Why is this Topic Important to Wealth Managers? Presents discussion relating to Foreign Bank and Financial Account disclosures. For those wealth managers with international clients it is most important to stay ahead on updates relating to international tax and compliance. Thus we have presented a discussion summarizing the new rule position with regards to international financial reporting.

As we have discussed in the past here at AdvisorFYI, there is no specific Federal law that prohibits an individual from owning any interest in a financial account in foreign jurisdictions.  “However, because offshore financial accounts can be used to hide criminal proceeds or evade taxes, federal law does require disclosure of such accounts.” [1]

Generally, “Congress has directed the Secretary of the Treasury to require residents and citizens of the U.S., or persons in and doing business in the U.S., to maintain records and file reports of transactions and relations with foreign financial agencies.” [2]

Specifically, every “U.S. citizen, resident and businessperson who has a financial interest in, or signatory authority over, one or more bank accounts, securities accounts or other financial accounts in a foreign country”, must “report that relationship to the U.S. Department of the Treasury if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year”, annually through Form TD F 90-22.1. [3]

Last year, The Financial Crimes Enforcement Network issued a proposed rule that amends the Bank Secrecy Act (BSA) implementing regulations regarding the Report of Foreign Bank and Financial Accounts. The FBAR filing requirements, authorized under one of the original provisions of the Bank Secrecy Act, have been in place since 1972.  Those proposed regulations were finally adopted in part this year. [4]

FinCEN’s final rule adopts the proposed changes with slight modifications. The final rule reflects FinCEN’s approach to issues raised in comments submitted in response to the proposed rule made by tax professionals and industry experts.  The new FinCEN rule:

• explains whether an account is foreign and therefore reportable as a foreign financial account and addresses the treatment of custodial accounts in this context;
• revises the definition of signature or other authority to more clearly apply to individuals who have the authority to control the disposition of assets in the account by direct communication (whether in writing or otherwise) to the foreign financial institution;
• explains that an officer or employee who files an FBAR because of signature or other authority over the foreign financial account of their employer is not expected to personally maintain the records of the foreign financial accounts of their employer; and
• advises filers that they may rely on provisions of this final rule in order to determine their filing obligation for FBARs in those cases where filing was properly deferred under prior Treasury guidance.

For additional discussion on FBAR see, Advisor FYI: Foreign Bank and Financial Account (FBAR).

Tomorrow’s blog will discuss topics relating to life insurance.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Steven Mark Levy.  Federal Money Laundering Regulation: Banking, Corporate and Securities Compliance (FMNYL) § 10.02. Wolters Kluwer.  2010; see, also Advisor FYI: Foreign Bank and Financial Account (FBAR).

[2] 31 U.S.C. § 5314(a).

[3] 31 U.S.C. §§ 5314(a), 5314(b); 31 C.F.R. § 103.24, 31 C.F.R. § 103.27(c), (d),

[4] See 31 CFR Part 101, Federal Register Vol. 76, Num. 37

Why is this Topic Important to Wealth Managers? Discusses voluntary disclosure program available to clients with offshore accounts.

The Internal Revenue Service announced earlier this week a special voluntary disclosure initiative (the second one of its kind in the past few years).  The Internal Revenue Service states the program is designed to bring offshore money back into the U.S. tax system and assist individuals that may have undisclosed income from hidden offshore accounts to pay taxes owed.  The new voluntary disclosure initiative will be available through Aug. 31, 2011.

The IRS decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts.  According to the IRS, the first special voluntary disclosure program finished with 15,000 voluntary disclosures on Oct. 15, 2009.  Since that time, the Service notes, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world.

The new initiative is being called the 2011 Offshore Voluntary Disclosure Initiative, which includes several changes from the 2009 Offshore Voluntary Disclosure Program.  The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting.  However, the 2011 initiative does have additional features.

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period.   However, some taxpayers will be eligible for lower 5 or 12.5 percent penalties.  Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Notably, the IRS’s newly created penalty category of 12.5 percent applies to smaller offshore accounts. Individuals whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate.

Taxpayers with undisclosed foreign accounts or entities are encouraged to make a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution.   Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues.

Taxpayers who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution.

Under the penalty framework, the values of accounts and other assets are aggregated for each year and the penalty is calculated at 25 percent of the highest year‘s aggregate value during the period covered by the voluntary disclosure.  If the taxpayer has multiple accounts or assets where the highest value of some accounts or assets is in different years, the values of accounts and other assets are aggregated for each year and a single penalty is calculated at 25 percent of the highest year‘s aggregate value.

Example:

Assume the taxpayer has $1,000,000 in a foreign account over the period covered by his voluntary disclosure.  It is assumed for purposes of the example that the $1,000,000 was in his account before 2003 and was not unreported income in 2003.  The account earns 5% each year and no tax is paid from years 2003-2010.

If the taxpayers in the above example were to come forward and their voluntary disclosure is accepted by the IRS, they face this potential scenario:

They would pay $518,000 plus interest. Which includes:

• Tax of $140,000 (8 years at $17,500 at 35%) plus interest,
• An accuracy-related penalty of $28,000 (i.e., $140,000 x 20%), and
• An additional penalty, in lieu of the FBAR and other potential penalties that may apply, of $350,000 (i.e., $1,400,000 x 25%).

If the taxpayers didn’t come forward, when the IRS discovered their offshore activities, they would face up to $4,543,000 in tax, accuracy-related penalty, and FBAR penalty. The taxpayers would also be liable for interest and possibly additional penalties, and an examination could lead to criminal prosecution

Tomorrow’s blogticle will discuss relevant topics to wealth managers in 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? Presents information useful to wealth managers who incorporate offshore activities into clients’ personal and business planning. Discusses, specifically, Foreign Bank and Financial Account reporting and compliance requirements.

There is no specific Federal law that prohibits an individual from owning any interest in a financial account in foreign jurisdictions.  “However, because offshore financial accounts can be used to hide criminal proceeds or evade taxes, federal law does require disclosure of such accounts.” [1]

“Congress has directed the Secretary of the Treasury to require residents and citizens of the U.S., or persons in and doing business in the U.S., to maintain records and file reports of transactions and relations with foreign financial agencies.” [2]

Specifically, every “U.S. citizen, resident and businessperson who has a financial interest in, or signatory authority over, one or more bank accounts, securities accounts or other financial accounts in a foreign country”, must “report that relationship to the U.S. Department of the Treasury if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year”, annually through Form TD F 90-22.1. [3]

For each foreign account, the Form TD F 90-22 must include:

• The name in which the account is maintained;
• The account number or other account designation;
• The name and address of the foreign bank or other person with whom the account is maintained;
• The type of account; and
• The maximum value of the account during the calendar year. [4]

Recently, the well known UBS situation highlighted the Foreign Bank and Financial Account or FBAR requirements, where U.S. account holders “held in the name of offshore trusts and other sham entities”, funds at the Bank. [5] In what was thought of by many as unprecedented the Swiss Bank agreed “provide the IRS with the identities and account information of certain U.S. clients.” [6] Federal criminal and civil suits soon followed “resulting in a scramble by thousands of holders of offshore accounts to come clean through an IRS partial amnesty program that was available until October 15, 2009.” [7]

“However, the IRS estimates that for every person who files an FBAR, four persons fail to file a required FBAR in any calendar year.” [8]

Nevertheless, any person who willfully violates the FBAR reporting requirements, or any person who willfully causes such a violation, is subject to a civil money penalty in the amount of $100,000 or 50 percent of the balance in the account at the time of the reporting violation, whichever is greater. [9]

Furthermore, any person who willfully violates the FBAR reporting requirements, or any person who willfully causes such a violation, is subject to criminal fine of up to $250,000 and/or imprisonment for up to five years. [10] Moreover, if the “violation occurs while the person is violating another federal law or as part of a pattern of unlawful activity involving in excess of $100,000 in a one-year period, the person is subject to up to a $500,000 fine, up to ten years imprisonment, or both.” [11]

The new reporting requirement discussed yesterday is similar to the information furnished in an FBAR report but is slightly different.  “For example, a beneficiary of a foreign trust who is not within the scope of the FBAR reporting requirements because his or her interest in the trust is less than 50 percent may nonetheless be required to disclose the interest in the trust with his or her tax return if the value of his or her interest in the trust together with the value of other specified foreign financial assets exceeds $50,000.” [12]

Tomorrow’s blogticle will discuss additional international planning considerations.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Steven Mark Levy.  Federal Money Laundering Regulation: Banking, Corporate and Securities Compliance (FMNYL) § 10.02. Wolters Kluwer.  2010.

[2] 31 U.S.C. § 5314(a).

[3] 31 U.S.C. §§ 5314(a), 5314(b); 31 C.F.R. § 103.24, 31 C.F.R. § 103.27(c), (d),

[4] 31 C.F.R. § 103.32.

[5] FMNYL § 10.01.  Citing, IRS Chief: Swiss Deal Shows U.S. Resolve. August 19, 2009. National Public Radio.  Interview.  Douglas Shulman IRS Commissioner.

[6] Id.

[7] Id.

[8] Department of the Treasury, Report to Congress in Accordance with § 361(b) of the USA Patriot Act, at 6 (April 26, 2002).

[9] 31 U.S.C. §§ 5321(a)(5)(C)(i).

[10] 31 U.S.C. § 5322(a); 31 C.F.R. § 103.59(b).

[11] FMNYL § 10.09. Citing, 31 U.S.C. § 5322(b); 31 C.F.R. § 103.59(c).

[12] Joint Committee on Taxation, Technical Explanation of the Revenue Provisions Contained in Senate Amendment 3310, the “Hiring Incentives to Restore Employment Act,” under consideration by the Senate (JCX-4-10), Page 60.  February 23, 2010.