A U.S. person is required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if that person has a financial interest in or signature authority over any financial account(s) in a foreign country and the aggregate maximum value of such account(s) exceeds $10,000 at any time during the calendar year. For this purpose, U.S. person includes U.S. citizens, residents, corporations, partnerships or LLCs created or organized under the laws of the U.S., and trusts or estates established under the laws of the U.S.
The FBAR is an information return that is due by June 30th each year with respect to accounts held during the previous calendar year. Beginning with the 2016 tax year, the due date of the FBAR will be April 15th, rather than June 30, with the option to apply for an automatic-six month extension to October 15 as part of the new “Highway Act.” A non-willful failure to file the FBAR may result in a civil penalty not to exceed $10,000. There is a reasonable cause exception that may be applied to abate the penalty. For a willful violation, the civil penalty is equal to the greater of $100,000 or 50% of the amount in the account at the time of the violation. The reasonable cause exception does not apply to willful violations. Moreover, willful violations may also be subject to imprisonment.
In a speech delivered on January 29, 2016 at the American Bar Association’s Tax Section Midyear Meeting, acting Assistant Attorney General Caroline D. Ciraolo focused on the Justice Department Tax Division’s (Department) offshore enforcement efforts and the Department’s plans for 2016. The Department’s criminal and civil tax enforcement efforts addressed in her speech include the following:
• Offshore tax enforcement continues to be a top priority. The Department recently reached final criminal resolutions with six foreign financial institutions, including Credit Suisse, which pleaded guilty and agreed to pay $2.6 billion for its role in assisting U.S. taxpayers to evade their U.S. reporting and tax obligations.
• In January 2016, the final Category 2 bank non-prosecution agreement was signed with HSZH, assessing a penalty of more than $49 million. In total, the Department implemented 78 agreements with 80 banks while assessing more than $1.3 billion in Swiss Bank Program penalties.
• The Swiss Bank Program has resulted in more than 54,000 voluntary offshore disclosures and the collection of more than $8 billion in taxes, penalties and interest as reported by the IRS in October 2015.
• Currently the Department is pursuing financial institutions outside Switzerland such as those located in Belize, the British Virgin Islands, the Cayman Islands, the Cook Islands, India, Israel, Liechtenstein, Luxembourg, the Marshall Islands, and Panama.
• Practitioners, financial institutions and individuals guilty of criminal conduct are encouraged to contact the Department to discuss options.
• The Department has expanded efforts to pursue individuals — who obscure foreign accounts and assets to evade U.S. tax obligations — by relying on civil enforcement. The Department continues to work closely with the IRS with respect to the examination and assessment of penalties for violations of the FBAR reporting requirements, as well as its efforts to obtain foreign account records. In an ongoing effort to collect outstanding FBAR penalties while providing defense against complaints for refund of FBAR penalties paid, the Department will continue to file suits. In addition, the Department has successfully obtained orders to enforce summonses in civil cases by opposing motions to reject grand jury subpoenas in criminal cases.
• The Department continues to seek orders authorizing “John Doe” summonses; where there are potential violations of internal revenue laws. Grand jury subpoenas along with Bank of Nova Scotia summonses are being utilized, which seek to compel a domestic financial institution to produce records located in a foreign country.
• To support enforcement efforts, the Department has hired more than 80 new attorneys within the last year. The Department is comprised of more than 200 civil trial attorneys, more than 100 prosecutors and approximately 50 appellate attorneys working to enforce tax laws through civil and criminal litigation.
Considering the aggressive enforcement steps being taken by the Department and the IRS, it is important to understand what constitutes “financial interest” and “signature authority.”
A U.S. person has a “financial interest” in each bank, securities or other offshore financial account in the following situations:
1. The U.S. person is the owner of record or holder of legal title, whether the account is maintained for the benefit of the U.S. person or for the benefit of another person, including a non-U.S. person.
2. The owner of record or holder of legal title is a person acting as an agent, nominee, attorney, or a person acting on behalf of the U.S. person with respect to the account.
3. The owner of record or holder of legal title is:
a. A corporation in which the U.S. person owns, directly or indirectly, more than 50% of (i) the voting power or (ii) the total value of the shares;
b. A partnership in which the U.S. person owns, directly or indirectly, more than 50% of the (i) partnership’s profits (distributive share of partnership income taking into account any special allocation agreement); or (ii) partnership’s capital;
c. A trust of which the U.S. person is the trust grantor and has an ownership interest for U.S. federal tax purposes;
d. A trust in which the U.S. person has a present beneficial interest in more than 50% of the assets or income of the trust for the calendar year (Note: A remainder interest is not considered a present beneficial interest for FBAR purposes); or
e. Any other entity in which the U.S. person owns directly or indirectly more than 50% of the voting power, total value of equity interest or assets, or profits interest.
An individual has “signature authority” over a foreign financial account if the individual has the authority, alone or in conjunction with another, to dispose of money, funds or other assets held in the foreign financial account by direct communication, in writing or otherwise, to the bank or other financial institution with whom the financial account is maintained.
According to Ciraolo, “Those who underestimate the ability of the United States to pursue offshore tax evasion do so at their own peril.”
Ms. Ciraolo stated that the Department’s goals for 2016 include additional civil enforcement actions and ongoing and new criminal investigations and prosecutions. Therefore, taxpayers who are not in compliance are encouraged to take immediate steps to comply under the IRS’s Offshore Voluntary Disclosure Program, Streamlined Filing Compliance Procedures or Delinquent FBAR Submission Procedures.