The Bank Secrecy Act (“BSA”) requires a person to file a Report of Foreign Bank and Financial Accounts (“FBAR”), Financial Crimes Enforcement Network (“FinCEN”) Report 114, when that person has a financial interest in, or signature or other authority over,  at least one foreign financial account and the aggregate value of all foreign financial accounts exceeds $10,000.  While often mistaken for a “tax” form, the FBAR is not technically a tax form.  Although the FBAR filing requirement has been around since the 1970s, the Federal Government has significantly stepped up enforcement—and penalty assessment—in more recent years.

FinCEN requires a FBAR filing when the aggregate balance amount of a person’s foreign financial account(s) totals more than $10,000 at any point during the year. A person must list the maximum amount in each account for the year when filing the FBAR. It is irrelevant whether a person has one or ten foreign financial accounts. If the aggregate balance in those accounts exceeds $10,000 at any point during the year, if only for one day, then a FBAR must be filed the following year. The due date for the FBAR for 2016 is April 15, 2017. For years prior to 2016, the due date was June 30 of the following year.

For FBAR purposes, a “person” required to report his foreign financial accounts is one of the following:

• U.S. citizens;
• U.S. residents (an alien residing in the US);
• Entities created or organized in the US or under the laws of the US such as corporations, partnerships, or limited liability companies; or
• Trusts or estates formed under the laws of the US.

Even if the person is a child, the child must file an FBAR. A child’s parent, guardian, or other legally responsible person must file for the child if the child is unable to file its own FBAR.

A person is required to file a FBAR if they have either a financial interest or signature or other authority over the foreign financial accounts (and the accounts exceed $10,000 in the aggregate). A foreign financial account is a financial account located outside the United States. The location of the account determines whether the account is considered foreign or domestic. For example, the account is maintained in a US bank’s branch that is located in London, the account is considered a foreign financial account that requires a FBAR filing assuming the other requirements are met. On the other end of the spectrum, an account maintained at a British bank branch located in New York City is not a foreign financial account, thus, no FBAR filing is required.

Interesting issues can arise as to whether an “account” is a financial account for FBAR purposes.  For instance, in U.S. v. Hom, a recent case in the Ninth Circuit, the court addressed the issue of whether online gambling accounts were considered a foreign financial account for FBAR purposes. During its analysis, the court focused on where the accounts were located and the purpose that the accounts served—were the accounts part of the online poker sites or were the accounts an intermediary for online poker sites? The court held that when the accounts belonged to the online poker sites and were used simply as a way to play poker with no other financial purposes, then those accounts were not foreign financial accounts for FBAR purposes. On the other hand, an account that is used as an intermediary or transmitter of funds (e.g., PayPal) between a bank account and an online poker site was held to be a foreign financial account (it was located and regulated in the United Kingdom) requiring a FBAR filing.

A person has signature or other authority over an account if that person can control the disposition of assets held in the account by direct communication to the bank or other financial institution that maintains the account. A person has a financial interest in an account when they are the owner of record or holder of legal title or where the owner of record or holder of legal title is one of the following:

• An agent, nominee, attorney or a person acting on behalf of the US person with respect to the account;
• A corporation in which a US person owns directly or indirectly more than 50% of the total value or voting power of shares of stock;
• A partnership in which the US person owns directly or indirectly an interest in ore than 50% of the partnership’s profits or partnership capital;
• The owner of record or holder of legal title is a trust of which the US person is: (i) the trust grantor and (ii) has an ownership interest in the trust under the grantor trust rules of 26 U.S.C. §§ 671-679;
• A trust in which the US person has greater than 50% interest beneficial interest in the assets or income of the trust for the calendar year; or
• Any other entity in which the US person owns directly or indirectly more than 50% of the: (i) voting power, (ii) total value of equity interest or assets, or (iii) interest in profits.

Several exceptions exist though regarding who is required to file a FBAR. If a person’s spouse has filed a FBAR for accounts with both their names, then the non-filing spouse is not required to file a FBAR so long as the non-filing spouse does not have any other foreign financial accounts. The filing spouse’s FBAR filing must be timely, and the filers have completed and signed Form 114a, “Record of Authorization to Electronically File FBAR’s.” If the prior conditions are not satisfied, then both spouses must file separate FBARs.

A failure to file a FBAR can result in serious penalty exposure.  If the government deems the penalty to be a willful violation, the potential statutory penalty is the greater of $100,000 or 50% of the amount of the balance in the account at the time of the violation. A non-willful penalty carries a penalty of $10,000 per violation.  A reasonable cause defense may, however, be available.

Criminal penalties may be assessed as well for a failure to file the required FBAR. If a person willfully violates 31 U.S.C. § 5314, the person may face imprisonment for up to five years and/or a fine of up to $250,000. If the violation was committed while violating another law or committed repeat of a pattern of illegal activities involving more than $100,000 in any 12-month period, then the fine ceiling is increased to $500,000 and/or imprisonment for up to ten years.

While these penalties are harsh, the IRS has several programs available that may allow a taxpayer to come forward proactively and fix outstanding filing deficiencies—often at a fraction of the cost.  Many taxpayers can even obtain protection (i.e., amnesty) from criminal exposure.  Taxpayers that previously failed to file a FBAR or tax information return should seek legal counsel from a tax attorney immediately.

Have a question? Contact Matthew Roberts, Freeman Law.