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If you’re a U.S. citizen or permanent resident, you need to know about an obscure Treasury agency called FinCEN, the “Financial Crimes Enforcement Network. Last March, FinCEN issued proposed regulations greatly expanding what U.S. taxpayers are supposed to disclose about their offshore holdings. The proposals were retroactive to 2009. I wrote about them here and here.
Before I get into the nuts-and-bolts of these regulations, I’ll provide a little background.
U.S. law requires U.S. citizens and permanent residents to report interests in, or authority over all foreign accounts with an aggregate value of $10,000 or more. You must comply with this reporting regime even if the accounts contain only precious metals or other non-cash assets, or generate no income. No report is required if the aggregate value of the accounts does not exceed $10,000.
Naturally, the penalties for non-compliance are draconian. You can be fined $10,000 per unreported account for each year you neglect to file the FBAR, although the sanction for a “negligent violation” is only a $500 fine. If you “willfully” fail to comply with this obligation, you face a fine up to $500,000, imprisonment up to five years, or both.
There are three separate reporting obligations:
- You must acknowledge foreign accounts annually on Schedule B of your federal income tax return, due April 15 of each year, or June 15 if you reside outside the United States. You can apply for a six-month extension of this deadline.
- You must file Form TD F 90-22.1 (the “foreign bank account reporting” or “FBAR” form) annually with the U.S. Treasury Department. The deadline for filing is June 30 for foreign accounts held the previous year. Information requested on the FBAR form includes how many foreign accounts you hold, their maximum value, the name of the financial institution where the accounts are held, the account numbers, etc.
- If you hold more than $50,000 of “foreign financial assets” outside the United States, a special reporting regime may apply, which I’ll discuss in my next blog entry.
The new FinCEN rules apply to requirement #2, the FBAR. On February 24, FinCEN issued final regulations that clarify the original proposal. Fortunately, the regulations are no longer retroactive to 2009. However, they do cover 2010, which means if you had any of the offshore investments the regulations cover in 2010, you must report them on the FBAR form by June 30, 2011. If you want to have a look at the new regulations for yourself, they’re posted here.
Unfortunately, it’s not always easy to figure out whether you need to report an offshore financial relationship or not. If you have “signature authority” over an account at a foreign bank or brokerage, this relationship is clearly reportable. But even using the published guidance from the IRS, it’s less clear whether you must disclose details of other offshore relationships.
The FinCEN rules clarify what other types of offshore investments are reportable to include:
- A foreign account that is an insurance policy with a cash value or an annuity policy;
- A foreign 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; and
- 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.
FinCEN also says it wants U.S. persons to report “an account with a person that is in the business of accepting deposits as a financial agency.” A financial agency is “a person acting for a person as a financial institution bailee, depository trustee, or agent, or acting in a similar way related to money, credit, securities, gold, or in a transaction in money, credit, securities, or gold.”
Basically, what the financial agency obligation means is that if you entrust a foreign person or entity – not just a bank – with your money, securities, or gold, the U.S. Treasury wants to know about it. For instance, if you buy gold overseas and pay a custodian a fee for safekeeping it, that custodian is probably acting as a financial agency. On the other hand, if you keep the gold in a safety deposit box at a bank or private vault facility to which only you have access, the bank or vault likely isn’t acting as financial agency. This type of holding appears to remain non-reportable.
With the publication of this final rule, hundreds of thousands of U.S. citizens and permanent residents previously not required to file FBARs will now need to file them. The best that can be said about the rule is that the FBAR form is simple to complete, and with this new guidance from FinCEN, it’s much easier to determine what’s reportable, and what’s not.
If you don’t want to report these investments, your choices boil down to three:
- Don’t comply, and risk fines and imprisonment
- Expatriate – give up U.S. citizenship and residence
In my next column, I’ll describe some additional aspects of the final rule, including a few welcome changes to current practice. I’ll also explain how they interact with the greatly expanded offshore reporting provisions of the HIRE Act, which President Obama signed into law last March.
Reprinted with permission from The Sovereign Society.
Mark Nestmann is a journalist with more than 20 years of investigative experience and is a charter member of The Sovereign Society's Council of Experts. He has authored over a dozen books and many additional reports on wealth preservation, privacy and offshore investing. Mark serves as president of his own international consulting firm, The Nestmann Group, Ltd. The Nestmann Group provides international wealth preservation services for high-net worth individuals. Mark is an Associate Member of the American Bar Association (member of subcommittee on Foreign Activities of U.S. Taxpayers, Committee on Taxation) and member of the Society of Professional Journalists. In 2005, he was awarded a Masters of Laws (LL.M) degree in international tax law at the Vienna (Austria) University of Economics and Business Administration.