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Foreign Bank Account Reporting Rules

By David Kerzner - Email Editor

Date : Oct 26, 2006

Dear Subscriber:

I have asked my dear friend David Kerzner to write a series of newsletters dealing with the reporting requirements relating to foreign accounts, trusts and some expat issues. This is a big issue and will become even bigger once the IRS starts matching data it gathered under the Patriot Act with tax returns. These rules are simple yet the penalties are potentially huge. I expect a lot of folks will find themselves frustrated about the prospect of facing needless criminal prosecution because they ignored the good advice David is about to give them. We don’t want any of our Subscribers or their clients to get into needless trouble, so please take this advice seriously. David has told me that many taxpayers may be eligible to clean up their act, by paying a small fine, and bypassing the criminal severities associated with their delinquencies. Part one of David’s article follows.

- Rob Lambert

FOREIGN BANK ACCOUNT REPORTING RULES

Lola Flunkenstein (pronounced Flunk-In-Shhteen) has a net worth of over $40 million. She resides in London with her family. Although she was born in Brooklyn, and is a U.S. citizen, she has spent most of her life in the U.K. She has second and third homes in Manhattan and Malibu. Mrs. Flunkenstein has never filed a U.S. return. She has also never reported the existence of her offshore bank and financial accounts to the U.S. Treasury Department, as is required by law on an annual basis. The U.S. returns are another issue, and I am focusing solely on the foreign account reporting rules here.

When I met with her tax and investment advisors regarding expatriation/estate planning, they were astonished to learn that the penalties for non-compliance with the foreign bank account reporting rules now constitute a felony crime, punishable with a five year prison sentence, and carry a civil penalty of upwards of $500,000. Her investment counselor, one of the most prominent in the world threw her hands up in the air as we sat around the boardroom table, peering out into the Canary Warf from a very high floor, remarking in utter exasperation, “Why would anyone want to live like that?”

“I don’t know,” I recall responding, “but there is a way to set this right, and to avoid the worst case scenario penalties, but it’s going to be very expensive.”

Yes, it’s a true story, but to protect the innocent, I have changed some of the facts. While Mrs. Flunkenstein may represent the apex of the high net-worth taxpayers who do not report their foreign account holdings, and while no one can say for sure, there are likely thousands of similarly situated taxpayers in the U.S. and throughout the world, who regardless of their net worth, must live with these self-imposed risks. Any client spending the big bucks for a brilliantly conceived wealth preservation planning strategy is well advised to make certain that they have not left themselves open to injury through past, present or future failures connected to U.S. compliance and reporting obligations.

Every U.S. person who has a financial interest in, or signature authority, or other authority over any financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceed $10,000 at any time during the calendar year, you must report that relationship each calendar year by completing and filing a form TD F 90-22.1 with the Department of the Treasury on or before June 30th of the succeeding year. U.S. persons include a U.S. citizen, U.S. resident (generally including green card holders!), domestic corporations, domestic partnerships and domestic trusts and estates. These rules are often referred to as the “FBAR” rules. There are many reasons why your clients may want to become compliant with these obligations. Being compliant with the FBAR rules is a sine qua non for expatriation.

Generally, a client desiring to “clean up” their FBAR situation can have their legal representative enter into anonymous negotiations with the various IRS and Treasury officials to obtain a closing agreement and waiver of interest from criminal prosecution. A fine may or may not have to be paid. It is impossible to recommend this or any other course of action without having a comprehensive analysis of the applicable facts and tax rules performed by U.S. legal counsel. Often, this sort of strategy will be considered in connection with other major U.S. federal income tax and transfer tax considerations. Readers interested in learning more about reporting for foreign trusts should read my article in next week’s edition of this journal.

David Kerzner is an international tax lawyer admitted to practice in New York, London and Toronto.

David Kerzner

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