Understanding Your Clients’ FBAR Filing Obligations and Getting Them in Compliance

Editor: Annette B. Smith, CPA

Foreign Income & Taxpayers

Following the June 30, 2014, filing deadline for FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), owners of reportable foreign accounts and those with signature authority over those accounts now find themselves either in compliance or delinquent. Some reading this item may be unsure into which category they or their respective businesses fall; others may be aware that they are delinquent and wonder whether any procedures are available for relief from civil or criminal penalties.

This item highlights two nuances of the scope of the FBAR reporting requirements that commonly result in filing missteps. For those who are delinquent, this item offers guidance on potential relief from penalties in accordance with applicable IRS procedures.

Scope of Reporting Requirement

Subject to certain exceptions discussed below, the Bank Secrecy Act, P.L. 91-508, and corresponding regulations impose the FBAR reporting requirement on “[e]ach United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country”(31 C.F.R. §1010.350(a)). Understanding the definitions of these terms is crucial to knowing the extent of one’s FBAR filing obligations. However, the regulations’ definitions of these terms contain more intricate or less obvious meanings, the nuances of which can pose traps for the unwary.

Two areas that most often cause compliance issues for FBAR filers are:

• U.S. persons who have a controlling interest in a foreign entity that owns reportable accounts; and
• The regulatory exceptions to the signature authority filing requirement, particularly as affected by the recent extension of the FBAR filing deadline for certain types of employees of U.S. and foreign entities.

Financial interest: In addition to having a financial interest in a foreign account by directly owning the account, a U.S. person is treated as having a financial interest in a foreign account when the record owner or legal title holder of the account is (1) a corporation in which the U.S. person owns directly or indirectly more than 50% of the voting power or the total value of the shares; (2) a partnership in which the U.S. person owns directly or indirectly more than 50% of the profits or capital; or (3) any other entity in which the U.S. person owns directly or indirectly more than 50% of the voting power, total value of the equity interest or assets, or interest in profits.

While this imputed financial interest can result in increasing a U.S. filer’s FBAR obligations, it also permits some related U.S. parties to file a single FBAR. If a U.S. entity is the record owner or titleholder of a foreign account and is more than 50% owned by another U.S. person, then the U.S. person owning the U.S. entity may file Form 114 as a consolidated report on behalf of itself and the U.S. entity that is the record owner or titleholder of the account.

One factor to note when analyzing the FBAR obligations of a group of entities is that a U.S. person’s entity classification for federal tax purposes is immaterial to determining whether a U.S. person has an FBAR filing obligation. Thus, disregarded U.S. entities that have no U.S. tax filing obligations nonetheless may be required to file an FBAR.

Signature or other authority: Signature or other authority is defined broadly as “the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds, or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained” (31 C.F.R. §1010.350(f)(1)). Officers and employees of companies who may be covered by this definition should understand that while they may delegate the filing of Form 114 to a third party, any officer or employee with a reporting obligation remains personally liable for a delinquent filing.

There are several exceptions to the “signature or other authority” filing requirement when one does not also have a financial interest in the foreign financial account over which the person would otherwise be considered to have signature authority. Those falling into the following categories are not required to file on account of their having signature or other authority over a foreign financial account:

• An officer or employee of a financial institution that is registered with and examined by the SEC or Commodity Futures Trading Commission;
• An officer or employee of an “authorized service provider” need not report that he or she has signature or other authority over a foreign financial account owned or maintained by an investment company that is registered with the SEC. “Authorized service provider” means an entity that is registered with and examined by the SEC and provides services to an investment company registered under the Investment Company Act of 1940;
• An officer or employee of an entity with a class of equity securities listed (or American depository receipts listed) on any U.S. national securities exchange or an officer or employee of a U.S. subsidiary of a U.S. entity with a class of equity securities listed on a U.S. national securities exchange need not file a report concerning signature or other authority over a foreign financial account of the subsidiary; or
• An officer or employee of an entity that has a class of equity securities registered (or American depository receipts in respect of equity securities registered) under Section 12(g) of the Securities Exchange Act (see 31 C.F.R. §§1010.350(f)(2)(i)-(v)).

Beginning for 2010, the IRS and Treasury’s Financial Crimes Enforcement Network (FinCEN) have issued a series of notices that postpone the FBAR due date for certain individuals with signature authority over foreign financial accounts of their employer or a closely related entity. The most recent of these notices, FinCEN Notice 2013-1, FBAR Filing Requirement-Extended Filing Date Related to Notice 2012-2, extends the due date for filing until June 30, 2015, for officers and employees covered by the notices who have signature or other authority over the reportable foreign accounts of the U.S. or foreign entities. To determine if officers and employees have an FBAR filing obligation, companies and their affected officers/employees must determine who the employer is and who owns the account.

It is important to note that postponement under the FinCEN notices does not relieve anyone of the duty to gather the information; FBARs for all years since 2010 will have to be filed in 2015 if the rules are not modified to change the reporting requirements and if an additional extension is not granted.

Questions have arisen about the scope of this exception when a public company is involved in a joint venture and owns exactly 50% or less of the venture entity. The company’s officers or employees, while exempt from reporting the corporate accounts over which they have signature or other authority, nevertheless must file an FBAR reporting the joint venture accounts over which they have signature or other authority, because an entity is a controlled entity of a public company only when the public company owns or controls more than 50% of the entity.

Potential Penalty Relief

A person who had an obligation to file Form 114 but who missed the June 30, 2014, filing deadline, should review FAQ No. 17 of the IRS 2012 Offshore Voluntary Disclosure Program (OVDP). FAQ No. 17 permits delinquent filers to avoid the imposition of penalties so long as the person files Form 114 and reports any income from the accounts in question on a tax return for that year. To obtain relief under FAQ No. 17, the late filer should prepare a statement detailing the circumstances that led to the late filing and also should make sure, and represent, that any income from the accounts has been properly reported.

Because, at present, Form 114 does not allow statements to be attached to electronic filings, filers should retain a copy of any statement for their records and be prepared to make it available to the IRS upon request. The electronic Form 114 has a section on the cover page where filers may select from a dropdown menu of explanations for why the form is being filed late. A filer may notify FinCEN and the IRS that the delinquent Form 114 is being filed pursuant to FAQ No. 17 by selecting “Other” from this dropdown menu and including a more concise explanation (the text box on the electronic form allows 750 characters of text) indicating that the form is being filed pursuant to FAQ No. 17.

EditorNotes

Annette Smith is a partner with PricewaterhouseCoopers LLP, Washington National Tax Services, in Washington.

For additional information about these items, contact Ms. Smith at 202-414-1048 or annette.smith@us.pwc.com.

Unless otherwise noted, contributors are members of or associated with PricewaterhouseCoopers LLP.