On February 23, 2011, the United States Department of the Treasury's Financial Crimes Enforcement Network (known as"FinCEN") issued a final rule to amend the Bank Secrecy Act regulations regarding the reporting of Foreign Bank and Financial Accounts (the "FBAR Rule"). The FBAR Rule takes effect on March 28, 2011, and applies to 2010 reports of foreign bank and financial accounts (which must be filed by June 30, 2011), as well as reports for subsequent years.
Under 31 U.S.C § 5314, the Secretary of the Treasury is authorized to require any "resident or citizen of the United States, or a person in, and doing business in, the United States to . . . 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 FBAR Rule broadly defines the term "foreign financial agency" to make clear that any individual or entity that "maintains an account with a foreign financial institution, . . . is maintaining a relation with a foreign financial agency." As a practical matter, the FBAR Rule applies to a number of accounts beyond a traditional bank account or securities account. For example, the FBAR Rule makes clear that an individual must report all "other financial accounts," defined to include insurance policies with a cash value or annuity, mutual fund accounts, and similar pooled funds. The FBAR Rule reinforces the broad scope of the foreign account reporting
requirements.
The issuance of the FBAR Rule coincides with a February 8, 2011, Internal Revenue Service ("IRS") announcement of a second voluntary disclosure initiative available to those individuals or entities with undeclared offshore bank accounts. Under the new voluntary disclosure initiative, which is similar to, but less generous than, a previous 2009 initiative, taxpayers can come forward and report income from hidden offshore accounts for the period from 2003 through 2010. Disclosures must be made by August 31, 2011. For those who come forward and disclose hidden foreign assets, the IRS will not recommend criminal prosecution to the Department of Justice ("DOJ"), as long as the disclosures are truthful, timely and complete. The new voluntary disclosure initiative also requires participants to pay back taxes, interest and penalties on the unreported income for the period from 2003 through 2010. Additionally, the initiative requires taxpayers to amend their tax returns for 2003 through 2010, and pay a penalty of 25% of the amount in the foreign accounts in the year with the highest aggregate account balance covering that period. However, reduced penalty provisions of 12.5% or 5% are applicable in limited circumstances.
The new voluntary disclosure initiative provides taxpayers holding undeclared foreign assets with an opportunity to avoid criminal prosecution. This second chance at amnesty can be particularly beneficial given the fact that the IRS and DOJ plan on continuing their aggressive efforts to combat international tax evasion. According to IRS Commissioner Doug Shulman, "Combating international tax evasion is a top priority for the IRS." Commissioner Shulman further stated that "[t]he situation will just get worse in the months ahead for those hiding assets and income offshore." Those holding offshore bank accounts should seriously consider taking this opportunity to seek amnesty and avoid facing criminal prosecution.
Hiscock & Barclay's Tax and Commercial Litigation Practice Areas have substantial experience representing individuals and companies in matters involving foreign assets and accounts and related civil and criminal issues. Please contact Gerald F. Stack (315-425-2829) or Gabriel M. Nugent (315-425-2836) should you have any questions regarding the issues raised in this Alert.