Article written by FGMK Tax Partner Fuad Saba and Tax Manager Jill Boland
U.S. persons with financial interests in, or signatory authority over, foreign financial accounts must disclose these on their Foreign Bank Account Report (FBAR) if the aggregate value of such accounts exceeds $10,000 during the calendar year. For purposes of FBAR filings, financial accounts include bank accounts, commodity futures or options accounts, insurance policies with a cash value, annuity policies with a cash value, and shares in a mutual fund (or similar pooled fund). Disclosure of these foreign accounts must be made on FinCEN (“Financial Crimes Enforcement Network”) Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”). Form 114 is filed electronically with the Department of the Treasury at https://www.fincen.gov/report-foreign-bank-and-financial-accounts.
A related filing requirement exists for “specified individuals” (and certain “specified domestic entities”) holding an interest in a “specified foreign financial asset.” Form 8938 is required if the aggregate value of the specified foreign financial assets exceeds a threshold amount. With respect to individual taxpayers living in the U.S., that threshold amount depends upon the individual’s filing status. For single taxpayers and married taxpayers filing jointly, that threshold is met when the total value of specified foreign financial assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year. (For individual taxpayers living outside the U.S., those threshold amounts are $200,000 and $300,000, respectively). For married taxpayers filing separately the threshold is met when the total value of specified foreign financial assets exceeds $100,000 on the last day of the tax year or $150,000 at any time during the tax year. (For individual taxpayers living outside the U.S., those threshold amounts are $400,000 and $600,000, respectively).
For purposes of Form 8938, “specified foreign financial assets” include:
- Financial accounts maintained by a foreign financial institution.
- The following foreign financial assets if they are held for investment and not held in an account maintained by a financial institution:
- Stock or securities issued by someone that is not a U.S. person (including stock or securities issued by a person organized under the laws of a U.S. possession);
- Any interest in a foreign entity; and
- Any financial instrument or contract that has an issuer or counterparty that is not a U.S. person (including a financial contract issued by, or with a counterparty that is, a person organized under the laws of a U.S. possession).
It is worth noting that, unlike Form 8938, which specifically provides for a joint return filing, there is only a limited exception allowing spouses to file a joint FBAR. One spouse can file on behalf of the other spouse if:
- All the financial accounts that the non-filing spouse is required to report are jointly owned with the filing spouse;
- The filing spouse reports the jointly owned accounts on a timely filed FBAR electronically signed; and
- The filers have completed and signed Form 114a, Record of Authorization to Electronically File FBARs (Form 114a is then retained in the filer’s records).
For those required to disclose interests in foreign financial accounts or specified foreign financial assets, the failure to file FinCEN Form 114 and Form 8938 can result in significant civil penalties. The penalties imposed vary according to the degree of the failure, ranging from $10,000 to amounts exceeding $100,000. But if a taxpayer who fails to file Form 8938 is found to have “reasonable cause” for the failure, then no penalties are imposed. This exception, however, does not apply to taxpayers whose failure to disclose constitutes “willful neglect.”
A U.S. person who is required to file FinCEN Form 114 and fails to do so is subject to a civil penalty. The amount of the penalty varies with the level of the violation. Generally, a failure to timely file an FBAR will result in a fine of up to $10,000, unless there is “reasonable cause” for the failure to file. However, if the failure to timely file an FBAR is found to be “willful,” the penalty increases to the greater of $100,000 or fifty percent of the amount of the unreported accounts at the time of the violation (the FBAR filing due date). This can be a very expensive outcome for willful non-filers.
Willfulness is not defined in the Internal Revenue Code, but it has been generally accepted by the U.S. Supreme Court, U.S. District Courts, and U.S. Courts of Appeals that in the civil liability context, willfulness may be satisfied by establishing the individual’s reckless disregard of a statutory duty, as opposed to acts that are known to violate the statutory duty. An individual shows reckless disregard of a statutory duty when his or her conduct demonstrates that he or she knew (or should have known) that there was a risk of non-compliance, and failed to take available corrective action. See Safeco Ins. Co. of Am. V. Burr (551 U.S. 47, 57 (2007)). A series of “willful failure” cases has designed a two-part test, finding that a willful failure to file an FBAR form exists when (a) the individual is aware of his or her statutory duty to file; and (b) recklessly disregards that statutory duty. See U.S. v. Williams, 110 AFTR 2d. 2012-5298 (2012); U.S. v. McBride, 110 AFTR 2d. 2012-6600 (2012); U.S. v. Bussell, 117 AFTR 2d. 2016-439 (2015); and U.S. v. Bohanec, 118 AFTR 2d. 2016-6757 (2016)). In determining “awareness” of a statutory duty to file an FBAR form, the courts have found constructive knowledge by taxpayers who have signed their tax returns: a taxpayer who has signed and filed a tax return is considered to have knowledge of its contents. Because IRS Form 1040, Schedule B, Part III, specifically directs taxpayers to the FBAR filing requirements, a taxpayer’s signature on his or her tax return has been found as proof that the taxpayer is aware of and understands that statutory duty.
Whether the taxpayer’s disregard is considered “reckless” is a more subjective test, and the circumstances surrounding the cases cited above lean toward the extreme: the defendants have variously been either convicted of, or pleaded guilty to, tax evasion, bankruptcy fraud, and tax fraud. In every instance, the deciding courts have read intent, and thus recklessness, into the defendants’ failure to file FinCEN Form 114.
However, in the above decisions the courts appear to have given implicit guidance as to what might not constitute recklessness. For instance, the courts in these cases have cited as evidence of recklessness the business acumen of the defendants (i.e., individuals owning successful businesses and employing multiple financial and legal advisors). This suggests that the courts might be less likely to find recklessness in the case of an unsophisticated individual without such acumen or resources.
The courts’ decisions also show that individuals who engage in secretive activities with respect to their foreign financial accounts are more likely to be found reckless. Such activities included, in the cited cases, liquidating foreign financial accounts after failing to disclose their existence; failing to provide foreign financial institutions with their U.S. addresses; and failing to divulge information about the foreign accounts to their own legal and financial advisors.
While the defendants’ actions in these cases were extreme and thus demonstrated readily a reckless disregard of the FinCEN 114 filing requirements, taxpayers would be well-advised to avoid, even on a small scale, similar actions. Taxpayers who draw on the advice of legal or financial advisors should always consult with and fully inform those advisors with respect to any foreign financial accounts or interests, and disclose these as required by tax law and by the Department of the Treasury.
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