- 1 U.S. Entity FBAR Compliance
- 2 What is an FBAR (FinCEN 114)?
- 3 Why does my U.S. Entity have to file an FBAR?
- 4 Who is a United States Person?
- 5 Common U.S. Entity Filing Examples
- 6 Even Disregarded Entities have to file an FBAR
- 7 What Types of Account Must be Reported?
- 8 What if my Entity Never Filed and FBAR?
- 9 The IRS Has Ways to Find Undisclosed Accounts
- 10 Offshore IRS Penalties
- 11 Golding & Golding, A PLC
U.S. Entity FBAR – (FBAR Guide for U.S Entities with Foreign Accounts)
As if it is not bad enough that the U.S. Government requires you, an individual, to file an annual FBAR so it can keep tabs on your personal foreign accounts — the U.S. Government also requires that your U.S. Entity (Corporation, Partnership, S-Corp, etc.) file an FBAR too.
U.S. Entity FBAR Compliance
While the FBAR requirement is nothing new (it has been around since the 1970s), with the introduction of FATCA (Foreign Account Tax Compliance Act), the IRS has ramped up enforcement — and the penalties can be severe (although you may be able to reduce or even eliminate the penalties by submitting to one of the approved IRS Amnesty Programs.
Common Questions we receive are:
- How does a U.S. Entity file an FBAR?
- Is a U.S. Entity FBAR due on the same date?
- What accounts do I list on the FBAR?
- What if my U.S. Entity never filed an FBAR?
- Will the U.S. Entity be penalized?
- What if my U.S. Entity is disregarded?
What is an FBAR (FinCEN 114)?
An FBAR is a Report of Foreign Bank and Financial Account Form.
You are required to file an “FBAR,” if on any day of the year, your aggregate total of maximum balances of all of your foreign accounts, exceed 10,000. The most important thing to remember is you do not need to have more than $10,000 in each account; rather, it is an annual aggregate total of the maximum balances of all the accounts.
Why does my U.S. Entity have to file an FBAR?
A U.S. Entity is considered a U.S Person (Persons are not limited to individuals). And, the FBAR requirement extends to U.S. Persons; therefore, a U.S Entity has to file the FBAR as well. As provided by the IRS:
Who is a United States Person?
A “United States person” means:
– A citizen or resident of the United States;
– An entity created or organized in the United States or under the laws of the United States. (The term “entity” includes but is not limited to, a corporation, partnership, and limited liability company)
– A trust formed under the laws of the United States; or • An estate formed under the laws of the United States.
Common U.S. Entity Filing Examples
Example 1: David owns a U.S. LLC that conduct business overseas, and keep various foreign accounts to hold local currency, pay vendors, etc.
Example 2: Michelle is in a U.S. Partnership with her college friend. Together, they sell widgets abroad. In order to facilitate transactions and avoid payment delays, they have bank accounts in various foreign countries.
Example 3: Scott and Denise have a U.S. Corporation they use to facilitate foreign country real estate transactions, including 1031 exchanges. They have multiple bank accounts in foreign countries.
What about Peter and Diana, who have a disregarded U.S. entity that has foreign account — do they have to file as well?
Even Disregarded Entities have to file an FBAR
When an entity is disregarded, it implies the entity is disregarded for tax purposes. In other words, if you own a single member LLC, you can typically “disregard the entity” so that for tax purposes, you report the income/expenses just as you would as a sole practitioner with no entity, on Schedule C.
Even if you disregarded the entity (so that it does not have to file its own tax return), it will may have to file an FBAR. The IRS is not entirely clear, and provides the following:
Entities that are United States persons and are disregarded for tax purposes may be required to file an FBAR. The federal tax treatment of an entity does not affect the entity’s requirement to file an FBAR. FBARs are required under a Bank Secrecy Act provision of Title 31 and not under any provisions of the Internal Revenue Code.
What Types of Account Must be Reported?
-Financial account includes the following types of accounts:
-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 policies with a cash value (such as a whole life insurance policy)
-Mutual funds or similar pooled funds (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions)
– Any other accounts maintained in a foreign financial institution or with a person performing the services of a financial institution.
What if my Entity Never Filed and FBAR?
If the Entity never filed an FBAR, there is the potential for fines and penalties. These penalties range from a warning letter in lieu of penalty, all the way to 100% penalty in a multi-year audit in which the U.S. Person to have been willful.
The IRS Has Ways to Find Undisclosed Accounts
To resolve this issue, the U.S. Government has developed many tactics to uncover undisclosed for and offshore accounts, assets, and income. Two of the biggest weapons are FATCA and ITEG
FATCA (Foreign Account Tax Compliance Act)
FATCA is the Foreign Account Tax Compliance Act. We have written numerous articles on the subject, but boiled down to its simplest form, the U.S. has entered into bilateral agreements with more than 110 different countries. The agreements require the reciprocal reporting of foreign account information of US account holders to the IRS, and vice versa. More than 300,000 foreign financial institutions have agreed to report this account holder information to the IRS.
ITEG (International Tax Enforcement Groups)
The IRS has developed several International Tax Enforcement Groups designed specifically to review, evaluate and assess tax positions taken on tax returns to determine whether they are proper. Some of these issues include foreign tax credits, foreign earned income exclusion, and the new section 965 repatriation of foreign income, along with various other tax enforcement initiatives.
Offshore IRS Penalties
The IRS has the right to issue excessively high fines and penalties against any individual who violates optional reporting disclosure rules. That is not to say that the IRS issues penalties against everyone who is out of compliance, but, if you are out of compliance than you may be subject to these penalties.
A Penalty for failing to file FBARs
United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
FATCA Form 8938
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A Penalty for failing to file Form 3520
Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
A Penalty for failing to file Form 3520-A
Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
A Penalty for failing to file Form 5471
Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A Penalty for failing to file Form 5472
Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
A Penalty for failing to file Form 926
Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A Penalty for failing to file Form 8865
Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Fraud penalties imposed under IRC §§ 6651(f) or 6663
Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)
Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)
If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An Accuracy-Related Penalty on underpayments imposed under IRC § 6662
Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty
Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)
Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A person convicted of tax evasion
Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.