Did You Forget To Report Your Foreign Bank Accounts to the Treasury Department? Amnesty Deadline is October 15, 2009

September 28, 2009 - After more than a year of legal wrangling, the IRS recently succeeded in forcing the Swiss banking giant UBS AG to release the names of 4,450 U.S. clients with Swiss bank accounts at UBS. This case has made many people aware of a relatively obscure Treasury Department form known as the “Report of Foreign Bank and Financial Accounts” (commonly known as “FBAR”) that needs to be filed by certain U.S. persons to disclose their foreign financial/bank accounts.

Generally, U.S. persons with foreign financial/bank account(s) with total balance greater than $10,000 during any year are required to disclose such account(s) to the U.S. Treasury Department by filing the FBAR. It appears that many U.S. persons have opened and maintained foreign financial/bank accounts, unaware of this disclosure requirement, and have exposure to civil and potentially criminal liabilities resulting from noncompliance with those rules. For example, a person who sells a property located in a foreign country and opens a temporary foreign bank account to receive and hold the sales proceeds could be required to report such bank account and may incur liability for failing to do so. Although opening a foreign bank account is not illegal, failing to disclose such account to the Treasury Department can be illegal.

The FBAR is required to be filed by June 30 of each year by each U.S. person who had more than $10,000 in one or more foreign financial/bank accounts during the previous calendar year. For example, a U.S. citizen or green card holder with an account at a Korean bank with a maximum balance of $10,001 during 2009 would be required to report such account on the FBAR filed by June 30, 2010. Because of the aggregation requirement, one cannot avoid disclosure by opening multiple foreign bank accounts and maintaining a balance of less than $10,000 in each account. The FBAR requires the filer to disclose the identity and highest balance of each foreign financial account during the applicable year.

Failure to file the FBAR can result in severe civil and criminal penalties. Currently, the maximum civil penalty for “willful violation” of the disclosure requirement is the greater of (i) 50% of the undisclosed account’s balance and (ii) $100,000. Since a person’s failure to disclose a foreign account for two consecutive years constitutes two separate violations, such a failure could result in the person losing his entire balance in the undisclosed account. For example, a U.S. person with $1 million balance in an unreported foreign bank account could owe that much in penalties after two years of “willful” nondisclosure. For non-willful violations, the civil penalty can be as much as $10,000 (per violation). There is, however, a “reasonable cause” exception for civil penalties. The IRS has six years to assess civil penalty. The criminal penalty for violation of FBAR disclosure rules can be up to 5 years in prison and/or a fine of up to $250,000 (and can be even greater in some circumstances). The statute of limitations for criminal violation is five years.

In March 2009, the IRS introduced an amnesty program for U.S. persons who have not been filing the FBAR and reporting interest income from foreign financial accounts. Under the amnesty program, which is currently scheduled to expire on October 15, 2009, a U.S. person would be required (i) to pay a penalty equal to 20% of the highest balance of the undisclosed bank account(s) during the past six years and (ii) to amend such person’s income tax returns for the past six years to include any previously unreported interest income from such account(s) (and pay any applicable income tax, late payment and accuracy related penalties, and interest). The advantage of participating in the amnesty program is that the participant could avoid criminal prosecution under the FBAR and tax rules as well as the higher civil penalties for willful violation of the FBAR rules.

We recommend that those who have not been filing the FBAR and reporting interest income on their foreign financial accounts to consult a tax professional. In particular, they should consider participating in the IRS’s amnesty program in order to correct their past noncompliance.

By: Richard Kim
Partner