S. military banking facility;

        • Held in an individual retirement account (IRA) of which you are an owner or beneficiary;

        • Held in a retirement plan of which you are a participant or beneficiary; or

        • Part of a trust of which you are a beneficiary, if a USP (trust, trustee of the trust or agent of the trust) files an FBAR reporting these accounts.                 

What is a Foreign Country?

      • Foreign Country:

        • A foreign country includes all geographical areas located outside of the U.S. A financial account is “foreign” for FBAR purposes when it is located outside of the U.S.

          • The U.S. includes:

            • The states of the U.S. and the District of Columbia;

            • The territories of the U.S. (Commonwealth of Northern Mariana Islands, American Samoa, Guam, Commonwealth of Puerto Rico, and U.S. Virgin Islands);

            • The Indian lands. The location of an account, not the nationality of the financial institution with which the account is held, determines whether the account is in a foreign country.

            • Any financial account (except accounts maintained with a U.S. military banking facility) that is located in a foreign country should be reported, even if the account is held with a branch of a U.S. financial institution located abroad. Accounts of foreign financial institutions located in the U.S. are not considered foreign accounts for FBAR.

Does the Aggregate Amount(s) in the Account(s) Valued in U.S. Dollars Exceed $10,000 at Any Time During the Calendar Year?

      •  To determine if an FBAR is required for a calendar year where the aggregate amount(s) in the foreign financial account(s) exceeded $10,000, valued in US dollars, at any time during that calendar year, each account must be valued separately as follows: § Determine the maximum value in locally denominated currency. The maximum value of an account is the largest amount of currency and non-monetary assets that appear on any quarterly or more frequent account statement issued for the applicable year. If no period account statements are issued, then the maximum account asset value is the largest amount of currency and non-monetary assets in the account at any time during the year. § Convert the maximum value into U.S. dollars by using the official exchange rate in effect at the end of the year at issue for converting the foreign currency into U.S. dollars. Generally, the official Treasury Reporting Rates of Exchange for the last day of the calendar year in issue should be used and be found at the Bureau of the Fiscal Service website at fiscaldata.treasury.gov/datasets/treasury-reporting-rates-exchange/treasury-reporting-ratesof-exchange. After separately valuing the accounts and converting into U.S. dollars, all reportable accounts should be aggregated, including:

        • Solely-owned accounts;

        • Jointly-owned accounts;

        • Direct financial interest accounts;

        • Indirect financial interest accounts; and

        • Signature authority accounts.

          • A USP with a financial interest in or signature authority over one or more but fewer than 25 accounts, who is unable to determine whether the maximum value of these accounts exceeded $10,000 at any time during the calendar year, should complete the applicable parts of the FBAR for each of these accounts and check the box in Item 15a “amount unknown.”

          • A USP only needs to provide the number of financial accounts and certain other basic information on the report and will be required to provide detailed information concerning each account when the IRS or FinCEN requests it, if:

        • The USP has a financial interest in 25 or more foreign financial accounts;

        • The USP has signature or other authority over 25 or more foreign financial accounts.

What Are the Recordkeeping Requirements?

      • If an FBAR is required, records are to be made and retained by each person having financial interests in or signature or other authority over any reportable foreign financial accounts. Such records shall contain: ?

        • The name in which each such account is maintained;

        • The number or other designation identifying such account;

        • The name and address of the foreign financial institution 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 from the FBAR due date for that calendar year and shall be kept at all times available for inspection as authorized by law.

          • A filer who has financial interest in or signature or other authority over 25 or more foreign financial accounts must also comply with the record keeping requirements and provide detailed information concerning each account to the IRS or FinCEN upon request.

            • CAUTION: An officer or employee who files an FBAR to report signature authority over an employer’s foreign financial account is not required to personally retain records regarding these foreign financial accounts.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the pension tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to streamlined procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead of the Streamlined Procedures. But, if a willful Taxpayer submits an intentionally false narrative under the streamlined procedures (and gets caught), they may become subject to significant fines and penalties

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.