International Communiqué: What Foreign Account Holders Need to Know from the IRS Before June 30 Deadline

June 18, 2009

Taxpayers with foreign bank or other financial accounts should be aware of the imminent June 30 filing deadline for Form 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR"), for the 2008 calendar year. Click here to read the new version of FBAR, released by the IRS. This form streamlines the filing process by allowing taxpayers to report all their foreign accounts on one form, with separate pages for accounts that are jointly owned and that are individually owned.

Any United States person with an interest in a foreign financial account with an aggregate value of at least $10,000 during the previous calendar year is required to file an FBAR. The most significant change is the revision of the definition of a "United States person," which will require more persons to file FBAR's than in the past. Under the July 2000 definition, a US person was a citizen or resident of the United States, a domestic partnership, a domestic corporation, or a domestic estate or trust. The new definition of a US person now includes, in addition, persons who are non-citizens or non-residents, but who are in the United States and doing business here. Because of the volume of comments received regarding this new filing requirement, the IRS temporarily suspended the reporting requirement for persons who are not citizens, residents or domestic entities, until additional guidance is issued. This means that while non-citizens or non-residents may not have to file an FBAR for 2008, they will likely be required to file in subsequent years.

In addition to the revision of the definition of a US person, the definition of "financial interest" has been expanded and now includes interests in corporations, partnerships or accounts held in trust. This means an FBAR must be filed for the accounts of a corporation in which the person owns more than 50% of the value, has more than a 50% interest in either the profits or capital of a partnership, or a trust or estate through a present beneficial interest and with a right to receive more than 50% of the income. For taxpayers unsure whether a foreign account falls under the new guidelines, it may be best to file a protective FBAR, to avoid any possible future penalties.

Failure to file timely an FBAR can result in serious sanctions or penalties. The IRS recently announced the Offshore Income Reporting Initiative, giving delinquent filers an option to avoid criminal prosecution and substantial civil penalties. For more information, please view the recent publication on this matter. Provided there are no income tax issues associated with what will be shown on the FBAR, and the income has been reported elsewhere, the filer may also be eligible to file the delinquent FBAR and attach a reasonable explanation as to why the filing is late. Generally, if the IRS determines the explanation was reasonable, penalties will not be assessed.

The FBAR for the 2008 calendar year is due on June 30. It must be filed separately from the taxpayer's income tax returns. Unlike an income tax return, the FBAR is timely filed when received by the IRS Center, not the date it was postmarked. For the taxpayer who is concerned about the FBARs arriving in a timely manner, the FBAR may be delivered to a local IRS Center where it can be date stamped and forwarded to the processing center.

For more information, contact Joseph J. Dehner.