My expression was a jaw dropping experience when a client of ours revealed their foreign bank account balances a month after we had filed their tax returns. A long lecture about foreign account balances, and an Amended Tax Return followed with required attachments. We quickly realized the need for the right questions in the December Tax Organizer. This was a few years ago and there have been many updates to those questions now.
Unfortunately there are many taxpayers out there who are still unaware of their filing/ reporting requirements. More details on the requirements in my post here. And many a time this is because they have not been educated of their requirements by their tax preparers.
Due Diligence is a BIG buzz word in tax professional circles! Especially since many taxpayers unaware of their requirement to file FBARs, blame the tax preparer on whom they reasonably relied. The tax practitioner in turn relies in good faith on the information provided to them by their clients, and are not required to audit the records of the client.
Circular 230, § 10.22 lays out the level of due diligence required to be exercised by Practitioners (Attorneys, CPA s, Enrolled Agents or Enrolled Actuaries):
(a) In preparing or assisting in the preparation of, approving, and filing returns, documents, affidavits, and other papers relating to Internal Revenue Service matters;
(b) In determining the correctness of oral or written representations made by him to the Department of the Treasury; and
(c) In determining the correctness of oral or written representations made by him to clients with reference to any matter administered by the Internal Revenue Service.
In addition to the above, a tax practitioner is also required by Circular 230, § 10.34 to not ignore the implications of any information provided. The tax professional should also advise the taxpayer of any potential penalties of non-compliance.
If the tax practitioner determines that there is a foreign bank account to report on Schedule B, he is not obligated to prepare the FBAR form for the client. He can do so only if he feels competent and the client has agreed to this additional service.
Notwithstanding the above lack of obligation to prepare the FBAR, the practitioner does have an obligation to advise the client of the need to file the FBAR form and the consequences of failing to do so.
So What Questions Should Your Tax Preparer Be Asking You About Your Foreign Accounts?:
1. Do you have accounts in countries other than the United States?
2. What are the nature of the bank accounts and how much are the balances therein.
3. Have you reported these accounts every year?
4. Did you have income from these accounts? If yes, has the income been included on the tax return?
5. How have you answered the question on Schedule B of Form 1040, Part III, Line 7a?
6. If thresholds were met, was FinCEN Form 114, Report of Foreign Bank & Financial Accounts aka FBAR filed? (FinCEN Form 114 was known as TD F 90-22.1)
7. If thresholds were met, was Form 8938, Statement of Specified Foreign Financial Assets, filed with the tax return?
8. Are you a beneficiary of a foreign trust? If so what is the nature of the relationship? Have you received a distribution?
9. Do you own stock in foreign companies or partnerships? If so what percentage of the total is it?
10. Are you a participant in a foreign retirement plan?
With a heightened availability of information to the Internal Revenue Service about foreign bank accounts through many Inter-Government Agreements, tax payers who have accounts in foreign banks or other such instruments should make sure their tax practitioners are asking the above questions.
Know Your Responsibility: If you are one of those reading this blog and have undisclosed foreign bank accounts, I cannot assert enough how important it is for you to come forward voluntarily with disclosure. The Internal Revenue Service’s 2014 Offshore Voluntary Disclosure Program (OVDP) is still open. If the IRS contacts you about these accounts then you will be subject to heavy fines & penalties and you will no longer have the chance to file under the OVDP.
Original Post By: Manasa Nadig
Bibliography: Circular 230; FinCEN From 114; Form 8938; FBAR FAQs from www.irs.gov