FBAR, FATCA put pracs on alert
taxnews
Foreign asset reporting requirements get confusing – and scary
BY ROGER RUSSELL
If FATCA isn’t keeping you awake at night, it should be, accord-
ing to practitioners. Ditto for FBAR.
The filing requirements under both can
trap the unwary, and the penalties can be
enormous.
The Foreign Account Tax Compliance Act,
or FATCA, enacted as part of the Hiring Incentives to Restore Employment Act, is aimed
at increasing tax receipts by identifying off-shore U. S. accounts that could potentially be
used for tax evasion purposes.
And it’s not to be confused with FBAR, or
Foreign Bank Account Reporting, which is a
product of the Bank Secrecy Act of 1970. The
FATCA reporting provisions for individual
taxpayers, while somewhat redundant to the
FBAR provisions, carry their own set of penalties and are filed with the tax return, rather
than separately.
Though the FBAR requirement has been
around for more than 40 years, the section
that requires the filing of Treasury Form
90-22.1 has only been seriously enforced in
the past few years. The provision applies to
a person having an interest in or signature
or other authority over a bank, securities or
other financial account in a foreign country if
the aggregate value of the accounts is greater
than $10,000 at any time during the year.
eign assets exceeds certain higher thresholds.
For example, a married couple living in the
U.S. and filing a joint tax return would not file
Form 8938 unless their total specified foreign
assets exceed $100,000 on the last day of the
tax year or more than $150,000 at any time
during the year. Form 8938 is not required
from individuals who do not have an income
tax return filing requirement.
And while the information asked for is
similar, Form 8938 does not replace or otherwise affect a taxpayer’s obligation to file
an FBAR. It has its own penalties — failure
to file could result in a $10,000 penalty, with
an additional penalty up to $50,000 for continued failure to file after IRS notification. A
40 percent penalty on any understatement of
tax attributable to non-disclosed assets can
also be imposed.
Temporary regulations issued last Decem-
ber seem to include ordinary transactions,
according to James M. Robbins, a principal
at Top 100 CPA and business advisory firm
Marks Paneth & Shron. “For example, if a U.S.
person owns real estate in the U.K., there’s no
reporting requirement so long as they own it
directly,” he said. “But if the individual wants
to set up a U.K. limited company to protect
against liability, the foreign entity would sud-
denly be trapped by FATCA. It’s worded so
broadly that even a loan to a foreign not-for-
profit appears to be reportable.”
FATCA also requires foreign financial insti-
tutions to report information about accounts
held by U.S. taxpayers directly to the IRS. Reg-
istration for banks and other foreign financial
institutions will take place through an online
system, which will become available by Jan.
1, 2013. The IRS says that it will work closely
with businesses and foreign governments to
implement FATCA effectively.
“The bank reporting requirement doesn’t
kick in until 2013, but the reporting require-
ment for individuals starts with 2011 returns,”
said David Gannaway, a principal in Top 100
Firm Citrin Cooperman’s Valuation and Fo-
rensic Services Group and a former special
agent with IRS Criminal Investigation.
CLOSE BUT NOT THE SAME
At first glance, there are similarities between
the two.
The FBAR form, Treasury Form 90-22.1,
essentially asks for the same information as
the FATCA form, IRS Form 8938. However,
TF 90-22.1 isn’t filed with the tax return, but
is filed by June 30 of the year following the
account activity it reports. Form 8938,
Statement of Specified Foreign Financial Assets, is
new for this filing season and should be filed
with returns by the due date of the return.
The FBAR requires disclosure of foreign accounts aggregating over $10,000 at any time
during the year, and has a set of penalties
running as high as 50 percent of the account
value per year.
FACTA Form 8938, on the other hand, is
required when the total value of specified for-
STIFF PENALTIES
The penalties for noncompliance with the
FBAR requirements may come as a shock to
those who unwittingly run afoul of them, according to Gannaway.
“The highest civil penalty could be 50 percent of the account balance per year. That
could be more than the value of the account,”
he said.
Two voluntary compliance programs, in
2009 and 2011, allowed taxpayers who had
failed to report their foreign accounts to come
forward and pay greatly reduced penalties
— 20 percent of the highest account balance
for only one year in the first program, and
25 percent for only one year in the second
program, Gannaway said.
A third program has been instituted, al-
most identical to the 2011 program, except
that its high penalty is 27. 5 percent. “That’s
27. 5 percent of the highest aggregate bal-
ance in the account during the eight full tax
years prior to the disclosure,” noted Kevin
Packman, a tax partner at law firm Holland &
Knight and chair of its offshore compliance
team. “It’s hard to say what the right number
is, but if they put it too high no one will come
forward. From the government’s viewpoint,
the third program makes sense.”
Unlike the two previous programs, the new
one has no set termination date. However, the
IRS reserves the right to change the terms of
the program at any time. For example, the
IRS might increase penalties in the program
for all or some taxpayers or defined classes
of taxpayers, or decide to end the program
See ALERT on 17
KPMG BUYS INDIRECT TAX BIZ
FROM THOMSON REUTERS
NEW YORK — Big Four firm KPMG has
acquired the U.S. assets of Thomson
Reuters’ ONESOURCE Indirect Tax Managed Services business.
As a result of the deal, approximately
300 people from Thomson Reuters will
be joining KPMG. Financial terms of the
transaction were not disclosed.
The sale includes Thomson Reuters’
sales and use tax compliance operations, the managed tax services operations (formerly known under the Sabrix
brand), business license management,
telecom tax rating, exemption certificate
management, and TRACS support and
maintenance operations, according to a
Thomson Reuters spokesperson.
Thomson Reuters told customers last
December that it intended to divest the
unit to KPMG. The service will become
part of KPMG’s Indirect Tax Compliance
Services, which is part of the U.S. firm’s
existing state and local tax practice and
the global indirect tax service offering provided by KPMG member firms
throughout the world. The acquisition
does not include the ONESOURCE
Indirect Tax software line, which Thomson
Reuters still retains.
IRS NEEDS TO IMPROVE
CRIMINAL COMPLIANCE
WASHINGTON D.C. — The Internal Revenue
Service does not have effective internal controls in place to make sure that
defendants who have been convicted of
tax-related crimes comply with the conditions of their probation and restitution,
according to a new report by the Treasury
Inspector General for Tax Administration,
which found that the IRS’s inability to
properly account for restitution payments
resulted in the issuance of erroneous refunds to three defendants and 16 taxpayers totaling approximately $543,000. In
addition, the IRS’s systems for monitoring
defendants’ compliance with the conditions of their probation and restitution
are neither effective nor reliable. IRS officials agreed with the recommendations
and stated that they plan to take corrective actions or have already taken action
to address them.
