Foreign Bank Account Reporting Requirements
It has come to the attention of the U.S. Department of Treasury that many U.S. citizens and residents have not been fulfilling their obligation to disclose a financial interest in a foreign bank account.
Title 31, Section 103.24, of the Code of Federal Regulations ("CFR"), 31 CFR 103.24, applies to any person or entity subject to the jurisdiction of the U.S., having a financial interest in, or signature or other authority over, a bank, securities or other financial account having a value exceeding $10,000 in a foreign country. Such persons or entities shall report such relationships to the Commissioner of the Internal Revenue on or before June 30th of the year following the calendar year in which such relationship exists. To report the relationship, the person or entity is required to file form TD F 90-22.1 ("FBAR").
Substantial civil and criminal penalties are prescribed for the failure to file an FBAR. The civil penalty for failure to file an FBAR, as instituted by the 2004 American Jobs Creation Act ("AJCA"), can be as much as $10,000, regardless of whether the violation is willful. A penalty exception may apply if the person can show that the violation was due to reasonable cause and the amount of transaction or balance of the account was properly reported. A second exception is provided if the person can show that any income was properly reported on the income tax returns and there was reasonable cause for the failure to report the financial account.
If the person willfully fails to file an FBAR, the civil penalty imposed will equal the greater of 50% of the balance in the account at the time of the violation or $100,000, but not less than $25,000. The criminal penalty for willful failure to file an FBAR is a fine of not greater than $250,000 and/or imprisonment for not more than five (5) years. If the violation is part of a pattern of criminal activity, the criminal fine and/or term of imprisonment may be doubled.
In the past few years, the U.S. Department of the Treasury has stepped up its efforts to enforce compliance. The increase in enforcement efforts stems from the large amount of tax shelter activity that the Internal Revenue Service experienced during the late 1990s and early 2000s and the funding of criminal and terrorist activities through foreign accounts.
During 2003, the U.S. Department of the Treasury delegated the enforcement of the FBAR from the Financial Crimes Enforcement Network to the Internal Revenue Service. The Internal Revenue Service has since been working to establish internal guidelines and procedures to enforce FBAR compliance. The delegation of enforcement of the FBAR to the Internal Revenue Service and Internal Revenue Service's increased emphasis on enforcement indicates that it is likely the Internal Revenue Service will begin to more strictly enforce the penalty provisions in the near future. Congress has again emphasized the need for stricter FBAR enforcement by enacting the new civil penalty provisions provided for under the AJCA.
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