FBARs and Not-Yet-Reported Offshore Income: Penalties and Practitioners’ Issues

This item considers (1) options available for the client that did not disclose under the IRS’s voluntary disclosure program, which ended October 15, 2009; (2) practitioners’ responsibilities, including tax organizers and engagement letters; and (3) items suspended and/or extended to the June 2010 due date.

Is it too late to initiate a voluntary disclosure under the IRS program for unreported offshore income and foreign bank and financial accounts? If a client asks for a recommendation, what are the options?

As of this writing, the IRS has released little in the way of new guidance. The IRS has warned taxpayers that full penalties will be assessed against those who did not disclose the underreported income or who did not file Forms 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, or 8865, Information Return of U.S. Persons with Respect to Certain Foreign Partnerships, by October 15, 2009 (see IRS, Voluntary Disclosure, Questions and Answers). The IRS said penalty computations could be 50%–70% or even the full balance of the account for which Treasury Forms TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBARs), were not previously filed and for which income was underreported, thus creating an income tax violation.

However, the IRS has also said that it always encourages taxpayers to come forward and disclose unreported income and is always willing to talk to taxpayers about negotiating a voluntary compliance agreement, even if no formal IRS voluntary program exists. In addition, if there is no unreported income—just the failure to file an FBAR return—the IRS might not assess penalties for the late FBAR because all income has been reported. If appropriate, consider requesting abatement of penalties for reasonable cause.

The IRS expanded audit resources in 2009 and plans to do more audits in 2010. International/offshore bank accounts and credit cards are an egregious area of noncompliance, according to William Marshall, IRS director of examinations, North Atlantic Region, at a recent IRS/NY State Society of CPAs joint symposium (September 29, 2009). Fiscal year 2010 examination strategies include 44,000 audits in this region (23,000 field and 21,000 office audits).

Consider the preparer due diligence requirement and the impact of the tax return preparer review recently announced by IRS Commissioner Douglas Shulman. Circular 230 outlines preparer responsibility. A practitioner must comply with FBAR rules as part of his or her due diligence obligation under Section 10.22 of Circular 230, Diligence as to Accuracy. The IRS further states:

Due diligence does not require that the practitioner “audit” their client. However, it does require that a practitioner make reasonable inquiries when a client provides information that suggests possible participation in overseas transactions/accounts subject to FBAR requirements. A practitioner may rely on information provided by a client in good faith. However, they may not ignore implications learned from information provided or actually known. The practitioner is also required to advise a client of potential penalties likely to apply to a position taken, such as failing to abide by FBAR requirements. The practitioner must make reasonable inquiries if information appears incorrect, inconsistent with an important fact or factual assumption, or is incomplete. [IRS, “Professional Responsibility and the Report of Foreign Bank and Financial Accounts”]

Suppose a client chooses to not disclose and the practitioner is aware of this noncompliance and underreporting of income. Under Circular 230:

A practitioner who, having been retained by a client with respect to a matter administered by the Internal Revenue Service, knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission. [Circular 230, §10.21]

With respect to tax returns and documents, affidavits, and other papers:

A practitioner may not advise a client to submit a document, affidavit or other paper to the Internal Revenue Service — (i) The purpose of which is to delay or impede the administration of the Federal tax laws; (ii) That is frivolous; or (iii) That contains or omits information in a manner that demonstrates an intentional disregard of a rule or regulation unless the practitioner also advises the client to submit a document that evidences a good faith challenge to the rule or regulation. [Circular 230, §10.34]

The AICPA’s FBAR/Circular 230 Task Force recommends strategies for practitioners to comply with Circular 230:

• Include an expanded list of FBAR questions in tax organizers sent to clients at year end;
• Mail clients a separate letter detailing FBAR reporting requirements, enclose a copy of the FBAR, and clarify whose responsibility it is to prepare and file FBARs; and/or
• Include in engagement letters expanded explanatory language detailing FBAR reporting requirements.

Practitioners should also call their professional liability insurance carrier’s hotline and view its website for examples. For extensive online resources, see AICPA Update on New FBAR Form, Reporting, and Due Diligence Requirements with web links and AICPA International Tax FBAR information at for a chart of information needed for FBAR and a detailed outline on the FBAR requirements.

Additional extensive online FBAR resources, including many web links to authoritative sources, are available at www.journalofaccountancy.com/Web/FBAR.htm.

Temporary Suspension of FBAR Filing Requirements Until June 30, 2010

The 2009 FBAR reporting requirements (with the new FBAR form that was revised effective January 1, 2009) include persons who are not citizens, residents, or domestic entities for reports due to be received by the IRS by the June 30, 2010, due date. The IRS suspended the FBAR reporting obligation for nonresidents and people doing business in or with the United States for the 2008 year (due June 30, 2009) on June 5 (Announcement 2009-51).

In addition, on August 31, 2009, the IRS issued Notice 2009-62 regarding FBAR filing requirements, which extended the filing date until June 30, 2010, for U.S. persons having signature authority over, but no financial interest in, a foreign financial account and for U.S. persons with financial interest in, or signature authority over, foreign commingled funds.

The IRS Chief Counsel’s Office said it is working on making new guidance available as of this writing.

Neil Sullivan, an international tax consultant, is chair of the AICPA FBAR Task Force and vice-chair of the International Tax Committee of the ABA Section of International Law. He moderated the teleconference Foreign Bank Account Reports and More: Voluntary Disclosure—September 23 Deadline! on August 20, 2009. He served as a panel member on voluntary disclosure, trusts, and confidentiality at the ABA Section of International Law spring 2009 meeting in Washington, DC.