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A Primer on the FBAR Filing Requirements

Cousin Elmer, Squirrels, and Foreign Inheritances

Cousin Elmer has seven and a half fingers and a score of little scars on remaining fingers, a reminder of an attack by a scurry of squirrels (yes, that is the name for a group of squirrels, and now you know) that had beset upon him after he tried, rather unsuccessfully, to eradicate their presence in his attic through the use of what can only be described as a Vietnam-era improvised explosive device (IED).

Squirrels, Elmer once told you, were generally pacifists unless backed into a corner or dizzy. Even at seven years old you were at once humored by at the mental image of a dizzy squirrel and horrified at Cousin Elmer for swinging one by his tail vigorously enough to induce rather severe spatial disorientation in the poor animal. So, when you heard that Elmer had blown himself up rather than the squirrel’s dray, you thought that it was a fitting comeuppance and not at all outside the ambit of possibilities.

The dray incident was but one of many “unfortunate” events in Elmer’s life; indeed, unfortunate events seem to follow Elmer like his old coonhound Daisy, who had an affinity, in equal measure, for Elmer, peanut butter, and chasing porcupines, and who lacked the sense (much like her owner) of learning from past mistakes.

Elmer thought that his luck had changed, however, when he received a call in 1993 from a man with a thick Bavarian accent, which was tinged with melancholy at the news he was tasked to deliver. Elmer was the last living relative (a distant nephew, it turned out) of a rather wealthy and curmudgeonly German woman who had died under circumstances that reminded Elmer more of a game of Clue (bludgeoned by the butler with a candlestick – likely in the library, Elmer thought) than an actual cause of death. Nonetheless, Elmer was now the proud owner of a substantial foreign financial account, among other assets.

For reasons known only to Elmer, he chose not to discuss his inheritance with anyone. The money was safe in a Swiss bank, and he was plenty happy in his holler without needing to complicate his life with any accoutrements of “city living” (a much-maligned term in Elmer’s doublewide). In 2012, Elmer received a letter from the IRS notifying him that the Swiss bank had entered into a disclosure agreement with the U.S. government, and that if he had any foreign accounts, now was the time to disclose them. Equally confused as to how (a) the IRS found him, and (b) how they found out about his Swiss account, he set out to check for gaps in the barbed wire fence and then set out to set the Government straight.

Elmer refused to pay for a long-distance phone call to Geneva, and so he sent a letter to the bank asking for the information necessary to report the account. Owing to the fact that Elmer had not attached enough postage, the letter never reached its destination, and owing to the rather lackadaisical approach of the Biddeford, Maine, post office, Elmer never receive a return-to-sender notice.

The next letter that Elmer received gave him pause. It stated that Elmer owed the Government approximately $11 million, or fifty percent of the foreign account, for “willfully” failing to report its existence. Elmer had limited dealings with the IRS, having needed to file taxes only once in his life (1991 was a boon in the taxidermy business, apparently), and so, through a complex web of aunts, uncles, and your father, who was somehow related to this clan through an accident of birth, you received a call from Elmer on a brisk November morning.

You gave him the Reader’s Digest version of the foreign information returns that is required to file, and you told him that you would be happy to help bring them into compliance through one of the IRS’s filing programs (whether Streamline Domestic Filing Procedures or Delinquent International Information Return Filing Procedures, you hadn’t decided yet). Elmer understood (or at least claims he did) the Form 8938 requirements, but he was hung up on the FBAR filing requirements. At first, you told him that he simply had to file FBARs, but he kept asking inane questions until finally you broke. Fine, Elmer, if you want the long version, you’ll get the long damn version. You got the regulation in front of you, and you proceeded to walk Elmer, step by step, through the filing requirements.

FBAR Filing Requirements Generally

Any U.S. person[1] having an interest in,[2] or signature authority over,[3] a bank, securities, or other financial account[4] in a foreign country shall report such relationship to the U.S. government for each year the relationship exists on FinCEN Form 114, which is most commonly referred to as an ‘FBAR.”[5] As you can see by the five footnotes in the previous sentence, each phrase of the regulation requires a substantial bit of unpacking.

A U.S. Person for Purposes of the FBAR Filing Requirements

A “United States person” means a citizen of the United States, a resident of the United States, or a United States entity.[6] Such entities include, but are not limited to, a corporation, partnership, trust, or limited liability company created, organized, or formed under the laws of the United States or any individual state – including the District of Columbia, territories, insular possessions, or Indian tribes. Thus, an LLC formed by an indigenous Puerto Rican tribesman, which LLC owns a bank account in Nevis, would be required to file an FBAR. As a red-blooded U.S. citizen, Elmer checks this first box.

Types of Reportable Accounts

Unless the foreign financial account bears some relation to the government or are used solely for bank-to-bank settlements,[7] all foreign financial accounts must be reported on an FBAR (assuming that all other qualifications are met).

A “bank account” is exactly what it sounds like. It incorporates savings accounts, deposit accounts, checking accounts, or any other account maintained with a “person” engaged in the business of banking (including, most often and rather on the nose, a bank). Because Elmer’s account is in a Swiss bank, it clearly falls within the definition of a foreign bank account.[8]

A “securities account” means an account with a person engaged in the business of buying, selling, holding, or trading stock or other securities.[9]

The term “other financial accounts” means a deposit account with a financial agency,[10] an insurance or annuity policy with a cash value,[11] account with a broker dealer a futures or options transaction in any commodity on or subject to the rules of the commodity exchange or association,[12] and a mutual fund or similar pooled fund (with shares issued and available to the general public that have a regular net asset value determination and regular redemptions).[13]

A Financial Interest in a Foreign Financial Account

If the U.S. person is the “owner of record” of an account described in the previous section or has “legal title” to such an account, the U.S. person has a financial interest in the account.[14] This is so, whether the account is maintained for his own benefit or for the benefit of others.[15] If 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 that account.[16]

A U.S. person has an “other financial interest” in a foreign financial account if the owner of record or holder of legal title is an agent of the U.S. person,[17] a corporation controlled by the U.S. person,[18] a foreign grantor trust created by U.S. person,[19] or a trust in which the U.S. person has a present beneficial interest of more than 50% of the assets or current income.[20]

Breaking this down even further, a U.S. person has a financial interest in a foreign financial account if the owner of record or holder of legal title of the account is a person acting as an agent, nominee, attorney, or in some other capacity on behalf of the U.S. person with respect to the foreign account, the U.S. person has an interest in the account.[21]

Next, a U.S. person has a financial interest in a foreign financial account if the owner of record or holder of legal title of the account is (i) a corporation in which the U.S. person owns (directly or indirectly) more than 50% of the voting power or the total value of shares, (iii) a partnership in which the U.S. person owns (directly or indirectly) more than 50% of the interests in profits or capital, or (iii) or any other entity (other than a trust, which we’ll discuss in just a moment) in which the U.S. person owns directly or indirectly more than 50% of the voting power, total value of the equity interest or assets, or interest in profits.[22]

Finally, a U.S. person has a financial interest in a foreign financial account if the owner of record or holder of legal title of the account is (i) a grantor trust (under the grantor trust rules set forth in IRC § 671 through IRC § 679), and the U.S. person is the grantor and has an ownership interest in the trust under such grantor trust rules,[23] or (ii) a trust in which the U.S. person has a beneficial interest in either more than 50% of the assets, or 50% of the current income.[24]

Importantly, there is an “anti-avoidance rule” contained in the FBAR regulations.[25] If any U.S. person causes an entity (including, without limitation, a corporation, partnership, or trust) to be created for the purpose of invading the FBAR reporting requirements, that U.S. person has a financial interest in a foreign financial account for which the entity is the owner of record or holder of legal title.[26]

Signature or Other Authority over Foreign Financial Account

Generally, “signature authority” means the authority of an individual to control the disposition of money, funds, or other assets held in a financial account by directly communicating in writing or otherwise to the person (bank, etc.) with whom the financial account is maintained.[27] this authority may be exercised alone or in conjunction with another person.[28]

There are five exceptions to the general signature authority rule.

First, an employee of a bank that is examined by a U.S. Federal institution, such as the Federal Reserve or the FDIC, does not need to report the interest in the account, even though he has signature authority over such account. Second and third, an officer or employee of a financial institution that is registered with and examined by the SEC or the Commodity Futures Trading Commission need not report that he has signature or other authority over the foreign financial account (so long as he has no financial interest in the account)[29] or commodities account held by such institution.[30] Fourth, an officer or employee of an entity with the class of equity securities listed on any U.S. stock exchange need not report that he is signature or other authority over a foreign financial account of such entity (so long as he has no financial interest in the account).[31] Fifth and finally, an officer or employee of an entity that has securities registered under § 12(g) of the Securities Exchange Act need not report that he is signature or other authority over a foreign financial accounts of such entity(so long as he has no financial interest in the account).[32]

Special Rules

If the U.S. person has a financial interest in or signature authority over 25 or more foreign financial accounts, that person need only provide the number of accounts and certain other basic information. If the IRS requests more detailed information, then that person is obligated to provide such information.[33] If a U.S. person, which is an entity, owns directly or indirectly more than 50% of one or more other entities required to report under this section, the parent entity may file a consolidated report on behalf of itself and such subsidiaries.[34]

Participants and beneficiaries and retirement plans that fall under IRC § 401(a), IRC § 403(a), and IRC § 403(b) of the Code, as well as owners and beneficiaries of IRAs under IRC § 408 or Roth IRAs under IRC § 408A of the Code are not required to file an FBAR with respect to a foreign financial account held by or on behalf of the retirement plan or IRA.[35] Finally, a beneficiary of a trust, in which the U.S. person has a beneficial interest in more than 50% of the assets or from which such person receives more than 50% of the current income, is not required to report the trust’s foreign financial accounts if the trust, the trustee of the trust, or the agent of the trust is (i) a U.S. person, and (ii) files an FBAR disclosing the trust’s foreign financial accounts.[36]

Meanwhile, Back to Elmer

Over the phone, you can virtually hear the hamsters spinning their wheels with furious pace inside his head, and you hear his 7.5 fingers tapping a truncated tattoo loudly on the table. Elmer asks you to go ahead and send him whatever confounded forms you need him to sign to file his FBARs. You tell him you will email him a Form 114a, which authorizes you to file the FBAR. The silence tells you that Elmer either doesn’t have a computer, or email is as foreign to him as his Great-Aunt Hilda, whose untimely demise was the root of all of Elmer’s present problems. You tell him you’ll mail him the Form 114a, but he will need to get in touch with the bank to provide you with the account numbers, value of the account, etc.

Before you hang up, your mind already on the two migraine pills that are just out of reach in the credenza drawer behind you, Elmer mentions offhand that you’re going to have to file an FBAR for Great-Aunt Hilda’s trust, of which Elmer is the only beneficiary. You set the phone down, chew the two sour, chalky pills (and pray that this makes them work faster), and tell him that a foreign trust has a number of other filing requirements and associated forms, but that you’ll cross that bridge in your next phone call.

Elmer says that’s finer than a frog hair split four ways, and as you hang up, the headache pills kick in, and you set your head on your desk and reflect on your life choices that made you become a tax lawyer to clients like Elmer. After you are done moping, you open up your already dog-eared, tattered copy of the 2020 Code, inhale the smell of thousands upon thousands of administrative hours spent creating new definitions for commonly accepted words, and you brush up on the foreign trust reporting requirements of IRC § 6048.


Footnotes:

[1] 31 C.F.R. § 1010.350(b).

[2] 31 C.F.R. § 1010.350(e).

[3] 31 C.F.R. § 1010.350(f).

[4] 31 C.F.R. § 1010.350(c).

[5] 31 C.F.R. § 1010.350(a); 31 U.S.C. § 5314.

[6] 31 C.F.R. § 1010.350(b)(1)-(3).

[7] 31 C.F.R. § 1010.350(c)(4)(i)-(iv).

[8] 31 C.F.R. § 1010.350(c)(1).

[9] 31 C.F.R. § 1010.350(c)(2).

[10] 31 C.F.R. § 1010.350(c)(3)(i).

[11] 31 C.F.R. § 1010.350(c)(3)(ii).

[12] 31 C.F.R. § 1010.350(c)(3)(iii).

[13] 31 C.F.R. § 1010.350(c)(3)(iv)(A).

[14] 31 C.F.R. § 1010.350(e)(1).

[15] Id.

[16] Id.

[17] 31 C.F.R. § 1010.350(e)(2)(i).

[18] 31 C.F.R. § 1010.350(e)(2)(ii).

[19] 31 C.F.R. § 1010.350(e)(2)(iii).

[20] 31 C.F.R. § 1010.350(e)(2)(iv).

[21] 31 C.F.R. § 1010.350(e)(2)(i).

[22] 31 C.F.R. § 1010.350(e)(2)(ii).

[23] 31 C.F.R. § 1010.350(e)(2)(iii).

[24] 31 C.F.R. § 1010.350(e)(2)(iv).

[25] 31 C.F.R. § 1010.350(e)(3).

[26] Id.

[27] 31 C.F.R. § 1010.350(f)(1).

[28] Id.

[29] 31 C.F.R. § 1010.350(f)(2)(ii).

[30] 31 C.F.R. § 1010.350(f)(2)(iii).

[31] 31 C.F.R. § 1010.350(f)(2)(iv).

[32] 31 C.F.R. § 1010.350(f)(2)(v).

[33] 31 C.F.R. § 1010.350(g)(1)-(2).

[34] 31 C.F.R. § 1010.350(g)(3).

[35] 31 C.F.R. § 1010.350(g)(4).

[36] 31 C.F.R. § 1010.350(g)(5).

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