What Happens to Those that Fail to Report a Beneficial Ownership in an Offshore Account?

Aug 30, 2017

This post hones in on what consequences apply to taxpayers that fail to report that they had a beneficial interest (i.e., financial interest) in a foreign account. The general rule is that any U.S. person who has “signature or other authority” over, or is the owner of record of or holder of legal title to, a foreign financial account is required to file an FBAR, if the aggregate value of that person’s or entity’s foreign financial accounts exceeds $10,000 at any time during the calendar year (source: 31 CFR § 1010.350). Under the regulations, the test for whether a person has signature or other authority over an account is whether the foreign financial institution will “act upon a direct communication from that individual regarding the disposition of assets in the account" (source: 31 CFR § 1010.350(f); see also the Preamble to the Final FBAR Regulations, 76 Fed. Reg. 10,234, 10,236 (Feb. 24, 2011)). If the financial institution or account holder requires authorization from more than one individual, every individual who is authorized to direct the bank regarding the disposition of an asset is considered a signatory under the IRS' view. To put it another way, if an account is in a person’s name or if he or she can sign a check, withdraw funds, direct investments, issue instructions to the bank (alone or in conjunction with another individual), etc., then he or she may be required to file an FBAR. To quickly and easily determine if you have an obligation to file the FBAR form and/or Form 8938, simply click "launch the app" above or via this link. The obligation to file an FBAR extends well beyond signatories and legal account holders and includes any U.S. person who has a “financial interest” in a foreign financial account. The term “financial interest” is broadly defined in the regulations and generally includes a U.S. person who is a beneficial owner of the assets in the account, even though he or she may not be identified as the legal account holder in the records of the financial institution or able to communicate directly with the financial institution (source: 31 CFR § 1010.350(e)(2)(i)). Thus, a U.S. person is required to file an FBAR if the owner of record or holder of legal title of the account is acting on the person’s behalf as an agent, nominee, attorney or in “some other capacity" (source: 31 CFR § 1010.350(e)(2)(i)). For example, if an older brother who resides overseas agrees to hold $15,000 of his younger brother's money in his foreign bank account, the younger brother has a reportable “financial interest” in the foreign financial account and is required to file an FBAR even though the younger brother is not a signatory to, or legal title holder of, the account. Similarly, if U.S. siblings inherit money from their mother and leave the funds in her estate's foreign bank account, the siblings also have a reportable financial interest in the estate’s foreign financial account and each sibling is required to file an FBAR. This is true even if the siblings’ funds are comingled in one account (assuming the aggregate value of each reporting sibling’s interest in all foreign accounts exceeds $10,000). The regulations also require reporting in various other circumstances, including situations in which a U.S. person creates an entity to conceal his or her beneficial interest in an attempt to avoid FBAR reporting (source: 31 CFR § 1010.350(e)(2),(3)). Therefore, if a U.S. or foreign person or entity holds assets in a foreign financial account on behalf of a U.S. person, the U.S. person must investigate his or her FBAR reporting requirements, and, when in doubt, file to avoid the risk of substantial penalties. Check out the FBAR Wiz app to quickly and anonymously determine if you have a filing obligation, and avoid the common pitfalls that less savvy taxpayers make.