Do Disregarded Entities File the FBAR?

FBAR for Disregarded Entities

Disregarded Entities & FBAR Filing

FBAR Filing forDisregard Entities: The IRS does not limit FBAR reporting to individuals. Rather, the U.S. Government requires all U.S. persons (including entities and disregarded entities) to file the FBAR. And, with the Internal Revenue Service taking an aggressive position of matters involving the enforcement foreign accounts compliance, it is important to file the necessary reporting forms, and/or consider amnesty and voluntary disclosure if you are already late.

What is the 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.

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.

Do Disregarded Entities have to file an FBAR?

Yes.

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.

But, in most situations, the Disregarded Entity must still file the FBAR.

As provided by the IRS:

“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.

Which Accounts Do Disregarded Entities Report on FBAR?

-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 Disregarded Entity Never Filed an FBAR?

If the disregarded 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.

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.

Additional Offshore Violation Penalties for Disregarded Entities

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

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.

A Penalty for failing to file Form 8938

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

Penalties 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

The failure to file each one of these information returns or for filing an incomplete return, is a penalty 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

The penalty  starts at $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 926

An unfiled form may lead to a penalty that 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

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.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure, and Disregarded Entity FBAR Requirements.

Contact our firm today for assistance with getting compliant.