by Brian Mahany
Anyone reading this blog knows that U.S. taxpayers possessing or having signature authority over foreign financial assets must file a Report of Foreign Bank and Financial Accounts or “FBAR.” (If you are unsure if you have an FBAR filing requirement, give us a call or use the search bar in the upper right hand corner of our Due Diligence blog for hundreds of informative articles.)
Many of the questions we field concern the definition of a foreign financial account. While pretty much everyone knows a numbered Swiss account must be reported, many people have questions about mutual funds, brokerage accounts, insurance products and the like. All great questions.
Like everything having to do with the tax code, there are often exceptions and exceptions to exceptions. This list should serve as a general guide. As we learned long ago, there are literally tens of thousands of financial products in the world with new ones being created everyday. If in doubt, contact us or a qualified tax accountant.
Bank Accounts. Just because your bank has branches or subsidiaries in other countries doesn’t mean you have a foreign account. If your account is maintained by a financial institution within the United States, it is probably not reportable. For example, Swiss Bank UBS has branches both in Switzerland and the United States. If your account is maintained at a U.S. branch, no FBAR is needed.
Bank accounts include savings, checking and “any other account maintained with a person engaged in the business of banking.” The regulations specifically include certificates of deposit.
Brokerage Accounts. Like bank accounts, if you maintain your account with a U.S. branch, no FBAR is needed no matter what foreign securities may be in your account.
Global Custodial Accounts. Some banks aggregate their funds into a global account or hold their funds offshore. Like traditional bank accounts, no FBAR is needed if you maintain your account in the U.S. If you can access the foreign holdings in a foreign institution, then the account is reportable.
Beyond the traditional bank and brokerage accounts, questions frequently arise when looking at other financial accounts. Treasury’s Financial Crimes Enforcement Network (called FinCEN) defines “other financial account” to include:
* an account with a person in the business of accepting deposits as a financial agency [we realize FinCEN’s definition is not very precise],
* an account with a person that acts as a broker or dealer for futures or option transactions,
* an account with a mutual fund or similar pooled fund which issues shares available to the general public. The regulations further say that the account must have a regular net asset value determination and regular redemptions.
Of course, with all of these definitions, one still must determine if the asset qualifies as foreign.
If you think this is starting to get a bit complicated, you are not alone. Foreign financial products don’t always fit our definitions. There is plenty of “gray” area, so much that some foreign institutions are simply closing the accounts of anyone they suspect has ties to the United States.
Beyond bank, securities and commodities accounts, foreign annuities or insurance products may also be reportable. If there is a cash value or investment component, the product probably is reportable. (If you have a reportable policy, the reporting requirement is on the policy holder who may or may not be the beneficiary.)
This post just scratches the surface of the issue. Obviously we cannot provide legal advice by blog post. We do want to raise awareness, however, that products other than traditional bank savings account may trigger an FBAR filing requirement.
This discussion becomes especially important with the implementation of the new FATCA law just months away. Soon foreign financial institutions will be required to review their accounts, determine those with a U.S. connection and report that information to the IRS. Official estimates peg the number of Americans with unreported foreign accounts well in the hundreds of thousands but no one knows for sure. We believe it is in the millions.
The penalties for failure to report a foreign account are huge. They include possible prison for willful violations and civil penalties that are the greater of $100,000 per account or 50% of the highest account balance for each year when no FBAR was filed!
Before anyone panics, there are some amnesty plan options available and those that can prove their innocence may even do better outside amnesty. (Use or search engine to search “OVDI” and “opt out” for dozens of informative articles.) If you have an unreported offshore account, you certainly aren’t alone and the IRS realizes that many violations were not intentional.
The tax lawyers at Mahany & Ertl have helped many taxpayers with unreported foreign accounts. We are also the exclusive legal services provider to the CPAmerica organization of accounting firms for offshore reporting issues. From FBARs to FATCA to the Offshore Voluntary Disclosure Program to foreign corporation returns, we can help.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and our satellite office in San Francisco, California. Services available worldwide.