By: Matthew D. Lee and Jeffrey M. Rosenfeld
Annual Filing Deadline Approaching
The annual deadline for filing FinCEN Form 114, Report of Foreign Bank and Financial Accounts (commonly known as the “FBAR” form), is fast-approaching. Any U.S. taxpayer with a financial interest in, or signature or other authority over, a foreign bank account (which includes bank, security, and other types of financial accounts, including certain foreign life insurance policies) is required to file the FBAR form if the aggregate value of the account (or accounts) exceeded $10,000 at any time during the 2013 calendar year, subject to certain exceptions. The FBAR filing requirements apply to all types of taxpayers with offshore bank accounts, including individuals, corporations, partnerships, LLCs, trusts, and estates (with some exceptions). Corporate officers with signature authority over corporate bank accounts located in a foreign country must also file the FBAR form in their individual capacity.
The FBAR filing deadline is June 30, 2014. No extensions of time to file the FBAR are available. Significant criminal and civil penalties may be imposed for the failure to timely file the FBAR form.
As opposed to last year when the FBAR could be filed in paper form, all FBARs are now required to be filed electronically through the Treasury Department’s BSA E-Filing System. The Treasury Department’s BSA E-Filing System can be accessed at http://bsaefiling.fincen.treas.gov/main.html.
Murky Guidance on Whether Digital Currency Must Be Included on the FBAR
The Internal Revenue Service (“IRS”) has yet to release any formal guidance on whether a Bitcoin account is required to be reported on an FBAR. However, during a recent IRS webinar entitled “Reporting of Foreign Financial Accounts on the Electronic FBAR,” an IRS representative stated that taxpayers do not need to include Bitcoin accounts on their 2013 FBAR. The IRS representative cautioned that the IRS could change this policy in the future, and we further caution that any such informal guidance is not binding on the IRS.
Conversely, a federal district court in California, in a case captioned United States v. Hom, 2014 U.S. Dist. LEXIS 77489 (N.D. CA 2014), recently upheld an FBAR penalty assessment against an individual who failed to report his interest in a FirePay, PokerStars and PartyPoker account. Such decision appears to conflict with the informal IRS guidance on Bitcoin accounts. Individuals with similar online poker accounts should file an FBAR if, at any time during 2013, they had $10,000 or more in the online poker account.
The new guidance on Bitcoin and online poker accounts illustrate the need for taxpayers to consult with a tax advisor to determine the extent of their FBAR filing obligations. As the use of digital currency continues to increase, the IRS is likely to revisit its guidance and practices. As evident from the recent guidance on Bitcoin and online poker accounts, the rules relating to digital currency are often not intuitive.
FATCA Implementation Deadline Is Just around the Corner
Meanwhile, the start date for implementation of the Foreign Account Tax Compliance Act (“FATCA”) is July 1, 2014. FATCA is a new information reporting regime pursuant to which foreign bank and financial institutions will annually report information to the IRS about their U.S. account holders. Foreign financial institutions that refuse to report such information will face a stringent 30 percent withholding tax on U.S. source payments as a penalty for non-compliance. To date, over 77,000 foreign financial institutions have registered with the IRS and indicated their agreement to report information to the IRS pursuant to FATCA, and nearly 80 foreign countries have either formally signed treaties with the U.S., or are actively negotiating such agreements, in order to implement FATCA’s information sharing requirements. FATCA is expected to provide the IRS with information regarding thousands of accounts held by U.S. taxpayers at financial institutions located around the globe.
Major Changes to Offshore Voluntary Disclosure Program and Related Initiatives
Taxpayers who are not compliant with their prior year FBAR or income tax reporting obligations with respect to foreign bank accounts may wish to take advantage of the IRS Offshore Voluntary Disclosure Program (“OVDP”), an amnesty program designed to encourage U.S. taxpayers with undisclosed foreign bank accounts to come into compliance with U.S. tax laws and avoid criminal prosecution. This program permits eligible taxpayers with undisclosed foreign bank accounts, and unreported income associated with those accounts, to avoid criminal prosecution in return for the payment of back taxes, interest, and penalties. Currently, there is no deadline for participation in the OVDP, although the IRS has stated that it could end the program, or modify its terms, at any time. To date, more than 45,000 taxpayers have come into compliance voluntarily through the OVDP and predecessor programs, paying about $6.5 billion in taxes, interest, and penalties.
On June 18, 2014, the IRS announced significant changes to the OVDP and related programs, including modifications to the existing “Streamlined Filing Compliance Procedures.” According to IRS Commissioner John Koskinen, “[t]he new versions of our offshore programs reflect a carefully balanced approach to ensure that everyone pays their fair share of taxes owed. Through the changes we are announcing today, we provide additional flexibility in key respects while maintaining the central components of our voluntary programs.”
To briefly summarize the changes, taxpayers who can certify that their failure to file an FBAR and/or report income from an offshore bank account was non-willful may be eligible for a reduced penalty framework. On the other hand, taxpayers whose failure to file FBARs and reporting offshore income was willful can be subject to an increased penalty, up to 50 percent of the maximum aggregate balance of their offshore holdings. Previously, such taxpayers were subject to a penalty calculated at 27.5 percent of their foreign accounts.
Individuals with questions about FBAR reporting, or who are considering making a voluntary disclosure to the IRS regarding foreign bank accounts, should consult experienced tax counsel to understand the benefits and risks of the voluntary disclosure process. Blank Rome’s FBAR and FATCA compliance team has significant experience with offshore reporting obligations, the IRS voluntary disclosure programs, and the Foreign Account Tax Compliance Act, and can assist individuals in navigating these reporting regimes.