This page looks the leading court case on the FBAR, Foreign bank account reporting form. I also included the actual Bank Secrecy Act (BSA), after the court case.
As you read the BSA, you will see that the IRS is causing chaos with the instructions to the FBAR. The IRS is changing the each year with a new set of reporting rules. Yet, the law has not changed for half a century.
The leading Foreign Bank Account Reporting case went to the District Court. To get the big penalty, the IRS has show willfulness. The case looked easy for the IRS since the taxpayer pleaded guilty to criminal tax fraud. He used his Swiss account to hide his money.
Willfulness is a state of mind. The Burden of Proof in this type of case is on America.. the IRS and the Department of Justice. The case, United States v. J. Brian Williams, (on this link) is important for those with foreign bank accounts. Mr. Williams please guilty to two counts of conspiracy to defraud the IRS, yet, he did not owe the penalty for failure to report his foreign bank account. The Court held that his failure to report his offshore bank accounts was not willful.
And there is more. Not all foreign accounts are FBAR reportable!
The IRS now states that foreign bond funds are exempt. For example, Vanguard has a set of foreign (Dublin) exchange traded funds (ETF) with very low fees. Many of these funds are invested in American and non-American government and safe corporate bond funds.
If you would like help on your tax planning, then email me at [email protected]
When you look at the actual law, you see most foreign investments are not FBAR reportable. Here is the law and a summary.
The U.S. Code (section 5314) requires U.S Persons to report to the Government if they:
1. makes a transaction “with a foreign financial agency” or
2. “maintains a relation for any person with a foreign financial agency.”
Understanding the background to the the law is crucial in determining the accuracy of the instructions.
The “Currency and Foreign Transactions Reporting Act” (the “Bank Secrecy Act” “BSA” ) was enacted in 1970, to address the concern that Americans were using banks located in certain foreign countries to evade tax.
The regulations, provide in part:
“Each person subject to the jurisdiction of the United States (except a foreign subsidiary of a U.S. person) having a financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country shall report such relationship to the Commissioner of the Internal Revenue for each year in which such relationship exists, and shall provide such information as shall be specified in a reporting form prescribed by the Secretary to be filed by such persons.”
Now, let’s re-write the regulations without the comma’s and see what we can learn.
They would read as follows: ” A U.S person having:
1. a financial interest or signature authority of a foreign bank account,
2. a financial interest or signature authority of a foreign securities account or
3. a financial interest or signature authority of an other foreign financial account
shall report such relationship to the IRS.
What is a “bank account”? We know from case law, it is not a money market account.
Can we assume that a money market account is another financial account?
Can we assume that an ETF (such as a Vanguard Fund) is another financial account? While the law is unclear and poorly written, the answer maybe yes they are a bank account for the purposes of the Bank Secrecy Act.
A “securities account” is not shares of a corporation, a promissory note, a bond from a corporation or government. The definition that is the common legal definition is found at this link
Assets held by a custodian as your agent is specially defined as not a securities account.
Further, a “securities account” means that the contract is governed by a securities law of the jurisdiction, such as the SEC.
But, let’s return to the law & not the FBAR instructions. Americans merely have to report a transaction with a foreign financial agency or a relationship that the American maintain for himself or some one else with a “foreign financial agency.” Having a foreign investment is not a relationship with a foreign financial agency. This term is defined by Federal law. Here is an link.
For your reference, below is the Bank Secrecy Act and a link to the IRS web site which limit’s the filing requirement.
Sec. 5314. Records and reports on foreign financial agency
(a) Considering the need to avoid impeding or controlling the export
or import of monetary instruments and the need to avoid burdening
unreasonably a person making a transaction with a foreign financial
agency, the Secretary of the Treasury shall require a resident or
citizen of the United States or a person in, and doing business in, the
United States, to keep records, file reports, or keep records and file
reports, when the resident, citizen, or person makes a transaction or
maintains a relation for any person with a foreign financial agency.
The records and reports shall contain the following information in the way
and to the extent the Secretary prescribes:
(1) the identity and address of participants in a transaction or
(2) the legal capacity in which a participant is acting.
(3) the identity of real parties in interest.
(4) a description of the transaction.
(b) (author’s note has exemptions)
(c) A person shall be required to disclose a record required to be
kept under this section or under a regulation under this section only as
required by law.
(Pub. L. 97-258, Sept. 13, 1982, 96 Stat. 997.)
If you would like to brainstorm your tax ideas or concerns, then please call me, Brian Dooley CPA, for a free brainstorming consultation at 949-99-3414.