US entities and US Foreign Bank and Financial Account
Reporting (FBAR) Requirements
Contributed by Laveco Ltd. [www.laveco.com]
On February 23, 2011, the Financial Crimes Enforcement Network
of the Department of the Treasury (“FinCEN”) released
final regulations (the “Final Regulations”) under
the US Bank Secrecy Act of 1970 (the “BSA”) relating
to annual information reporting requirements for certain foreign
bank and financial accounts in which United States persons
have a financial interest or over which they have signature
or other authority (such report referred to as an “FBAR”).
The act requires that “US persons” file
an annual FBAR report disclosing details where they have “a
financial interest in or signature or other authority over
any foreign financial accounts, including bank, securities
or other types of financial accounts, in a foreign country,
if the aggregate value of these financial accounts exceeds
$10,000 at any time during a calendar year”.
The Final Regulations apply to FBARs required to be filed
by the 30th of June 2011 with respect to calendar year 2010
and FBARs for all subsequent calendar years.
DEFINITION OF “US PERSON”
Often in international structures for commercial reasons and/or
to avoid the application of potential fiscal ‘blacklists’
clients would utilise US LLCs. In these cases there would
be no US beneficial owners, no US assets and no US business
activity.
In these circumstances it was historically believed that such
a US LLC would not fall within the definition of “US
person” and accordingly it was thought that FBAR filing
regulations were not applicable.
Over the last year as part of the ongoing IRS crackdown on
US taxpayers the need to submit current and outstanding FBAR
forms has been widely published by the IRS and this has been
accompanied by further clarification of who falls within the
definition of a US person and extension of the persons covered
by the FBAR requirements was made.
A “United States person” is:
A citizen or resident of the United States.
A domestic entity (including a corporation,
partnership, or limited liability company, regardless
of whether the entity has made an election to be disregarded
for federal income tax purposes). A domestic entity for this
purpose is an entity created, organized or formed in, or under
the laws of, the United States.
A domestic trust or estate.
The IRS have confirmed that in their view a US LLC is a US
person for the purposes of the FBAR reporting regime and the
fact that for US federal income tax purposes such a US LLC
would be treated as a ‘disregarded’ entity is
not relevant.
The above extension of the definition of US person
means that LLC-s created, organised or formed in, or under
the laws of, the United States:
will be subject to FBAR reporting requirements, but
will not be subject to federal income taxation in the US,
as the law currently stands.
The FBAR reporting requirement will not currently result
in federal income tax liability, though there is no guarantee
that this will not change in the future.
TYPES OF REPORTABLE ACCOUNTS (FOREIGN FINANCIAL ACCOUNTS)
Foreign financial accounts include the following accounts:
Bank accounts such as savings, demand, checking, deposit and
any other accounts maintained with a financial institution
or other person engaged in the business of a financial institution;
Securities accounts such as mutual funds, brokerage accounts,
securities derivatives or other financial instruments accounts.
A reportable securities account is an account maintained with
a person in the business of buying, selling, holding or trading
stock or other securities;
Accounts where the assets are held in a commingled fund that
is a mutual fund;
Any other account(s) maintained in a foreign financial institution
or with a person engaged in the business of a financial institution;
that are located outside the following:
United States
Northern Mariana Islands
District of Columbia
American Samoa
Guam
Puerto Rico
U.S. Virgin Islands
Trust Territories of the Pacific Islands
DEFINITION OF “FINANCIAL INTEREST”
Under the Final Regulations, a U.S. person is treated as having
a financial interest in a foreign financial account when that
person is the owner of record or the holder of legal
title to the account, regardless of whether the account
is maintained for the U.S. person’s own benefit or for
the benefit of others. When an account is maintained in the
name of more than one person, each U.S. person in whose name
the account is maintained has a financial interest in the
account and is therefore subject to the FBAR reporting requirement.
In addition, a U.S. person is treated as having a financial
interest in a foreign financial account when the owner of
record or holder of legal title is:
- A person acting on behalf of the U.S. person, such as
an attorney, agent, or nominee;
- A corporation in which the U.S. person owns directly or
indirectly more than 50 percent of the voting power or total
value of the shares; a partnership in which the U.S. person
owns directly or indirectly more than 50 percent of the
profits interest or capital; or any other entity (other
than a trust) in which the U.S. person owns directly or
indirectly more than 50 percent of voting power, total value
of the equity interest or assets, or interest in profits;
- A trust, if the U.S. person is the trust grantor and has
an ownership interest in the trust under the grantor trust
rules (sections 671-679); or
- A trust in which the U.S. person either has a present
beneficial interest in more than 50 percent of the assets
or from which the U.S. person receives more than 50 percent
of the current income.
DEFINITION OF “SIGNATURE OR OTHER AUTHORITY”
Signature or other authority means the authority of an individual
(alone or in conjunction with another) to control the disposition
of money, funds or other assets held in a financial account
by direct communication (whether in writing or otherwise)
to the person with whom the financial account is maintained.
The filing requirement is therefore placed on the
person who has the authority to directly deliver instructions
to the foreign financial institution(account signatory).
REPORTING FOR JOINT ACCOUNTS
If two persons jointly maintain an account, or if several
persons each own a partial interest in an account, then each
U.S. person has a financial interest in that account and each
person must file an FBAR.
REPORTING DEADLINE
The FBAR is due by the 30th of June of the
year following the year that the account holder meets the
$10,000 threshold.
REPORTING PROCEDURE
FBAR reports for calendar year 2010 must currently be filed
on paper by 30th of June 2011.
FBAR forms are available:
Online via www.irs.gov;
Online via Department of the Treasury’s Financial Crimes
Enforcement Network website, www.fincen.gov;
Completed forms must be sent by mail to the following addresses:
By post:
U.S. Department of the Treasury
P.O. Box 32621
Detroit, MI 48232-0621
By express delivery:
IRS Enterprise Computing Center
ATTN: CTR Operations Mailroom, 4th Floor
985 Michigan Avenue
Detroit, MI 48226
Failure to file an FBAR when required to do so may potentially
result in civil penalties, criminal penalties or both.
RECORDKEEPING
FBAR records should be kept for five years
from the due date of the report which is June 30 every calendar
year.
The records should contain the following:
Name maintained on each account.
Number or other designation of the account.
Name and address of the foreign bank or other person with
whom the account is maintained.
Type of account.
Maximum value of each account during the reporting period.
Failure to maintain required records may potentially result
in civil penalties, criminal penalties or both.
Penalties
The following chart highlights the civil and criminal penalties
that may be asserted for not complying with the FBAR reporting
and recordkeeping requirements.
| Violation |
Civil
Penalties |
Criminal
Penalties |
Comments |
| Negligent
Violation |
Up to
$500 |
N/A |
31 U.S.C.
§ 5321(a)(6)(A)
31 C.F.R. 103.57(h) |
| Non-Willful
Violation |
Up to
$10,000 for each negligent violation |
N/A |
31 U.S.C.
§ 5321(a)(5)(B) |
| Pattern
of Negligent Activity |
In addition
to penalty under § 5321(a)(6)(A)
with respect to any such violation, not more than $50,000 |
N/A |
31 U.S.C.
5321(a)(6)(B) |
| Willful
- Failure to File FBAR or retain records of account |
Up to
the greater of $100,000, or 50 percent of the amount
in the account at the time of the violation. |
Up to
$250,000 or 5 years or both |
31 U.S.C.
§ 5321(a)(5)(C)
31 U.S.C. § 5322(a)
and 31 C.F.R. § 103.59(b) for criminal.
The penalty applies to all U.S. persons. |
| Willful
- Failure to File FBAR or retain records of account
while violating certain other laws |
Up to
the greater of $100,000, or 50 percent of the amount
in the account at the time of the violation. |
Up to
$500,000 or 10 years or both |
31 U.S.C.
§ 5322(b) and 31 C.F.R. § 103.59(c) for criminal
The penalty applies to all U.S. persons. |
| Knowingly
and Willfully Filing False FBAR |
Up to
the greater of $100,000, or 50 percent of the amount
in the account at the time of the violation. |
$10,000
or 5 years or both |
18 U.S.C.
§ 1001,
31 C.F.R. § 103.59(d) for criminal. The penalty
applies to all U.S. persons. |
| Civil
and Criminal Penalties may be imposed together.
31 U.S.C. § 5321(d).
|
CONCLUSION
The primary intent of the widened FBAR reporting requirements
is to capture data that will assist US authorities in determining
whether US Residents and Citizens have additional incomes
that should be subject to US taxes.
Unfortunately LLCs created, organized or formed in, or under
the laws of, the United States will face additional administrative
duties and increased costs of annual filing even if they have
no US beneficial owners, no US assets and no US business activity.
The following options are available to such LLCs:
1. Striking off of the US LLC and registration
of a new company in a different jurisdiction
Although as the law currently stands the LLCs registered
through LAVECO Ltd. would not be subject to federal tax
in the USA, we believe that this situation could change
in the near future. In our opinion, it would be better for
clients to distance themselves now from all such US entities,
and to establish companies in different jurisdictions. For
“holding” purposes, for example, companies registered
in the Seychelles, Belize or Anguilla etc. may be just as
suitable, while more prestigious solutions may be offered
by Hong Kong or LLPs registered in the UK.
2. Continuation, re-registration of the US LLC
in another jurisdiction
To avoid the filing requirement, LLCs may be re-domiciled
to other jurisdictions. Re-domiciliation would mean that
the existing LLC ceases to exist in the USA, and is “continued”
in a jurisdiction with less stringent filing requirements,
such as the Seychelles, Belize, BVI etc. This will involve
a certain amount of administrative work and a not insignificant
fee.
3. Compliance with FBAR reporting requirements
As the current law will not make LLCs registered through
LAVECO Ltd. subject to federal tax, complying with the FBAR
requirements will not lead to a substantial tax burden for
such companies. However, compliance will involve additional
administrative work and costs for the annual filing, as
well as exposure to the IRS.
4. Non-compliance with FBAR reporting requirements
Failure to comply and maintain the necessary records may
result in civil penalties, criminal penalties or both.
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