Back in 1970, Congress enacted a law that became known as the Bank Secrecy Act, or BSA.
But like the PATRIOT Act, the USA Freedom Act, and many other opaquely named laws Congress enacts, the BSA had nothing to do with encouraging bank secrecy. Indeed, perhaps more than any other law enacted by Congress, in its 45-year history, the BSA has effectively ended bank secrecy worldwide.
As with other laws Congress executes, the BSA requires that individuals and companies file various forms with the government. And penalties for non-compliance are heavy – staggering, in some instances.
Take for instance, the Report of Foreign Bank and Financial Accounts, or FBAR. If you meet the criteria set out in the instructions for this form, you must file it annually with an obscure Treasury agency called the Financial Crimes Enforcement Network (FinCEN). The deadline for filing the FBAR is June 30 for foreign accounts you held the previous calendar year.
Thus, in just two weeks, the FBAR deadline will be upon us. If you need to file this form, be sure you don’t miss this deadline.
In summary, the BSA requires US citizens and permanent residents to file an FBAR if they had financial interests in, or authority over, foreign accounts with an aggregate value of $10,000 or more at any time during the preceding year.
The penalties for non-compliance with the reporting regime can be draconian. You can be fined up to $10,000 per unreported account for each year you neglect to file the FBAR. If you willfully fail to file the form, you face a fine of up to $100,000 or 50% of the closing aggregate balance of the accounts, whichever is greater, and imprisonment up to five years .
And it’s much easier for the government to prove “willfulness” than you might think.
The poster child for what could happen if you fail to comply with these requirements is an 88-year-old man named Carl Zwerner. Last year, a federal jury found that Zwerner “willfully” failed to disclose the existence of a Swiss bank account in 2004, 2005, and 2006. It imposed a penalty of 50% of the peak value of the account for each year: $2.24 million in all. That amount far exceeds the peak value of the account – $1.55 million – during those years. Keep in mind that the penalty is in addition to back taxes, interest, and penalties that Zwerner already paid for the earnings in this account from 2004 to 2007.
But it could have been worse; the original IRS assessment against Zwerner came to a whopping $3.5 million. The IRS also didn’t seek criminal penalties, including possible imprisonment, against him.
Also keep in mind that the FBAR is only one of numerous forms you may need to file if you have offshore accounts. Fortunately, it’s the only one with a deadline approaching.
Unfortunately, it’s not always easy to figure out whether you need to report an international financial relationship on the FBAR or not. If you have “signature authority” over an account at an international bank or brokerage, this relationship is clearly reportable. But the published guidance from the IRS doesn’t always make clear whether you must disclose details of other international relationships.
As a starting point to understanding exactly what you need to report, check out this chart from the IRS. It’s a comparison chart for two separate offshore reporting requirements, but for now, look at the right column.
Even with this chart, there are still some FBAR reporting obligations that are easy to overlook. Here’s a rundown of some of the ones we encounter the most:
- Foreign account over threshold for only a short period of time. The $10,000 threshold applies to the aggregate value of all foreign accounts you held in 2014, even if you exceeded it only briefly. For instance, let’s say that your only foreign account is in Panama. During 2014, the value of the account never exceeded $10,000 except for a single day, when you sent a wire transfer for $100,000 to it. You immediately invested this amount in Panamanian real estate. That transfer makes the account reportable, and you must list the peak value of the account ($100,000-plus – whatever balance was in it when the wire hit the account) on the FBAR.
- Foreign retirement account. The definition of a “foreign account” is much broader than a mere bank or securities account. And if you’re one of the more than eight million US citizens and green card holders living outside the US, you may have an overlooked reporting obligation: your pension or retirement plan in your adopted country. Social Security-type plans need not be reported on the FBAR. Otherwise, if you have a “financial interest” in a foreign retirement plan, even if you have no signature authority over it, you might need to report it. That’s especially true if the assets of the plan are held in individual accounts and especially in insurance or annuity contracts.
- Account held through a US company. This is one of the most overlooked aspects of the FBAR reporting regime. It applies to US persons who own more than 50% (directly or indirectly) of a US corporation, a US partnership (including an LLC), or similar entity. If that entity holds non-US accounts with an aggregate value of $10,000 or more, it must file a separate FBAR.
- Precious metals accounts. Note that the IRS chart says that precious metals “held directly” need not be reported on the FBAR. I’ve never seen any formal guidance from the IRS on what “held directly” means, but in this FAQ, the IRS says, “[A] safe deposit box is not a financial account.” Unfortunately, this posting doesn’t refer to the FBAR, but to a separate reporting obligation. Still, this statement seems to be an indication that precious metals held in a safe deposit box would qualify as being “held directly.”
Confused? If you are, I don’t blame you. The definition of a “foreign account” is so broad, it’s often difficult to determine what’s reportable and what’s not. For that reason, it’s been my policy for the nearly 30 years that I’ve been filing FBARs to report any foreign relationship that the IRS could conceivably consider a “foreign account.”
I realize that the FBAR, and all the other reporting forms required to disclose international investments, telegraphs information you’d probably rather not share with your benevolent Uncle Sam. My advice is to file them even in borderline situations. The consequences of NOT filing are severe, should you get caught.