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A Holiday Gift: What To Do About The Unfiled FBAR – Part 1



John Richardson

I suspect that history will show that that the growth in renunciations of U.S. citizenship (and abandonment of Green Cards) continued in 2016. Absent a change in the way that the United States treats its “U.S. Persons Abroad”, I suspect that the growth in renunciations of U.S. citizenship will continue.

The purpose of this post and a short summary:

This blog post will hopefully encourage those with U.S. tax issues to consider whether they can deal with minor/unintentional FBAR violations as a “stand alone single problem”. There may be no need to escalate and expand one single problem into a multi-dimensional full blown tax problem that may end up with unintended and unanticipated costly professional fees as well as undue time spent! Read on and learn why. Keeping a calm head is most important, even if it is most difficult to do in the face of the scary situation of not being in compliance with the U.S. tax and regulatory regime.

This post consists of the following six parts:

Part 1 – Problems, more problems and the expansion of problems

Part 2 – Looking For Mr. FBAR

Part 3 – It often begins with a chance meeting with Mr. FBAR

Part 4 – How the compliance problems of “Homeland Americans” (particularly Green Card holders) differ from the compliance problems of “Americans Abroad”

Part 5 – Focusing specifically on the problem of FBAR non-compliance

Part 6 – Dealing with the tax professionals: Beware of how they can expand the number of problems

[We will be splitting the six sections in half, going over the first three today and the last three tomorrow]


Part 1 – Problems, more problems and the expansion of problems

For those who want to be in compliance with U.S. laws:

It is my hope to encourage some thinking (“asking the right questions”) and a calm (or calmer) state of mind. Obviously this post is NOT and could NEVER constitute legal advice for you (or for anybody else). I don’t know you. I don’t know your situation. But, I do want to share my perception of why and how some very honest people ended up being irreparably damaged by their attempts to “obey the law”. Their attempts to “obey the law” were commendable. It was the way that they went about attempting to “obey the law” that created the problems. In many cases they started with an “FBAR problem”. They (or rather their advisers) quickly expanded the problems and created a costly compliance nightmare. It’s important for you to understand how this happened.

For those who do NOT want to comply with U.S. laws:

This post is NOT directed to those who use “offshore accounts” to facilitate tax evasion. (It’s unlikely that a person fitting this profile would file FBARs anyway.)

But, what is/are the “laws” to which this post refers?

Recognizing that your goal is to “obey the law”, at the risk of oversimplification, as a “U.S. Person” you must comply with the rules of at least two separate U.S. statutes:

Title 31 – AKA “The law of Mr. FBAR”

Title 26 – AKA “The law of taxes”

It’s important to understand that Title 31 and Title 26 are separate statutes with separate issues. They are logically unrelated!

Speaking of problems and the expansion of problems:

Let’s begin with the “John Richardson” principle of understanding and dealing with “multiple problems”. It works like this.

Have you ever noticed the effect of compounding problems in your life? Problems weigh you down? Say you start with one problem which weighs 10 pounds. If you get a second problem that weighs 10 pounds, the combined weight (the way you feel it) is NOT 20 pounds. No, it’s more like 40 pounds. What if you add a third problem weighing 10 pounds? The combined weight of the three problems is NOT 30 pounds. No, it’s more like 90 pounds.

Principle – The way that people experience the weight of problems is this:

Anxiety/stress/distraction/weight of multiple problems = the square of the number of problems

Example:

Weight of 1 problem = 1 times 1 = 1

Weight of 2 problems = 2 times 2 = 4

Weight of 3 problems = 3 times 3 = 9

Notice that by solving one of the three problems, the weight decreases by more than fifty percent. (Have you ever heard the suggestion: Let’s do one thing at at time?) Notice also the compounding effect of adding additional problems.

You need to understand the problem of allowing “single problems” to escalate into “multiple problems”. This is critical when coping with U.S. regulatory issues.

Part 2 – Looking For Mr. FBAR

This post assumes that you understand FBAR basics. For those who wish a “reintroduction” to Mr. FBAR, I recommend the following articles:

“In Search of FBAR Fullfilment and Consciousness”

“Fast & Digestible FBAR Facts”

“Will a business trip to the United States of America trigger a ‘chance’ encounter with Mr. #FBAR?”

This post is not for the purpose of detailing the FBAR rules. What you need to know is that:

If a “U.S. Person” (which includes citizens and Green Card holders regardless of where they actually live):

– has financial accounts (which includes more than bank accounts) which in aggregate had balances exceeding $10,000.00 USD at any time in the year;

– information on those accounts must be reported to the Financial Crimes division of U.S. Treasury

Finding Mr. FBAR: The FBAR rules are the sum of the following individual components:

A summary of the IRS interpretation of the FBAR rules and regulations may be found here. In summary, the FBAR rules are found in three distinct places:

1. Congressional legislation – Title 31 Bank Secrecy Act – Generally and primarily General reporting requirement, Civil penalty, and Criminal penalty.

2. Regulations made pursuant to the Congressional legislation -Primarily:

3. The FBAR form and instructions.

Clearly, almost all Americans abroad would be impacted by this rule.

The failure to report these accounts can lead to confiscatory penalties and even (in some cases) criminal charges. FBAR violations can generate both “civil” and “criminal” penalties. See for example the cases of Marie Curran, Carl Zwerener, Dan Horsky and others.

There is little or no evidence of FBAR being used aggressively against Americans abroad (at least yet). There are instances of FBAR being used aggressively against Homeland Americans who have deliberately failed to disclose foreign bank accounts for the purpose of evading U.S. taxes. (These were people who were considered to be “bad actors“.)

FBAR penalties are not automatic

The final paragraph of the FBAR filing rules state:

Penalties

A person who is required to file an FBAR and fails to properly file may be subject to a civil penalty not to exceed $10,000 per violation. If there is reasonable cause for the failure and the balance in the account is properly reported, no penalty will be imposed. A person who willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. See 31 U.S.C. section 5321(a)(5). Willful violations may also be subject to criminal penalties under 31 U.S.C. section 5322(a), 31 U.S.C. section 5322(b), or 18 U.S.C. section 1001.

This is consistent with the clear language in the FBAR law. The law clearly encourages the filing of FBARs.

Mr. FBAR is admired and emulated.

The FBAR rules have recently been adopted by Russia and applied to Russian citizens. The penalties for noncompliance imposed by the Kremlin are NOT as severe as the penalties imposed by the IRS.

In any event, the FBAR filing requirement should be taken seriously.

Part 3 – It often begins with a chance meeting with Mr. FBAR

During the last few weeks I have had two conversations with U.S. residents who: (1) believed that they were compliant with their U.S. tax obligations, (2) had non-U.S. bank accounts (for entirely legitimate reasons), (3) didn’t know about the FBAR rules, and (4) in attempting to solve a simple FBAR problem ended up paying legal fees that were astounding (in one case exceeding six figures by a large margin and in the other case approximately $50,000). Needless to say, that is NOT what the clients “thought they were signing up for”. In neither case is the problem resolved. Notice also that they these are people who recognized that they were NOT in compliance with the FBAR rules (which few people know about and fewer understand) and wanted to be in compliance with the FBAR rules. The purpose of this post to explore how this tragedy happened and how it might be avoided.

What happens when you are introduced to Mr. FBAR

Americans are extremely law abiding people. They commonly live under the assumption that compliance with the law is “the right thing”. Their instincts are generally toward compliance. Therefore, when they learn about Mr. FBAR (perhaps they received a FATCA letter) and the potential for the damage that he can inflict (FBAR is a form of “civil forfeiture), their immediate reaction is:

1. Oh My God! – I’m not in compliance

2. I want to fix this and file my FBAR.

3. FBAR is a law, I am in violation of the law. Please, I just want to file my FBAR.

4. I have read all I can on the internet (most of which is scaremongering) and I still don’t really understand this.

5. In order to comply with the law I will call a lawyer or accountant.

A principle to guide you: “The smaller the compliance step taken, the bigger and better the result!”

It’s at this point, that you might discover that what you thought was one problem (Title 31), is potentially two problems (Title 26) (or maybe even more). You must do your best to “contain the problem”. Make every effort to avoid the escalation of problems. Seek advisers who actively seek to prevent the “escalation” of problems.

The governing principle should be:

“The smaller the compliance step taken, the bigger and better the result!”

Why a Title 31 FBAR problem may (or may not) mean a Title 26 tax problem

It’s because the “foreign bank account” might be generating interest income that may not have been reported on your 1040. Of course a “foreign bank account” may have generated “interest income” that WAS reported on your 1040. Or maybe, that “foreign bank account” might have generated NO income whatsoever (in which case there was nothing to report on the 1040).

The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a Toronto based lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.

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