On February 24, 2011, the Treasury Department issued new reporting rules, effective March 28, 2011, relating to the filing of an annual Report of Foreign Bank and Financial Accounts, commonly call an FBAR. New Rules (PDF)
Briefly, United States persons are required to file an FBAR if: (i) the United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and (ii) the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported. “United States person” means United States citizens; United States residents; entities, including but not limited to, corporations, partnerships, or limited liability companies created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States. Returns for calendar year 2010 must be received—received, not mailed–by June 30, 2011.
The new rules are important because the reporting requirement is imposed on individuals and entities who have a financial interest in or signature or other authority over a foreign financial account, with limited exceptions. This language referring to “signature or other authority” for financial accounts, regardless of financial interest, means that many individuals and organizations who had not previously filed an FBAR will now be required to file. It is not uncommon for multinational organizations to give signing authority to United States officers and employees over foreign bank accounts maintained by the parent or by foreign affiliates (whether those individuals are expats or residing in the U.S.).
The final rules require the individual employees and officers, if they are U.S. persons and have signature authority over foreign financial accounts, to file an FBAR for all such accounts, even if (i) they have no personal financial interest in the accounts and (ii) the corporate account owner files an FBAR that includes such accounts. Prior to the new rules, the IRS allowed a deferral of the FBAR filing for certain individuals, such as employees and officers, who held signature authority over but no financial interest in foreign financial accounts. Those employees and officers who took advantage of this deferral period for years prior to 2010 now have FBAR filings that are required to be received by June 30, 2011.
A few exceptions to the FBAR filing requirements still apply for officers and employees of companies with signature or other authority for an account owned directly by that company, not the foreign affiliate, where the employee has no financial interest in the account. These exceptions are:
➢An officer or employee of a publicly held company, whether foreign or domestic, with a class of equity securities, listed on any U.S. national securities exchange;
➢An officer or employee of a U.S. subsidiary of a U.S. entity with a class of securities listed on a U.S. national securities exchange if the subsidiary is included in a consolidated report filed by the U.S. parent;
➢An officer or employee of a bank that is examined by federal authorities;
➢An officer or employee of a financial institution that is registered with and examined by the Securities and Exchange Commission or Commodity Futures Trading Commission; and
➢An officer or employee of an authorized service provider where there is an account owned or maintained by an investment company that is registered with the Securities and Exchange Commission.
Given the short time remaining before the filing deadline and the fact that the new rules have not been covered by the mainstream media and may not be widely known, the risk of non-compliance is high. Companies that are affected should collect information about their foreign financial accounts and those of their foreign affiliates; identify any officers and employees who are U.S. persons and who have signature authority over any of those financial accounts; inform those officers and employees of the reporting requirement and assist them in meeting the requirement before June 30, 2011. Companies and individuals that filed 2010 federal income tax and information returns before the March 28, 2011, have the choice of using the FBAR regulations that applied before the final rules or the new rules that became effective March 28, 2011. For others, the new FBAR rules apply.
Under the OVDI, taxpayers are subject to a penalty of 25 percent of the highest aggregate account balance on their undisclosed account(s) between 2003 and 2010. If the value was less than $75,000 at all times during those years, the penalty is only 12.5 percent.
These account balance penalties are in lieu of all other penalties that may apply, including FBAR and offshore-related information return penalties. Plus, participants are required to pay taxes and interest on any monies (such as interest income on foreign accounts) they previously failed to report. Finally, they must pay an accuracy-related penalty equal to 20 percent of the underpayment of tax, plus interest.