Government’s Foreign Bank Filing Requirements Becoming More Stringent

Published June 17, 2014

If you think June 30, 2014, was just another lazy, hazy summer day, think again. If you’re a US citizen or permanent resident, this may be a date to remember. It was the deadline to report signatory or “other” authority over, or financial interest in, any “foreign bank, securities, or ‘other’ financial accounts” if the aggregate value of those accounts exceeded US$10,000 at any time in 2013. This is done by filing an FBAR (Report of Foreign Bank and Financial Accounts).

There’s even a shiny new form for the FBAR that you must file electronically: FinCEN Report 114. The government will no longer accept the old paper form – FinCEN Form TD F 90-22.1. (FinCEN, the “Financial Crimes Enforcement Network,” is the Treasury bureau responsible for collecting FBARs.)

You might be surprised to discover what Uncle Sam considers a reportable account. If you have a foreign bank account or securities account, its clear you must file. But there are other offshore relationships you may have to report.

The IRS answers some questions about reporting foreign accounts at a link on its Web site. But traps remain for the unwary.

On-Again, Off-Again Rules

Sometimes the IRS changes its mind, with catastrophic results for taxpayers.

A case in point is online poker accounts.

Since online gambling is (mostly) illegal in the United States, Web sites catering to gamblers operate internationally. Until 2008, FinCEN advised that online poker accounts didn’t need to be reported on the FBAR. In 2009, it shifted gears and declared these accounts to be reportable. Then, in 2011, FinCEN reversed itself again. Online poker accounts were once again non-reportable.

This written guidance, though, didn’t help John Hom, who gambled online and set up accounts at two online poker companies. He used a third online company to facilitate the transfer of funds to the poker accounts. All three companies were organized outside the United States.

The IRS charged Hom with not reporting the accounts on the FBAR. It assessed civil penalties of $30,000 for the three unreported accounts for 2006 ($10,000 for each account) and $10,000 for a single unreported account in 2007. With interest, Hom owes more than $45,000.

Hom appealed the penalty to a federal district court. But on June 4, a judge ruled all three accounts were reportable on the FBAR.

FBAR Instructions Meaningless

Perhaps Hom’s biggest problem was that he represented himself before the court. Still, he made some good points. He argued that since many of the actual accounts maintained by these companies were in the United States, the IRS had no proof that he had any “foreign accounts.” He also pointed to the FBAR instructions for support, which state:

“. . . the geographic location of the account, not the nationality of the financial institution in which the account is found, determines whether it is an account in a foreign country.”

The district court disagreed. It ruled an account’s location is determined by its host institution, not where the physical money might be stored after it is sent to a bank.

Adding insult to injury, the court held that instructions for the FBAR form aren’t legally binding, because:

“. . . interpretation by taxpayers of the language used in government pamphlets cannot act as an estoppel on the government, nor change the meaning of taxing statutes.”

An “estoppel” is a rule of evidence that prevents someone from denying the truth of a statement of facts that person previously asserted. In other words, when it comes to the FBAR, normal rules of evidence simply don’t apply.

In some respects, Hom was lucky. The IRS didn’t accuse him of “willfully” failing to file FBARs. That capped the civil penalty at $10,000 per account per year.

Still, the Hom decision is scary because it ignores FinCEN’s written guidance, not to mention its arrogant dismissal of the plain wording of the FBAR instructions.

Professional Help Vital

Those who have any kind of non-US financial relationships, no matter how far removed they are from the ordinary meaning of an “account,” should ask a tax professional for help. It’s important that the tax professional is experienced with FBAR filings (many aren’t).

The FBAR isn’t the only form taxpayers need to file to disclose investments or financial relationships outside the United States.

  • You must disclose any “reportable” foreign accounts on Schedule B of Form 1040. This is a simple “yes or no” declaration, along with a list of the countries in which you hold foreign accounts.
  • You must file Form 8938 to report “specified foreign financial assets” you hold outside the United States with a total aggregate value of more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Both Schedule B and Form 8938 must be filed with your tax return.

Mark Nestmann ([email protected]) is the president of the Nestmann Group, an investment advisory group based in Phoenix, Arizona. Reprinted with permission of Nestmann’s Notes,