Foreign financial account IRS reports due today

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Brian Bernhardt

In the past few years, the IRS has begun to more rigorously enforce its rules requiring taxpayers with foreign financial accounts to file a Report of Foreign Bank and Financial Authority (more commonly called an “FBAR”) or face “serious consequences.”  If you are required to file an FBAR for your 2007 tax year, today is the deadline.

The Bank Secrecy Act requires you to file an FBAR if you have a financial interest in or signature authority over any “financial accounts” in a foreign country with a total value of more than $10,000 at any time during the year.  “Financial accounts” include foreign bank accounts, brokerage accounts, mutual funds, unit trusts and other financial accounts.  In addition, even if you don’t know that you have signature authority over a foreign bank account, you are still required to file an FBAR.

Failure to timely file the FBAR, or filing an improper FBAR, can subject you to substantial civil and criminal penalties.  The IRS can impose a penalty of up to $10,000 on anyone who violates, or causes any violation of, the FBAR reporting requirements, without having to show that the violation was willful.  In addition, if the IRS can prove that the violation of the FBAR reporting requirement was willful, it can impose a penalty of either $100,000 or 50 percent of the money in the foreign account, whichever is greater.  Although you may be able to avoid the $10,000 penalty for a violation that was unintentional by showing you reported the income in the foreign bank account on your income tax return, there is no similar exception for a willful violation.

These rules help the IRS trace taxpayer money held off-shore in foreign banks which are not subject to the same reporting requirements as United States banks.  The FBAR filing requirement enables the IRS to more easily identify tax evasion and embezzlement, and it allows other government agencies to target money used in drug trafficking, racketeering and terrorism.

As a result, if you are doing business oversees or making investments overseas, you should carefully examine all of your financial accounts to determine if you are required to file an FBAR.  Similarly, if you have any credit or debit cards issued by foreign banks you may be required to file an FBAR.  Not doing so, even by accident, can result in a substantial penalty.

The FBAR is not an income tax return and is filed separately from your income tax return.  However, keep in mind that Schedule B on your income tax return does include a line for you to acknowledge whether you have any financial accounts that will require you to file an FBAR.  So even though you don’t have to file an FBAR until June 30, you should know months earlier whether or not you have to file the FBAR.

Brian Bernhardt is a partner in the Richmond office of McGuireWoods LLP. He practices in the areas of Federal tax controversies, Federal tax litigation, and nonprofit and tax-exempt organizations, focusing on their administrative relationships with the Internal Revenue Service.

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