by Brian Mahany
We have helped many people with unreported foreign accounts. Some simply need to file missing FBAR forms, some are amnesty candidates while others fare better under a traditional voluntary disclosure. The only common thread to all these cases is that very few are ever black and white. The current guidance from the IRS on the Offshore Voluntary Disclosure program (amnesty) consists of a few dozen frequently asked questions. With little written guidance from the IRS and few court decisions (the laws are still new), its difficult for the average taxpayer to find answers.
The IRS wants to know if you have a “financial interest in or signature authority over a financial account in a foreign country.” One of the consistent issues we face is trying to determine who must report the account on an FBAR form (Report of Foreign Bank and Financial Account). This question and defining a foreign account are not covered in this article. Suffice it to say, the definitions are not always clear but the stakes are quite high.
Assuming you have an obligation to file an FBAR, are you also responsible for any income derived from that account? That’s the purpose of this article.
As a general rule, beneficial ownership is the key to determining who must report any income. It is possible to have signature authority without having beneficial ownership. For example, an adult daughter may have signature authority over her aging parents’ Indian bank account to help manage their finances and pay bills. The beneficial ownership appears to be remain with the parents.
Of course, things are rarely this clear cut.
Foreign law usually determines who is the beneficial owner of the account. The IRS is not bound by that determination, however. This means that the IRS could impose a tax obligation on the person it believes to be the beneficial owner even though under foreign law, that person may not have an ownership interest in the account assets.
Although the IRS does defer to the law where the account is held, there are exceptions as noted above. The Service wants to know who has the authority to dispose of the asset, the intent of the parties and who derives the benefit of the asset.
In one tax court case, a father opened 4 accounts in the names of his children. He said the money was for the kids but the IRS showed that he used the money to further his business. Although he claimed he merely borrowed the money from his kids accounts, the court found that he had beneficial ownership of the accounts and was therefore responsible for the income generated by those accounts.
Certainly, if you are acting as an agent for another, it is extremely beneficial to have an agreement in place that explains the relationship of the parties. If your name appears on a joint account but your role is merely to help another pay their bills, create an agreement upon opening of the account. Don’t wait until the IRS starts an audit.
There are also special rules for community property income if one or both the spouses are non resident aliens. While this article is just a brief summary, know that section 879(a) of the Internal Revenue Code may take precedence over local community property laws.
If this isn’t already complicated enough, remember that the FBAR rules want to know about both beneficial ownership and signature authority (nominal ownership). In other words, if you are in any way an owner or signer of the account, report it. As noted above, who reports the income from that account is a different question. The new FATCA filing requirements now in effect for the first time also have different requirements (they appear to look to beneficial ownership).
If you have a joint account or appear on an account with other family members or associates, seek professional tax guidance. Failing to file an FBAR can result in steep civil penalties. If the IRS believes the failure to file was willful, the penalties can include prison and 50% of the high balance of the account or $100,000 for each year not reported.
The tax lawyers at Mahany & Ertl concentrate in foreign tax reporting requirements. OVDI, amnesty, FBARs, FATCA compliance, foreign corporations, foreign gifts and voluntary disclosures, we can help. For more information, contact attorney Brian Mahany at (414) 704-6731 (direct) or by email at . All inquiries are protected by the attorney client privilege and are kept in strict confidence.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine & Minneapolis, Minnesota. IRS services available worldwide.