Filing Season Pointers: Better Ask About Foreign Accounts & Assets
By Steven J. Mopsick and Ryan T. Carrere
April 15 has come and gone, but the filing season is not really over until after June 30, when foreign bank account reports are due. Hopefully, most return preparers asked their clients about ownership of (or signature authority over) foreign financial accounts in preparation for the April 15 filing. It’s getting a little late to ignore, as some preparers have for years, Part III of Schedule B for both Form 1040A and Form 1040. In plain language, Part III says: ‘‘If ‘Yes’, are you required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), to report that financial interest or signature authority? See FinCEN Form 114 and its instructions for filing requirements and exceptions to those requirements.’’ This should put any return preparer on notice that there might be some additional work to do.
FBARs have been required since the early 1970s under the Bank Secrecy Act, but it was not until 2004 that the Treasury Department turned over FBAR responsibility to the IRS. With enforcement of offshore reporting issues now an IRS priority, return preparers must devote special attention to proper reporting of offshore accounts and assets. Taxpayers with FBAR requirements not only need to report from now on, they may need to correct past delinquencies before the IRS catches up with them.
There Is a New Reporting Paradigm
For generations in the United States, we have been accustomed to thinking at tax filing time that we just need to let the government know each April how much taxable income we made; hence the quaint phrase ‘‘voluntary self-reporting.’’ Now, however, with FBARs and other information reporting forms, we are required to report to the government how much we have overseas, regardless of the presence or absence of a taxable event during the past reporting period. If need be, Uncle Sam can let us know if he thinks we need to chat.
Tax practitioners, preparers, and accountants have been slowly rising to the challenges presented by FBAR compliance issues. U.S. taxpayers with undisclosed foreign financial assets now have four options for complying. Many taxpayers are considering the IRS streamlined filing compliance procedure for a reduced-penalty scheme, which requires that they swear under penalty of perjury that they did not willfully fail to file FBARs (or any other information return) or willfully fail to report in- come.
The IRS was slow to take on FBAR enforcement in 2004. In 2009 the Service rolled out the first of three offshore voluntary disclosure programs that allowed taxpayers with suspicious and embarrassing noncompliance histories to simply say, ‘‘I’ll be good from now on,’’ and pay the back taxes plus large penalties. This is nothing new. Since the early 20th century, the IRS policy has been that even if there was willful noncompliance, no one who comes forward voluntarily to self-correct will have to go to jail.
The role assigned to the IRS in 2004 regarding FBAR and other foreign tax issues, compounded by a surge of people coming forward to confess their sinful past behavior, caused the voluntary disclosure program to get backed up. Smartly, in June 2014 the commissioner made it a lot easier to counsel clients with benign non-willful scenarios. The revised streamlined filing compliance procedure now allows more taxpayers to participate and also helps the government to process FBAR compliance cases by funneling more cases through the system.
After the practitioner makes a threshold assessment of the potential criminal penalties in a given case, other issues arise. Among them are distinguishing willful from non-willful conduct, which can be challenging. As recently as October 9, 2014, the IRS published on its website instructions for U.S. taxpayers residing in the United States under the new streamlined procedures. It defined non-willful conduct as ‘‘conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.’’
In the Internal Revenue Manual, the IRS defines willfulness as a ‘‘voluntary, intentional violation of a known legal duty.’’ Willfulness is shown by knowledge of reporting requirements and a conscious choice not to comply. Complicating the analysis is the concept of willful blindness. According to the IRM, willful blindness:
may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements. An example that might involve willful blindness would be a person who admits knowledge of and fails to answer a question concerning signature authority at foreign banks on Schedule B of his income tax return. This section of the return refers taxpayers to the instructions for Schedule B that provide further guidance on their responsibilities for reporting foreign bank accounts and discusses the duty to file Form 90-22.1. These resources indicate that the person could have learned of the filing and recordkeeping requirements quite easily. It is reasonable to assume that a person who has foreign bank accounts should read the information specified by the government in tax forms. The failure to follow up on this knowledge and learn of the further reporting requirement as suggested on Schedule B may provide some evidence of willful blindness on the part of the person. For example, the failure to learn of the filing requirements coupled with other factors, such as the efforts taken to conceal the existence of the accounts and the amounts involved may lead to a conclusion that the violation was due to willful blindness. The mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, by itself, to establish that the FBAR violation was attributable to willful blindness.
The distinction between willful and non-willful delinquencies has a lot to do with the penalties that a noncompliant taxpayer may face. Penalties can range from the greater of 50 percent of an account balance or $100,000 for each year the statute of limitations remains open for those that do not elect one of the four compliance options to as little as no penalty for those non-willful taxpayers residing outside the United States.
Establish a Record About Foreign Assets
Return preparers are in a position to help their clients avoid these issues altogether. Here are some things to think about.
Practitioners should ask their clients about the existence of offshore accounts, offshore assets, and foreign income, documenting both inquiry and response in a written contemporaneous record. Using a questionnaire or tax organizer is a good way to do this.
Some preparers do not use them, and some have not updated theirs in years. It is helpful to maintain an up-to-date tax organizer that asks all questions relevant to completing a proper tax return. This helps the return preparer document what was disclosed by the client.
An actual conversation or e-mail with the client about foreign assets is now a must. On first mention of foreign information return compliance, the preparer should know how the various penalties can apply so that the client can be fully informed of the risks of nondisclosure. Of course many clients do not like tax organizers and just ignore them, but the possibility of omissions in reporting escalates if clients are not made to do their homework.
For many taxpayers, the annual visit to the return preparer feels like going to the doctor. With angst in their voices, the clients ask, ‘‘Are you going to be able to save me anything at all this year on my taxes?’’ Although a trip to the return preparer may seem like a visit with a cardiologist, an audit from the IRS can feel like a visit with a proctologist.
Immigrants Present a Special Challenge
In these cases, practitioners should ask their clients about family accounts abroad and whether they know if someone back home put their names on any accounts but never bothered to tell them. Citizenship classes teach all about the pledge to the flag and who the presidents were but they don’t tell the applicant that if their names show up on family accounts in their native countries, they may be putting themselves at risk for a U.S. government penalty. Return preparers should take a moment to explain to clients that the U.S. taxes worldwide income, unlike almost all other countries, which tax earnings derived from sources within that particular country.
A client with no foreign bank accounts at the time the practitioner was first engaged should be asked again each year if the situation has changed. Issues relating to FBAR and the Foreign Account Tax Compliance Act weigh heavily on recent immigrants to the United States, and there is no comfort in hearing that they were part of the collateral damage and unintended consequences of FATCA and FBAR enforcement.
Eleven years after the IRS announced it was looking for ways to plug the drain at the bottom of the bathtub by directing its enforcement efforts to foreign accounts, some in the return preparer community are just becoming aware of the potential for serious problems in the offshore compliance area. It is possible for taxpayers with foreign accounts to come clean now, and practitioners should let their clients know all the available options.
 The implementation of the Foreign Account Tax Compliance Act and the ongoing efforts of the IRS and the Justice Department to ensure compliance with U.S. tax obligations have raised awareness of U.S. tax and information reporting requirements regarding non-U.S. investments. Because the circumstances of taxpayers with non-U.S. investments vary widely, the IRS offers the following options for addressing previous failures to comply with U.S. tax and information return obligations:
1. the offshore voluntary disclosure program;
2. streamlined filing compliance procedures;
3. delinquent FBAR submission procedures; and
4. delinquent international information return submission procedures.
The IRS encourages taxpayers to consult with professional tax or legal advisers to determine which option is the most appropriate for them. See http://www.irs.gov/Individuals/ International-Taxpayers/Options-Available-For-U-S-Taxpayers- with-Undisclosed-Foreign-Financial-Assets.
 See http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-in-the-United-States.
 IRM section 22.214.171.124.5.2.
 IRM section 126.96.36.199.5.3.