Taxable Talk

The Financial Crimes Enforcement Network (FINCEN) announced this week that you can now file an FBAR (Form TD F 90-22.1) electronically.

Electronic filing of an FBAR is different than electronic filing for a tax return. You must complete an application, and download a special forms reader (used for transmitting the FBAR). Under FINCEN rules, tax professionals cannot file an FBAR on a client’s behalf.

And it appears that FINCEN is working on linking the FBAR to tax preparation software. Given the pace that government works, this is probably still at least a year away.

Note that you can still paper file your FBARs.

Hat Tip: Taxdood

The Department of Justice press release reads like a Who’s Who of foreign tax havens. Sean and Nadia Roberts of Tehachapi, California (near Bakersfield) run the National Test Pilot School in Mojave. They’ve also pleaded guilty to one count of filing a false tax return though they admitted filing false tax returns for several years.

The Roberts had accounts on the Isle of Man, Switzerland, Hong Kong, South Africa, and New Zealand. I may have missed a country or two, too. There were nominees, and UBS aided the couple in purchasing at least one nominee. The Roberts didn’t declare the interest income they earned from the foreign accounts, and deducted transfers to foreign accounts as “interest payments.” The loss to the Treasury was $709,675. As part of the plea agreement, the Roberts will make restitution, pay an FBAR penalty of 50% of the high balance year in their foreign accounts (that amount wasn’t disclosed in the press release), and could each find themselves sentenced to ClubFed for one year.

While I have said that the IRS has, at times, looked like they’re using shotguns on jaywalkers (vis-a-vis foreign account enforcement), that’s not the case here. It appears that the Roberts were deliberately evading taxes.

The IRS posted a revised draft of Form 8938, the “Son of FBAR.” I’d normally note the highlights; however, in this case let’s look at the lowlights:

First, the form is far more extensive than the original draft. Let’s assume you have to report a foreign bank account. You will need to report the same information that’s on the FBAR (Form TD F 90-22.1) plus the conversion rate (to US Dollars), what conversion rate you used (e.g. CIA World Fact Book), and the foreign currency the account is maintained in. You also have to note if you opened or closed the account during the year.

For non-bank accounts (investments, and other items), you will have to report the above along with information about the asset. For example, you will have to note the kind of entity it is (e.g. corporation). If the entity is not a stock, you have to list out all the issuers/counterparties of the entity.

But there’s more! (Unlike infomercials, this is not a good thing.) In Part III of the form you have to note the income from each asset and then note where it is being reported on your tax return. If you have nontaxable distributions from a foreign asset, you must note these, too.

Finally, the brief ray of sunshine exists for files of Forms 3520, 3520-A, 5470, 8621, or 8865. Those individuals do need to file Form 8938 but just get to note in Part IV of Form 8938 that they’ve filed the other form and the number of those forms filed.

As best as I can tell, this form will apply for all foreign assets, and all money maintained outside of the United States. This will include online gambling accounts, so for those who no longer have to file the FBAR, you may have to file the Son of FBAR. Note that the Son of FBAR only applies if you have $50,000 or more in one or more such accounts. And given that Congress likes to use shotguns to go after jaywalkers, there are new fines and penalties associated with this form.

Remember, this is just a draft of the form, so it is subject to change. Additionally, this is a requirement for filing for 2011 (due in 2012), not your 2010 returns (due in 2011). Still, it would be nice if we saw some simplification rather than bringing out the Son of FBAR and the like.

I, along with other tax professionals, liken the FBAR to going after jaywalkers with shotguns. Well, a few fewer jaywalkers need worry about the FBAR for this year. The IRS announced today that individuals in two categories will not need to file FBARs:

• An employee or officer of a covered entity who has signature or other authority over and no financial interest in a foreign financial account of another entity more than 50 percent owned, directly or indirectly, by the entity (a “controlled person”).
• An employee or officer of a controlled person of a covered entity who has signature or other authority over and no financial interest in a foreign financial account of the entity or another controlled person of the entity

For anyone in those categories, the deadline for filing FBARs has been delayed one year until June 30, 2012.

One final reminder: Individuals with online poker accounts in 2010 do not need to file FBARs. However, third party processing accounts based overseas are foreign financial accounts and you may need to file an FBAR for those accounts. The penalties for not filing an FBAR when required are draconian, so this is definitely time to file. The deadline is June 30th and there are no extensions available.

The Internal Revenue Service Advisory Council (IRSAC) issued their 2010 report. The report includes 23 recommendations to the IRS (and Congress, I suppose). The entire report is worth perusing. I’m going to focus on just one item of the 23 in this entry: FBARs.

IRSAC notes that the requirements for the FBAR are confusing and extremely overbroad. Well, as one who practices in this area all I can say is, that’s absolutely correct. So what is the IRS (not IRSAC) proposing? Currently, plans are underway for an additional form, the Son of FBAR.

IRSAC’s recommendations are a breath of fresh air.

Our summarized recommendations include: (a) extending the due date to October 15 to coincide with the final filing deadline for most income tax returns; (b) providing coordinated electronic filing for income tax filers, developing an easy to use electronic filing portal for non-income tax filers, and adopting the well established “mailbox” rule for paper filers, (c) requesting guidance in connection with a reasonable cause penalty relief to encourage and accommodate filings when accounts have been disclosed and income has been substantially reported; (d) changing the filing threshold, and (e) providing an exemption from the filing requirement for employee benefit plans and U.S. officers and employees of publicly traded corporations and their subsidiaries.

Somehow I suspect that adding a second form that duplicates the FBAR wouldn’t be on their wish list.

Of course, just because the recommendations exist does not mean that anything will come of them. Unfortunately it’s far more likely we’ll see the Grandson of FBAR rather than sanity prevailing on this issue.

Coming in 2010 is Form 8938, Statement of Foreign Financial Assets. The draft of the form, which the IRS is soliciting public comment on, is now available. It may remind you of Form TD F 90-22.1 (FBAR).

Phil Hodgen (who alerted me to this form) notes, “What this means to you: Lots more work. Higher risks for screwing up your paperwork.” Yes, and the form appears more inclusive. The FBAR just asks for the financial assets. The way the Form 8938 reads that if you or a client owns 100 shares of a publicly traded foreign stock (say 100 shares of British Petroleum), you’d have to note it on the form. Perhaps I’m overreading the draft of the form (I haven’t seen instructions), but who knows.

I am likely to submit a comment to the IRS: Just have the FBAR submitted with the tax return, and be done with it. Unfortunately, I suspect that Congress meddled somewhere and is forcing this duplication of efforts. Adding this to the new mandatory $5,000 fine for even inadvertently not filing the FBAR makes foreign accounts far nastier in 2011 (that is, reporting 2010 foreign accounts).

Phil Hodgen, a tax attorney in Pasadena, has been approached by a reporter who is working on a story dealing with the draconian nature of FBAR penalties. From Phil’s post:

A certain large American publication is working on a story on the Voluntary Disclosure Program and how the IRS is treating taxpayers. Your input is needed.

If you are willing to tell your story to the reporter working on this story, please contact me directly. I will pass along your information.

If you are a professional, an individual dealing with the direct or indirect consequences of the FBAR (especially an individual residing outside the United States who is a US citizen), this is something that you should respond to. The FBAR rules are draconian, and the IRS (and Department of the Treasury) have been imposing penalties is a very draconian nature.

Read Phil’s post, and if you think you can provide information, let Phil know. Phil says, “The IRS needs to hear the impact of what they are doing on Americans who have offshore bank accounts but decided–for whatever reason–to not participate…I will help you assure your anonymity in this situation as well.” You can email Phil at phil at hodgen dot com. His post even has his cell number.

Like Phil, my clients have been impacted by this; however, most of my clients have non-interest bearing accounts and have not (to date) been targets of the IRS/Treasury witch hunt.

I’ll be back with more posts next week after the October 15th deadline passes.