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Schedule B of Form 1040 has a new question designed to educate taxpayers and explicitly put them on notice that they may be required to file an FBAR (foreign bank account report).

More Clarity on Foreign Bank Account Reporting

  • 6/6/2012

More Clarity on Foreign Bank Account Reporting

Scott Michel, a member of Caplin & Drysdale, Chartered, Washington, D.C., and Dianne Mehany, an associate at Caplin & Drysdale, spoke on May 31 at a program on international tax enforcement. The speakers focused on the reporting of foreign accounts by U.S. citizens and residents.

Filing FBAR

The IRS has amended Schedule B of Form 1040, regarding foreign accounts, Michel said. The 2011 form not only asks whether the taxpayer has a foreign trust or account, it asks whether the taxpayer has an obligation to file a foreign bank account report (FBAR). This new question is designed to educate taxpayers and explicitly put them on notice that they may be required to file an FBAR.

Mehany noted that a taxpayer may have to file an FBAR even if he or she does not have to file a Form 1040. The FBAR is not a tax form; it is required by Title 31 of the U.S. Code, rather than Title 26, Michel said. This means that the FBAR, unlike a tax form, is not protected from disclosure by Code Sec. 6103, for example. However, a firewall supposedly exists within the IRS between administration of tax and FBAR reporting, he said.


Taxpayers can be penalized for evading FBAR reporting, but there currently is no standard for willful evasion of the requirement, according to Mehany. Michel suggested that filing another foreign reporting form, such as Form 3520 for a trust, while not submitting an FBAR, demonstrates a lack of willfulness. However, reporting one FBAR account but not another would indicate willfulness regarding the failure to report the second account. The issue of willfulness is currently being litigated in United States vs Williams, a Fourth Circuit case.

Unlike a tax case, Michel said, the IRS does not have the power to impose a penalty for FBAR reporting. Instead, it must bring suit through the Department of Justice and must reduce the case to judgment.

Michel suggested that some of the FBAR reporting requirements are excessive. For example, the reporting of signature authority over corporate accounts is not particularly useful. However, reporting could be appropriate if an adult U.S. child has signature authority over a foreign parent’s bank account and is investing the account in various assets.

Offshore voluntary disclosure initiative

The IRS’s offshore voluntary disclosure initiative (OVDI) has been the most successful compliance program in the world, Michel said. The IRS successfully leveraged the disclosure of UBS AG bank accounts to obtain more than 33,000 bank account disclosures and payments of more than $4 billion, he reported. Michel noted that taxpayers have an option to opt out of the program. This can be risky, since there is no cap on the potential civil penalty for those who opt out. It can be worthwhile for taxpayers who are complying in good faith and would otherwise be forced to pay a penalty of 20 percent or more.

Taxpayers participating in the second or third disclosure initiatives have to report rental properties, Mehany said, even though these do not have to be reported on an FBAR. For taxpayers with these assets, it might make more sense to opt out of the OVDI and avoid reporting.

According to Michel, the latest version of the OVDI, initiated in 2012, does not have many participants so far, but has received some publicity abroad. Many U.S. citizens living outside the United States are reporting appropriately to the government where they live, but are not familiar with U.S. reporting. It may also be appropriate for these taxpayers to opt out and to comply with FBAR in the future.

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