VOL. 25, NO. 1 SPRING 2012
B
L
J O U R N A L
Mary Burke Baker
Y ears ago, the tin can in the backyard was the financial plan of choice of many Americans. The subterranean treasure didn’t earn any interest, but it was safely hidden and easily accessible. The biggest risks were rust and rot, or perhaps forgetting where it was buried.
Decades later, globalization has facilitated the use of foreign financial accounts as the preferred choice of many to “bury” their cash.
There are many reasons to have an offshore account, and the Internal
Revenue Service (IRS) is quick to say there is nothing improper about
1 setting up or maintaining one. However, having a financial interest in or signature authority over a foreign financial account does trigger certain reporting requirements to the IRS and the Financial Crimes
Enforcement Network (FinCEN), with potentially stiff penalties for failing to comply.
Further, banking offshore just got a lot more complicated and potentially more hazardous for the uninformed and unwary.
Amended foreign financial account reporting rules finalized in
2011, together with new information reporting mechanisms for offshore accounts and entities enacted in the Foreign Account
Mary Burke Baker is a government affairs advisor in K&L Gates’s
Washington, DC, office. She focuses her practice on federal tax matters affecting businesses and individuals, including tax policy, tax
administration, and technical tax issues.

Revised FBAR and New FATCA Information Reporting Rules
Tax Compliance Act (FATCA) provisions of the Hiring Incentives to Restore Employment Act (HIRE) in 2010, create significant new reporting burdens that may cause some to question the benefit of holding assets offshore and conjure up nostalgic memories of the good old days of the tin can.
Apart from accounts held by US individuals, employees and officers with signature or other authority over the foreign financial accounts of their employers need to understand their personal filing obligations to determine if they are required to report their relationship with their employers’ accounts, or whether they are excepted from the reporting rules.
To help US persons associated with offshore accounts and entities understand their reporting compliance obligations, this article describes in detail the updated “Report of Foreign Bank and Financial
Accounts (FBAR)” filing requirements. In addition, a brief review of the new FATCA reporting requirements is included to alert readers to the expanded scope of information concerning foreign financial assets that will soon be available to the IRS.
The “Report of Foreign Bank and Financial Accounts (FBAR)” filing requirements have been in place since 1972, established pursuant to the requirements and intent of the Bank Secrecy Act
(BSA). US persons are required to file Form TD F 90-22.1a, “Report of Foreign Bank and Financial Accounts,” for each year they have a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country, unless the aggregate value of all the accounts did not exceed $10,000 during the year.
The FBAR form must be filed with and received by the IRS Detroit
Computing Center by June 30 of the following year. Although the
FBAR form is filed with the IRS, it is not an income tax form and it is not filed with the tax return. Financial Crimes Enforcement Network
(FinCEN) offers an electronic filing option for FBARs that requires only one signature. Spouses with joint foreign financial accounts may choose to file separate FBARs electronically, or file a joint paper FBAR. 4
Extensions of time for filing the FBAR generally are not granted.
Upon receipt by the IRS, the FBAR data are entered into the BSA financial database for use by law enforcement agencies consistent with the intent of the Act. In 1970, Eugene T. Rossides, former
Assistant Secretary of the Treasury for Enforcement and Operations, described the ambitious goals of the BSA as follows:
Our overall aim is to build a system to combat organized crime and white-collar crime and to deter and prevent the use of secret
BENEFITS LAW JOURNAL 2 VOL. 25, NO. 1, SPRING 2012

Revised FBAR and New FATCA Information Reporting Rules foreign bank accounts for tax fraud and their use to screen from view a wide variety of criminally related financial activities, and to conceal and cleanse criminal wealth. This administration recognizes the widespread moral decay that would result if these practices are permitted to continue and expand. We are determined to do something about them.
The FinCEN Fiscal Year 2010 Annual Report echoed Mr. Rossides’s sentiment a little more bluntly: “Follow the money.” Consistent with both visions, the completed FBAR is a roadmap of the foreign financial accounts held by the US person filing the form, identifying offshore bank accounts and other financial interests.
Pursuant to the authority granted in the BSA, the Secretary of the
Treasury has issued regulations establishing the filing requirements to disclose foreign financial accounts. In general, each US person
“having a financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country shall report such relationship to the Commissioner of the Internal Revenue for each year in which such relationship exists.” The report “shall be filed on or before June 30 of each calendar year with respect to foreign financial accounts exceeding $10,000 maintained during the previous year.” Records of the accounts reported “shall be retained by each person having a financial interest in or signature or other authority over any such account” and “shall be retained for a period of 5 years and shall be kept at all times available for inspection as authorized by law.”
On February 16, 2011, final rules amending these regulations were issued in order to define the scope of individuals and entities required to file the FBAR, delineate the types of reportable accounts, and exempt certain persons and accounts from the reporting requirement. 10 The definitions and clarifications in these rules are discussed below.
For purposes of FBAR reporting, a US person is defined as follows: 11
• A citizen of the United States;
12 and
• An entity, including but not limited to, a corporation, partnership, trust, or limited liability company created,
BENEFITS LAW JOURNAL 3 VOL. 25, NO. 1, SPRING 2012

Revised FBAR and New FATCA Information Reporting Rules organized, or formed under the laws of the United States, any State, the District of Columbia, the Territories and
Insular Possessions of the United States, or the Indian
Tribes.
To explain the scope of these definitions, FinCEN notes in the preamble to the amended regulations that the purpose of the FBAR is broader than tax administration. Thus, US citizens living abroad are required to file FBAR reports, even if they have lived outside the
United States for an extended period of time and have no US activity.
Similarly, pension and welfare benefit plans, as well as tax-exempt entities, are subject to the FBAR rules.
The following types of accounts must be reported under FBAR:
• A bank account, meaning a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking;
• A securities account, meaning an account with a person engaged in the business of buying, selling, holding or trading stock or other securities;
• Other financial account, meaning the following:
— An account with a person that is in the business of
accepting deposits as a financial agency;
— An account that is an insurance or annuity policy with a cash value;
— An account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association;
— An account with a mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions; or
— An investment fund (reserved).
An account is not considered to be a foreign account if it is maintained with a financial institution located in the United States.
Individuals who purchase, as part of their investment portfolio,
BENEFITS LAW JOURNAL 4 VOL. 25, NO. 1, SPRING 2012

Revised FBAR and New FATCA Information Reporting Rules
securities of a foreign company through a securities broker located in the United States are not required to file an FBAR. Similarly, investments with a US bank that creates pooled cash and securities accounts in a non-US market to hold the assets of multiple investors, commonly known as omnibus accounts, are generally not subject to FBAR reporting by the individual investor unless the investor can directly access funds held in the omnibus account.
The treatment of investment companies other than mutual funds or similar pooled funds has been reserved in the regulations, meaning that the Treasury may address whether and how they should be reported at a later time after additional consideration.
Hedge funds and private equity funds with shares not available to the general public, and without a regular net assets value
determination and regular redemption feature, appear to fall into the reserved category and are not currently subject to FBAR reporting.
The regulations provide certain exceptions to the general rules regarding reportable accounts, including:
• An account of a department or agency of the United States, an Indian Tribe, or any state or any political subdivision of a state, or a wholly owned entity, agency, or instrumentality of any of the foregoing; and, an account of an entity established under their laws that exercises governmental authority on their behalf;
• An account of an international financial institution of which the US government is a member;
• An account in a US military banking facility operated by a
US financial institution to serve US government installations abroad; and
• Correspondent or nostro accounts maintained by banks and used solely for bank-to-bank settlements.
In general, these exceptions are limited to government-related accounts or other types of accounts which would be considered to pose a low risk of tax evasion and other types of abuses.
For purposes of FBAR reporting, a foreign country includes all geographical areas located outside of the United States. The United
States is defined as “The States of the United States, the District of
Columbia, the Indian lands (as that term is defined in the Indian
BENEFITS LAW JOURNAL 5 VOL. 25, NO. 1, SPRING 2012

Revised FBAR and New FATCA Information Reporting Rules
Gaming Regulatory Act), and the Territories and Insular Possessions
17
A financial interest is considered to include the following arrangements:
• An owner of record or holder of legal title has a financial interest in an account whether the account is maintained for his or her own benefit or the benefit of others;
• A US person has a financial interest in an account for which the owner of record or holder of legal title is:
— A person acting as an agent, nominee, attorney or in some other capacity on behalf of the US person with respect to the account;
— A corporation in which the US person owns directly or indirectly more than 50 percent of the voting power or the total value of the shares;
— A partnership in which the US person owns directly or indirectly more than 50 percent of the interest in profits or capital;
— Another entity in which the US person owns directly or indirectly more than 50 percent of the voting power, total value of the equity interest or assets, or interest in profits;
— A trust, if the US person is the trust grantor and has an ownership interest in the trust for US tax purposes; and
— A trust in which the US person either has a present beneficial interest in more than 50 percent of the assets or from which the person receives more than
18
Both beneficial owners and nominees are subject to the reporting requirements. The preamble to the regulations identifies some
narrow exceptions to these broad rules, clarifying that a beneficiary of a discretionary trust and a remainder interest is not intended to fall within the scope of the reporting rules. In response to comments to proposed regulations, FinCEN also removed a trust with a trust protector from the filing requirements, noting that the anti-avoidance rule in the regulations (discussed below) should be sufficient to stop abuses stemming from such a trust.
BENEFITS LAW JOURNAL 6 VOL. 25, NO. 1, SPRING 2012

Revised FBAR and New FATCA Information Reporting Rules
The regulations provide that “[S]ignature 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.” 20
The test to determine whether an individual has signature or other authority over the account is whether the foreign financial institution will act upon a direct communication from that individual regarding the disposition of assets in the account. Mere participation in a decision on how to allocate or distribute assets in a foreign financial account does not rise to the level of a reporting requirement.
FinCEN acknowledged in its preamble that duplicative reporting may occur among those with a financial interest in an account and those with signatory or other authority, but believed that duplicate reports will identify more individuals with access to the accounts as well as minimize evasion of the reporting requirements. 22
The signature authority rules apply only to individuals. 23 Individuals filing FBARS only because they have signature or other authority are not subject to the five year recordkeeping requirement.
The regulations provide limited exceptions to the signature reporting rules for certain officers and employees of regulated entities:
• An officer or employee of a bank who is examined by the
Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, or the National Credit Union Administration is not required to report that he or she has signature or other authority over a foreign financial account owned or maintained by the bank if the officer or employee has no financial interest in the account;
• An officer or employee of a financial institution who is registered with and examined by the Securities and Exchange
Commission or Commodity Futures Trading Commission is not required to report that he or she has signature or other authority over a foreign financial account owned or maintained by the financial institution if the officer or employee has no financial interest in the account (this exception does
BENEFITS LAW JOURNAL 7 VOL. 25, NO. 1, SPRING 2012

Revised FBAR and New FATCA Information Reporting Rules not apply to officers and employees of investment advisors) ; 25
• An officer or an employee of an Authorized Service Provider is not required to report that he or she has signature or other authority of a foreign financial account owned or maintained by an investment company that is registered with the Securities and Exchange Commission (SEC) if the officer or employee has no financial interest in the account.
An Authorized Service Provider means an entity that is registered with and examined by the SEC and that provides services to an investment company registered under the
Investment Company Act of 1940.
• An officer or employee of an entity with a class of equity securities listed (or American depository receipts listed) on any US national securities exchange is not required to report that he or she has signature or other authority over a foreign financial account of the entity if the officer or employee has no financial interest in the account. An officer or employee of a US subsidiary of such entity also is not required to file a report if the US subsidiary is included in the consolidated report of the parent. 26 This exception does not apply to officers or employees of a US parent with signature authority over a foreign financial account of a US subsidiary. It also does not apply to officers and employees of a US subsidiary of a foreign parent listed on a US national securities exchange. 27
• An officer or employee of an entity that has a class of equity securities registered (or American depository receipts in respect of equity securities registered) under Section 12(g) of the Securities Exchange Act is not required to report if he or she has no financial interest in the accounts.
The exceptions were granted because these situations already are subject to stringent regulatory and reporting requirements and therefore are considered to maintain a higher level of transparency and a lower risk of abuse.
Other special rules and provisions that are important to know include the following:
• A US person with a financial interest in, or signature or other authority over, 25 or more foreign financial accounts
BENEFITS LAW JOURNAL 8 VOL. 25, NO. 1, SPRING 2012

Revised FBAR and New FATCA Information Reporting Rules is required only to report the number of accounts and basic identification information. The person must provide detailed information regarding each account upon request. 29
• An entity that is a US person owning directly or indirectly more than 50 percent interest in one or more other entities required to file the FBAR report may file a consolidated report on behalf of itself and those other entities.
• Participants and beneficiaries in retirement plans under
IRC Sections 401(a), 403(a), and 403(b), and owners and beneficiaries of individual retirement accounts (IRAs) under
Section 408 and Roth IRAs under Section 408A, are not required to file an FBAR on foreign financial accounts held by or on behalf of the retirement plan or IRA.
• A trust beneficiary with a greater than 50 percent beneficial interest, or who receives greater than 50 percent of current income of the trust, is not required to file an FBAR if the trust, trustee or agent of the trust is a US person that files a report. 32
• Bona fide periodic statements prepared in the ordinary course of business by the foreign financial institution may be relied upon to determine the highest account balance for purposes of FBAR.
The preamble to the regulations demonstrates that at times FinCEN struggled to find the appropriate balance between the benefit to the government derived from FBAR reporting and the burden imposed on those preparing the reports, for example, officers and employees of trusts, foreign banks acting as qualified intermediaries, and foreign parent companies. 34
In the event that FinCEN miscalculated the risk of abuse, or if unanticipated abuses arise, an anti-avoidance rule provides that a US person who causes an entity to be created for a purpose of evading the FBAR rules will be considered to have a financial interest in a foreign financial account for which the entity is the owner of record or holder of legal title.
Since 2009, FinCEN and the IRS have offered some exceptions to the FBAR filing deadline requiring that an FBAR reporting the previous year’s activity must be received by the IRS Detroit Computing Center on or before June 30 of the following year (a June 30 postmark fails
BENEFITS LAW JOURNAL 9 VOL. 25, NO. 1, SPRING 2012

Revised FBAR and New FATCA Information Reporting Rules to meet this deadline). These extensions, aimed primarily at persons with signature authority but not a financial interest in an account, were granted to give the government time to develop, and signato-
36 After
June 30, 2011, one extension remains in place. Employees or officers of a regulated entity with signature or other authority over, and no financial interest in, a foreign financial account of another entity more than 50 percent owned, directly or indirectly, by the regulated entity (a controlled person), and employees or officers of a controlled person of a regulated entity with signature or other authority over, and no financial interest in, a foreign financial account of the regulated entity or another controlled person of the regulated entity, have until June 30, 2012, to file FBAR reports.
The final regulations apply to FBARs filed by June 30, 2011, with respect to foreign financial accounts maintained in calendar year 2010 and all years thereafter. However, filers who properly deferred filing obligations pursuant to IRS Notice 2010-23 may choose to apply the rules in the final regulations when submitting FBARs for periods prior to 2010.
The Secretary of the Treasury has delegated general administration of the BSA to FinCEN. In 1992, Treasury Directive 15-41 delegated to the IRS the authority to investigate possible violations of the FBAR
38 In 2003, the IRS’s authority was expanded to include the assessment and collection of civil penalties by means of a
39 Because the FBAR relies on self-reporting, FinCEN has estimated that the compliance rate may be as low as 20 percent. 40
FBARs filed with the Detroit Computing Center provide the IRS and other law enforcement agencies with information regarding foreign accounts. In addition, US Individual Income Tax Return Form 1040,
Schedule B, Part III, Line 7, inquires whether the taxpayer at any time during the tax year had an interest in, or a signature or other authority over, a financial account in a foreign country, such as a bank account, securities account, or other financial account. If so, the taxpayer is required to identify the name of the country and is directed to the instructions for TD F 90-22.1, the FBAR form.
IRS civil auditors may examine for compliance with the FBAR requirements. The IRS Criminal Investigation Division reviews failures to file identified by IRS examiners and through other investigative techniques for possible criminal investigation. Cases recommended for prosecution are forwarded through the IRS Office of Chief Counsel to the Department of Justice to obtain approval to seek criminal charges. 41
BENEFITS LAW JOURNAL 10 VOL. 25, NO. 1, SPRING 2012

Revised FBAR and New FATCA Information Reporting Rules
The penalties for failure to comply with the FBAR rules can be quite severe. A non-willful violation carries a civil penalty up to
$10,000 for each violation. Willful failure to file the FBAR or to retain records of the account may result in civil penalties up to the greater of $100,000 or 50 percent of the amount in the account at the time of the violation, and criminal penalties up to $250,000 or five years or both. Willful failure to file the FBAR or to retain records of the account while violating certain other laws may result in civil penalties up to the greater of $100,000 or 50 percent of the amount in the account at the time of the violation, and criminal penalties up to
$500,000 or ten years or both. Civil and criminal penalties may be imposed together. Civil penalties can be waived upon establishment of reasonable cause.
In August of 2009, the IRS and the Department of Justice negotiated an agreement with the Swiss government that would provide to the IRS an unprecedented amount of information on US holders of
43 This agreement spawned a number of plea agreements and prosecutions for failure to file FBARs as well as failure to report as US taxable income amounts earned in foreign accounts.
To encourage voluntary compliance with the FBAR reporting rules, and to capitalize on the extensive publicity surrounding the Swiss/
UBS agreement, the IRS has offered voluntary disclosure initiatives to allow taxpayers who have not complied with FBAR reporting rules or failed to report income associated with foreign financial accounts to come forward and remedy those failures. In exchange for voluntarily disclosing their noncompliance, taxpayers may benefit from reduced penalties compared to the statutory rates.
In March 2009, the IRS announced a program imposing a 20 percent penalty on the highest balance or value in the foreign account, compared to the statutory rate of up to 50 percent. 45 In February 2011, the IRS offered a voluntary disclosure program similar to the 2009 initiative, with the primary difference of a 25 percent penalty compared to 20 percent. The IRS has received 33,000 voluntary disclosures from these initiatives, collecting more than $4.4 billion so far. In January
2012, the IRS reopened the voluntary disclosure program indefinitely, increasing the penalty rate to 27.5 percent. The IRS cautioned that the terms of the program could change or end at any time.
IRS Commissioner Doug Shulman has made it clear that the IRS does not intend to rest on the laurels of these voluntary programs. During
Mr. Shulman stated, “As we continue to amass more information and
BENEFITS LAW JOURNAL 11 VOL. 25, NO. 1, SPRING 2012

Revised FBAR and New FATCA Information Reporting Rules assets offshore is increasing. … Tax secrecy continues to erode. We are not letting up on international tax issues, and more is in the works. For those hiding cash or assets offshore, the time to come in
47 Upon reopening the program, Mr. Shulman remarked, “As we’ve said all along, people need to come in and get right with us before we find you. … We are following more leads and the risk for people who do not come in continues to increase.”
Commissioner Shulman’s remarks were not idle threats. The FATCA provisions enacted in the March 2010 HIRE Act contain measures to increase the transparency of foreign financial accounts and entities, and to reduce tax evasion associated with offshore activities.
The cornerstone of FATCA, and the provision receiving the most attention, establishes an international information reporting regime that will rely on third parties to identify US holders of foreign accounts, and US owners of foreign entities, to the IRS. Section 501 of the HIRE Act inserts a new chapter into the Internal Revenue
Code that imposes a 30 percent withholding tax on most types of
US-source payments to foreign financial institutions and non-financial foreign entities unless they enter into an agreement with the IRS to disclose their US account holders and US owners, respectively.
The following descriptions demonstrate the scope of this measure:
• A US account means “any financial account which is held by one or more specified United States persons or United
States-owned foreign entities.” 51
• A financial account means any depository account maintained by a foreign financial institution, any custodial account maintained by a foreign financial institution, and any equity or debt interest in such financial institution other than interests which are regularly traded on an established securities market.
• A financial institution means any entity that accepts deposits in the ordinary course of a banking or similar business, as a substantial portion of its business holds financial assets for the account of others, or is engaged primarily in the business of investing, reinvesting or trading in securities, partnership interests, commodities, or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities.
BENEFITS LAW JOURNAL 12 VOL. 25, NO. 1, SPRING 2012

Revised FBAR and New FATCA Information Reporting Rules
• A foreign financial institution means any financial institution which is a foreign entity. This generally will not include a financial institution which is organized under the laws of any possession of the United States.
• A US-owned foreign entity means any foreign entity which
55 In general, a substantial corporate US owner is a US person owning, directly or indirectly, more than 10 percent of the stock of the corporation by vote or value; a substantial partnership owner means a US person owning, directly or indirectly, more than
10 percent of the profits interests or capital interests in the partnership; and a US person treated as an owner of a trust.
In the case of investment vehicles, the applicable threshold is zero percent. 57
Exceptions apply for publicly traded corporations, including the following:
• Members of the affiliated group;
• Individual retirement plans;
• Banks;
• Real estate investment trusts;
• Regulated investment companies;
• Common trust funds; and
The types of information to be reported to the IRS will include the following:
• Names, addresses, and taxpayer identification numbers of account holders and owners;
• Account balances or values (as prescribed by the Secretary of the Treasury); and
• Gross deposits and gross withdrawals (also as prescribed by the Secretary).
BENEFITS LAW JOURNAL 13 VOL. 25, NO. 1, SPRING 2012

Revised FBAR and New FATCA Information Reporting Rules
The Treasury was granted broad regulatory authority in the statute to interpret and implement these complex new rules. To date, final guidance has not been issued, so the full extent of the effect of the
60 The new rules apply to payments made after December 31, 2012; however,
Treasury has exercised its administrative authority to effectively postpone information reporting and withholding until 2014.
While the information reporting by foreign financial institutions and non-financial foreign entities has received significant attention,
Part II of the FATCA provisions has gone largely unnoticed. For individuals with offshore accounts, these additional sections of
FATCA will present a significant, and largely duplicative (with FBAR)
information reporting requirement with the IRS beginning with their
2011 tax returns.
The “Information with Respect to Foreign Financial Assets” provision in FATCA requires any individual holding any interest in a specified foreign financial asset during the year to attach information regarding the asset to the person’s tax return if the aggregate value of all such assets exceeds $50,000 (or a higher dollar amount as prescribed by the Secretary). For purposes of this rule, a specified foreign financial asset means any financial account maintained by a foreign financial institution; and, other assets not held in an account maintained by a foreign financial institution, including any stock or security issued by a person other than a US person, any financial instrument or contract held for investment that has an issuer or counterparty which is not a US person, and any interest in a foreign entity. The definitions of these terms are consistent with those of the
FATCA third-party foreign information reporting regime discussed earlier in this article.
Information required to be provided is similar to that required on the FBAR. It includes identifying information of the name, type, and location of the account or asset; in the case of any stock or security, the name and other identifying information of the issuer and the class of the stock; and in the case of any other instrument, contract, or interest, any information necessary to identify the nature of the asset as well as the issuers and counterparties. The maximum value of the asset during the taxable year also is required to be disclosed. 64
On December 14, 2011, the IRS issued temporary and proposed regulations relating to this reporting requirement. Form 8938,
Statement of Specified Foreign Financial Assets, will be used to report this information. In general, Form 8938 must be filed when a
BENEFITS LAW JOURNAL 14 VOL. 25, NO. 1, SPRING 2012

Revised FBAR and New FATCA Information Reporting Rules
“specified person” has an interest in one or more “specified foreign financial assets” with an aggregate fair market value exceeding either
$50,000 on the last day of the taxable year or $75,000 at any time during the taxable year for single filers, and $100,000 on the last day of the taxable year or $150,000 at any time during the year for joint filers. For specified persons living outside the US, these thresholds are
$200,000 and $400,000 for single filers, and $300,000 and $600,000 for
65 The amount reported on Form 8938 is the maximum fair market value of the asset during the year. 66 Form 8938 is not required of individuals who do not have an income tax return filing require-
67 Individuals must begin filing Form 8938 with their 2011 tax returns.
FATCA imposes new penalties on individuals failing to make the necessary foreign financial account disclosures. Failure to file Form
8938 will result in a $10,000 penalty. After 90 days, the penalty increases in increments of $10,000 for each 30-day period the penalty failure continues, up to a maximum penalty amount of $50,000. The penalty can be waived for reasonable cause.
Another penalty applies when an underpayment of tax is determined that is attributable to undisclosed foreign financial assets.
When an understatement of income arises in connection with any transaction involving an undisclosed foreign financial asset, a
40 percent penalty applies to the amount of the underpayment of tax associated with the understatement. This penalty also can be waived for reasonable cause.
In addition to new penalties, FATCA grants the IRS additional time to assess taxes resulting from an understatement of gross income in excess of $5,000 attributable to a foreign financial asset subject to the new disclosure rules. The statute of limitations for assessment of the tax is extended from three years to six years.
The significance of the FATCA reporting rules should not be underestimated. FATCA will make the existence of offshore activity and any related unreported income substantially easier for the IRS to detect.
Although the scope of the FATCA rules and the FBAR reporting requirements overlap substantially, there are differences. A major difference is that while the FBAR rules rely on self-reporting, the
FATCA regime will provide the IRS with third-party information reporting from foreign financial institutions and non-financial foreign
BENEFITS LAW JOURNAL 15 VOL. 25, NO. 1, SPRING 2012

Revised FBAR and New FATCA Information Reporting Rules entities. The IRS will not have to rely on voluntary self-disclosure by taxpayers to learn about offshore activity. Foreign banks, custodians, and business entities will have a strong incentive to disclose their
US customers and owners to the IRS in order to avoid a 30 percent toll charge on most payments coming from the United States.
IRS research demonstrates that third-party reporting substantially improves compliance.
The value to the IRS of foreign financial asset reporting with the tax return is much greater than mere convenience. Although the IRS gains access to FBAR information both through filings with the Detroit
Computing Center and through information provided on Schedule B of Form 1040, the use of this information among IRS operating units is impeded because the FBAR regime is authorized under Title 31 of the
US Code, while tax administration operates under the aegis of Title 26.
Stringent disclosure rules and other barriers inhibit the ability of the
IRS to compare and share this information, reducing the agency’s effectiveness in carrying out its FBAR enforcement responsibilities, including collection of FBAR penalties. Disclosure of foreign financial asset information with the tax return largely eliminates these challenges, and, together with the other FATCA information reporting provisions, can be expected to facilitate the IRS’s efforts to aggressively pursue tax compliance associated with foreign financial accounts and other foreign assets.
The reporting rules for foreign financial accounts and foreign entities are complex and difficult to understand. Recent legislation will make the existence of offshore holdings even more transparent to the IRS.
The potential consequences for failing to understand and comply with disclosure requirements and information reporting rules are serious. In a global environment where it has become common to hold accounts, investments, and assets outside of the United States, it is increasingly important for businesses, tax-exempt entities, benefit and investment vehicles, as well as officers, employees, and individuals to understand their filing obligations and exposure in order to avoid catastrophic penalties and potential prosecution. Still, even with the extra effort required, offshore banking probably beats the old tin can in the backyard.
1. IR-2008-79 (June 17, 2008).
2. Bank Secrecy Act, Pub. L. No. 91-508, 84 Stat. 1122 (1970) (“the Secretary of the
Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen or person makes a transaction or maintains a
BENEFITS LAW JOURNAL 16 VOL. 25, NO. 1, SPRING 2012

Revised FBAR and New FATCA Information Reporting Rules relation for any person with a foreign financial agency.” Information to be reported includes the identity and address of the participant, the legal capacity of the participant, the identity of the real party in interest, and a description of the transaction. The
Secretary is authorized to prescribe certain exemptions and other matters considered necessary to carry out the purposes of the law.).
3. Department of the Treasury, PO Box 32621, Detroit, MI 48232-0621.
4. News Release, FinCEN, FinCEN Offers Optional Electronic Filing for FBAR Forms
(July 18, 2011).
5. Statement of Eugene T. Rossides, Former Assistant Secretary of the Treasury for
Enforcement and Operations, Senate Hearing on Foreign Secrecy (June 9, 1970).
6. Financial Crimes Enforcement Network, Fiscal Year 2010 Annual Report, 2.
7. 31 C.F.R. §§ 103.24, 103.27, 103.32, and 1010.350 (2011).
8. § 103.24.
9. § 103.27.
10. § 1010.350, Amendment to the Bank Secrecy Act Regulations, Reports of
Foreign Financial Accounts, 76 . 10,234, 10235 (Feb. 24, 2011).
11. 31 C.F.R. § 1010.350(b).
12. 26 U.S.C. § 7701(b) (2006), using the definition of a US person found at 31 C.F.R.
§ 1010.100 (hhh).
13. Amendment to the Bank Secrecy Act Regulations, Reports of Foreign Financial
Accounts, 76 . at 10,237.
14. at 10,235.
15. at 10,239.
16. 31 C.F.R. § 1010.350(c).
17. § 1010.100 (hhh).
18. § 1010.350(e).
19. Amendment to the Bank Secrecy Act Regulations, Reports of Foreign Financial
Accounts, 76 . at 10,240.
20. 31 C.F.R. § 1010.350(f).
21. Amendment to the Bank Secrecy Act Regulations, Reports of Foreign Financial
Accounts, 76 . at 10,235.
22. at 10,236.
23.
24.
25. at 10,241.
26. 31 C.F.R. § 1010.230(f).
27. Amendment to the Bank Secrecy Act Regulations, Reports of Foreign Financial
Accounts, 76 . at 10,242.
28. 31 C.F.R. § 1010.350 (f).
BENEFITS LAW JOURNAL 17 VOL. 25, NO. 1, SPRING 2012

Revised FBAR and New FATCA Information Reporting Rules
29. §§ 1010.350 (g)(1) and (g)(2).
30. § 1010.350(g)(3).
31. 31 C.F.R. § 1010.350(g)(4).
32. § 1010.350(g)(5).
33. Amendment to the Bank Secrecy Act Regulations, Reports of Foreign Financial
Accounts, 76 . at 10,237.
34. at 10,240–10,242.
35. 31 C.F.R. § 1010.350(e)(3).
36. Notice 2009-62 (Aug. 31, 2009), Notice 2010-23 (Feb. 26, 2010).
37. FinCEN Notice 2011-1 (June 2, 2011).
38. TD 15-41 (Dec. 1, 1992).
39. IR-2003-49 (Apr. 10, 2003), 31 C.F.R. § 103.56 (2003).
40. Secretary of the Treasury, A Report to Congress in Accordance with 361(b) of the Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) (Apr. 26, 2002).
41. n.6.
42. 31 U.S.C. § 5321(a)(5)(B), 31 U.S.C. § 5321(a)(5)(C), 31 U.S.C. § 5322(a), 31 C.F.R.
§ 103.59(b), 31 U.S.C. § 5322(b), 31 C.F.R. § 103.59(c), and 31 U.S.C. § 5321(d).
43. Agreement between the United States of America and the Swiss Confederation on the request for information from the Internal Revenue Service of the United
States of America regarding UBS AG, a corporation established under the laws of the swiss_government_agreement . room/article/0, id=110092,00.html.
45. 2009 Offshore Voluntary Disclosure Program, http://www.irs.gov/newsroom/ article/0, id=206012,00.html.
46. IR-2012-5 (Jan.9, 2012), IRS Offshore Programs Produce $4.4 Billion To Date for gov/newsroom/article/0,,id=252162,00.html.
47. Second Voluntary Disclosure Initiative Opens; Those Hiding Assets Offshore Face
Aug. 31 Deadline,
48. n.46.
49. Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, 124 Stat. 71
(2010).
50. § 501, IRC §§ 1471–1474.
51. § 1471(d)(1).
52. § 1471(d)(2).
53. § 1471(d)(5).
54. § 1471(d)(4).
55. § 1471(d)(3).
BENEFITS LAW JOURNAL 18 VOL. 25, NO. 1, SPRING 2012

Revised FBAR and New FATCA Information Reporting Rules
56. § 1473(2)(A).
57. § 1473(2)(B).
58. § 1473(3).
59. § 1471(c).
60. Notice 2010-60 (Sept. 13, 2010), Notice 2011-34 (Apr. 8, 2011), Notice 2011-53
(July 14, 2011).
61. Notice 2011-53 (July 14, 2011).
62. n.44, § 511, IRC § 6038D.
63. IRC §§ 6038D, 6038D(a), and 6038D(b).
64. IRC § 6038D(c).
65. 26 C.F.R. § 1.6038D-2T(a)(1).
66. § 1.6038D-4T(a)(5).
67. § 1.6038D-2T(a)(7).
68. § 1.6038D-7T(d).
69. n.44, § 511, IRC § 6038D(d).
70. n.44, § 512, IRC § 6662.
71. n.44, § 513. update_070212.pdf.
Copyright © 2012 CCH Incorporated. All Rights Reserved.
Reprinted from Benefits Law Journal Spring 2012, Volume 25,
Number 1, pages 5-23, with permission from Aspen Publishers,
Wolters Kluwer Law & Business, New York, NY, 1-800-638-8437, www.aspenpublishers.com