For the IRS, the fiscal year ended Sept. 30, 2014, marked the
fourth consecutive year of reduced appropriations.1
Substantially reduced funding has had a serious negative impact on
taxpayer services,2 and the number of audits dropped 12
percent from the previous fiscal year to its lowest number since
2005.3 Despite these reduced IRS resources, the IRS,
along with the Department of Justice and the Financial Crimes
Enforcement Network (FinCen) continue to focus strongly on steps to
ensure taxpayer disclosure of offshore assets. As of early November
2015, the Treasury Department has signed 78 Intergovernmental
Agreements (IGAs) with other countries in furtherance of the
enforcement and compliance provisions of the Foreign Account Tax
Compliance Act (FATCA). Moreover, IGAs have been reached in
substance but are still pending with 34 other
countries.4 Under these IGAs, Competent Authority
Arrangements (CAAs) continue to be reached between the IRS and
foreign taxing authorities to exchange tax information. On
September 24, 2015, the IRS announced that it entered into signed
CAAs with Australia and the U.K., with the expectation that several
other CAAs will be reached in the near future.5
Financial institutions and tax authorities in IGA countries will
exchange taxpayer and account holder information using the
International Data Exchange Service (IDES) in an effort to enforce
offshore account disclosure and prevent money laundering and
related crimes.6 Under the terms of some IGAs, foreign
financial institutions (FFIs) must register with the
IRS7 to disclose information directly to IRS personnel
or face a 30 percent withholding tax on U.S.-source payments made
to them. Despite doubts from critics about the ability of Treasury
to exert such extraterritorial jurisdiction over foreign financial
institutions, there are 177,147 FFIs registered with the IRS as of
early November 20158 with the total number steadily
Moreover, the Department of Justice has been very active during
2015, in reaching agreements under its Swiss Bank Program, in which
eligible Swiss banks may resolve potential criminal liability
through disclosure of information and other steps. As of
early November, the Department of Justice has made 37 announcements
that either involve Swiss Bank Program agreements or involve
convictions of taxpayers failing to disclose offshore assets or the
income from offshore assets.9
Accordingly, despite the reduction in IRS resources, the IRS and
other agencies continue to press forward with taxpayer compliance
with offshore asset disclosure. Such steps include enforcement of
the compliance requirements associated with the two most widely
applicable disclosure obligations for U.S. taxpayers: the
obligation under the Bank Secrecy Act to file FinCen Form 114,
Report of Foreign Bank and Financial Accounts and the
FATCA requirement to file IRS Form 8938, Statement of Specified
Foreign Financial Assets.
While taxpayers willfully hiding offshore assets are most
certainly the focal point of these filing obligations and
enforcement measures, most taxpayers that run afoul of these filing
obligations are not hiding offshore assets at all, but rather, find
themselves caught within the very wide net cast by these rules.
Inheritances, business transactions, and many other common and
innocuous transactions or situations will frequently bring
ownership interests or accounts into a taxpayer's circumstances
which are reportable under one or both sets of rules.
Given the large number of taxpayers affected by these two sets
of rules, and the substantial civil and criminal penalties for
failure to adhere to these requirements, attorneys need to develop
a working knowledge of the rules associated with each of these two
separate filing obligations to properly advise clients about filing
obligations. It is also imperative to understand what actions may
cause the attorney or law firm to trigger a disclosure obligation,
which may occur through the use of trust or escrow accounts or
other financial arrangements to facilitate client business. A good
overview of the relevant rules will help the attorney "issue spot"
and understand what triggers a disclosure requirement.
Both sets of rules involve various complexities and "gray areas"
where further guidance would be helpful. It isn't possible to cover
all of these complexities within this article. In the absence of
such clear guidance, experienced judgments on part of the tax
practitioner are frequently required. In addition, these two
sets of rules form only part of a much larger compliance and
disclosure environment, which includes other sets of rules that
form separate disclosure obligations for other various
interests10 (and one interest in a foreign asset or
entity may trigger several different disclosure requirements each
year under the various sets of rules that exist beyond those
discussed herein). In addition, the IRS has established programs
for taxpayers who have not filed many of the required forms to
remedy their delinquency and comply.11
However, the Bank Secrecy Act and FATCA disclosure rules are the
most widely applicable disclosure rules, and accordingly, some
insight into these two sets of rules can greatly assist attorneys
in steering themselves and clients clear of the significant
penalties associated with noncompliance. The relevant rules
associated with Bank Secrecy Act will first be discussed, followed
by a discussion of the rules associated with FATCA.
Bank Secrecy Act offshore asset compliance
The obligation to disclose certain types of assets outside the
United States using FinCen Form 114 arises under the Bank Secrecy
Act (BSA).12 This BSA compliance area was previously
known as the "FBAR" (foreign bank account report) requirement and
practitioners still refer to these rules as the FBAR rules.
Generally, under the BSA, a U.S. person with a financial
interest in, or signature authority over, foreign financial
accounts must disclose all reportable accounts if the aggregate of
such accounts is in excess of $10,000 at any time during the
year. The $10,000 filing threshold is measured in U.S.
For purposes of these rules, a U.S. person is defined as a U.S.
citizen, a U.S. resident, or an entity established under either
U.S. federal law, the laws of a state (or the District of Columbia)
or U.S. territories or possessions.13 Determining
whether an entity (such as a corporation, LLC, partnership or other
entity) has been established under federal or state
law14 or whether an individual is a U.S. citizen is
typically straightforward. However, a determination of U.S.
residency may be more complicated. Generally, the FBAR rules refer
to the U.S. residency rules found in IRC §7701(b). Under IRC
§7701(b), a U.S. resident is generally a non-citizen of the United
States that is either:15
- Admitted as a lawful permanent resident of the United States at
any time during the year
- Meets the substantial presence test;16
- Makes the "first-year" election under IRC §7701(b)(4)
For purposes of this rule, the definition of "United States"
includes not only the 50 states and the District of Columbia, but
also U.S. territories and possessions.17 FinCen guidance
indicates that individuals who "elect to be treated as residents
for U.S. tax purposes under section 7701(b) should file FBARs only
with respect to foreign accounts held during the period covered by
the election."18 In addition, a U.S. resident who elects
to be treated as a nonresident of the U.S. under a tax treaty must
still comply with the FBAR rules.19
Generally, a joint return may not be filed if either spouse is a
nonresident alien.20 One common tax election used by
spouses is the tax election available under IRC §6013(g). This
special tax election, effective for the year in which it is made
and for subsequent years until revoked, is a joint election made by
U.S. citizen and nonresident alien spouses allowing a joint return
to be filed. FinCen guidance indicates that the IRC §6013(g)
election itself is not sufficient to make the nonresident alien
spouse subject to the FBAR rules.21 In addition, under
the Foreign Investment in Real Property Tax Act (FIRPTA), a foreign
corporation holding a U.S. real property interest (USRPI) that
elects under IRC §897(i) to be treated as a U.S. corporation for
income tax purposes is not subject to the FBAR disclosure
requirements solely because of the §897(i)
Financial interest or signature authority
The FBAR filing and disclosure requirement covers foreign
financial accounts in which the U.S. person has either a "financial
interest" or accounts over which the U.S. person has "signature
A financial interest in a foreign financial account exists if
the U.S. person is either:
- Holder of legal title of the account
- Constructive owner of the account
- Deemed owner of the account
Holding legal title of the foreign financial account will
constitute a financial interest in that account even though the
U.S. person is holding or maintaining that account for another
party's benefit.23 For accounts titled jointly among two
or more U.S. persons, all U.S. persons named on the account have a
financial interest in that account.24
Constructive foreign financial account ownership typically
arises if the account owner is acting on behalf of another party.
Typical examples are attorney escrow or trust accounts, and
accounts in the name of an agent or nominee.
The deemed ownership rules for foreign financial accounts are
generally a series of "look-through" rules designed to attribute
ownership of an entity-owned foreign financial account to a
more-than-half owner of that entity. Specifically, a U.S.
person is deemed to be the owner of a foreign financial account
- The account is owned by a corporation in which the U.S. person
owns more than half of the voting power or share value in the
- The account is owned by a partnership in which the U.S. person
owns more than half of the profits or capital.
- The account is owned by any entity other than a trust, and the
U.S. person owns more than half of the entity's voting power, value
of the equity interest or assets, or profits interest.
- The account is owned by a trust and the U.S. person is the
grantor and owner of that trust under U.S. federal tax
- The account is owned by a trust in which the U.S. person has a
present beneficial interest in more than half of the assets or
receives more than half of the current income of the trust.
With respect to trusts, FinCen guidance indicates that the
status of discretionary beneficiary alone does not constitute
deemed ownership, and that the term "present beneficial interest"
is not intended to include a remainder interest under FBAR
Further, the FBAR deemed ownership rules do not incorporate the
attribution rules found in either IRC §§267 or 318. Accordingly,
entity ownership interests of related parties are not aggregated
together under the deemed ownership rules.
An individual has signature authority over a foreign financial
account if the individual has the ability to control the
disposition of money or other account assets through any type of
communication with the financial institution or party at which the
account is maintained. The existence of a power of attorney over an
account that authorizes control over its funds will generally
constitute signature authority, even if the power of attorney
authority is never exercised.27 For joint accounts,
signature authority may exist either jointly with other account
owners, or on a joint-and-several basis.28
There are several situations over which FinCen does not believe
FBAR filing or disclosure requirements are necessary, even though
an individual has signature authority over one or more
accounts. Generally, these situations cover individuals who
are employees or officers of banks or publicly-listed U.S.
corporations who have authority to control or direct funds in
foreign financial accounts in which the employee or officer has no
financial interest, because the accounts are owned by the employer
(and such accounts are likely disclosed under other regulatory
rules). Accordingly, there are five exceptions for such
individuals that have signature authority (but no financial
interest) in employer accounts.29
Foreign financial accounts
Generally, under the FBAR rules, a foreign financial account is
an account located outside the geographic bounds of the United
States. For purposes of this rule, the definition of "United
States" includes U.S. territories and possessions.30
Accordingly, an account in Puerto Rico would not be considered
reportable. The types of accounts31 subject to
disclosure, referred to as "reportable accounts" include the
following types of accounts if located outside the geographic
bounds of the United States.
- Bank, savings, and checking accounts and certificates of
- Securities and commodities accounts
- Insurance or annuity policies with cash values
- Accounts with mutual funds or other pooled investments that
issue shares to the general public that have regular net asset
value determinations and regular redemptions
- Other investment funds32
Under the FBAR rules, even if the above types of accounts are
held at a U.S. bank branch, the account is reportable if that
branch is located outside the geographic bounds of the United
While accounts maintained with a federal or state government
agency or at a U.S. military banking facility are exempt from
reporting requirements,33 a federal district court has
held that accounts with foreign poker websites are reportable
accounts under the FBAR rules because such websites operate as
institutions engaged in the business of banking.34 This
case underscores not only the possibility of further judicial
refinement and expansion of the FBAR reportable account rules, but
also the need for tax practitioners to ask clients about online
financial activity in determining whether the client is subject to
FBAR disclosure requirements.
Retirement accounts covered under IRC §§401(a), 403(a), or
403(b) that hold foreign accounts as investments are not subject to
FBAR disclosure.35 In addition, IRA accounts (covered
under IRC §408) holding such foreign accounts are likewise
exempt.36 However, there is no further "blanket
exemption" for a foreign retirement plan. If the U.S. person
has either a financial interest in or signature authority over a
foreign retirement plan, the plan is reportable. The tax
practitioner must determine the nature of the client's what rights
and degree of control over their interest in the foreign retirement
plan to determine whether the requisite "financial interest in" or
"signature authority over" that plan exists in order to trigger a
filing requirement. Such a determination is frequently a difficult
one to make, and there is currently a distinct lack of guidance in
this area under the FBAR rules.
Threshold value and currency conversion
A U.S. person with a financial interest in or signature
authority over one or more foreign financial accounts must disclose
such accounts if their aggregate value exceeds USD$10,000 at any
time during the year. To determine whether the taxpayer's relevant
accounts exceed the $10,000 threshold, the maximum annual values of
the accounts are added together. Determining the maximum value of
some types of investments, such as a certificate of deposit, may
prove to be a far easier task than for other market-related
investments such as stocks or commodities. FBAR guidance indicates
that a reasonable approximation of the maximum value attained by
the account during the year will suffice. Periodic statements
issued in connection with the account or investment may be relied
upon for this purpose as long as those statements are genuine
statements issued by the financial institution (or other third
party with which the account or investment is held) in its ordinary
course of business and the statements fairly reflect account values
during the year.37
The maximum values of the taxpayer's accounts are used for both
threshold determination and reporting purposes. Accounts that are
denominated in a foreign currency must have their maximum values
for the year converted to a U.S.-dollar-equivalent in order to
determine if the USD$10,000 threshold is reached. FBAR guidance is
specific about the particular exchange rate used. The appropriate
exchange rate is the December 31 Treasury Department's Financial
Management Service rate for the year for which the disclosure is
being made.38 The December 31 rate for the year is used
regardless of the point during the year that the account attained
its maximum value. Each year, the Treasury Department's Financial
Management Service website provides December 31 exchange rates for
the currencies of approximately 180 countries that are used for the
conversion into U.S. dollars.
Moreover, the USD $10,000 threshold is not subject to any annual
inflation adjustment. The absence of such an adjustment will tend
to obligate more taxpayers with nominal foreign account amounts to
trigger a filing requirement under the FBAR rules.
Filing FinCen Form 114
For U.S. persons with reportable accounts with maximum values
that have exceeded the USD$10,000 threshold must generally disclose
details on those accounts and the amounts on FinCen Form 114.
FinCen Form 114 must be filed using the online filing system
provided by FinCen. FinCen Form 114 is not filed with the
taxpayer's tax return. Several commercial tax preparation software
packages also support the electronic filing of FinCen Form 114
through FinCen's online system.
FinCen Form 114 supersedes former Form TD F 90-22.1, which is
now obsolete. The FBAR reporting requirement is met
- Completing the FBAR-related questions on a federal tax
- Timely filing a FinCen Form 114 using the electronic filing
system provided by FinCen
Reflecting the broad definition of U.S. persons covered by the
FBAR rules, federal tax return FBAR-related questions now appear
Form 1040, Schedule B, Part III (for individuals), under the "Other
Information" section of page 2 of Form 1041 (for trusts and
estates), Schedule B, box 10 of Form 1065 (for partnerships) and
Schedule N, boxes 6a and 6b of Form 1120 (for corporations).
The deadline for filing 2015 FinCen Forms 114 is June 30, 2016.
For subsequent years, the deadline is changing to a new deadline of
April 15 of the following year (with an extension of the tax return
also extending the Form 114 due date to October 15).40
Accordingly, the deadline for 2016 Forms 114 will be April 15,
Practitioners must register with the FinCen online system to
file returns for clients.41 Special rules exist for the
filing of a joint Form 114 for spouses.42 Special
simplified filing requirements exist for taxpayers who have either
a financial interest in 25 or more accounts or who have signature
authority over (but no financial interest in) 25 or more
Under the relevant statutes, both civil and criminal penalties
for failure to file Form 114 may be imposed. In addition, current
IRS guidance indicates that under certain circumstances, relief may
be available for a taxpayer delinquent in filing FinCen Forms 114
for prior years in which a filing requirement existed.
Failure to file a Form 114 may result in a civil penalty of
$10,000 per violation.44 However, the penalty may waived
if reasonable cause exists for the failure to file and the amount
was properly reported.45 Willful failure to file may
result in a penalty as high as the greater of $100,000 or 50
percent of the total balance for the foreign accounts not
A maximum criminal fine of $250,000 or up to five years
imprisonment may be imposed. However, if the failure to file
Form 114 is part of an overall pattern of illegal activity, the
fine and term of imprisonment may be increased to $500,000 and 10
years, respectively.47 Both the criminal fine and
imprisonment may be imposed.48
The most recent guidance from the IRS indicates that taxpayers
who are not using other special IRS offshore disclosure
programs49 and who are not under an IRS examination or
criminal investigation should file any delinquent Forms
114.50 The FinCen electronic filing system will
accommodate the filing of delinquent returns.
In addition, the IRS currently takes the position that a penalty
will not be imposed for failure to file a delinquent FBAR if the
income from the undisclosed accounts was properly reported on tax
returns and the tax on that income has been paid (and the IRS has
not previously contacted the taxpayer about delinquent FinCen Forms
114 for the years involved).51
Foreign Account Tax Compliance Act
The foreign account disclosure rules under FATCA comprise an
entirely separate potential foreign asset disclosure requirement
from the FBAR rules. Taxpayers may trigger either or both sets of
rules. The FATCA rules, definitions and thresholds are very
different than those found under the FBAR requirement, which can
make compliance with both sets of rules difficult.
Under FATCA, there are disclosure requirements that apply to
specified persons having an interest in specified foreign financial
assets (SFFAs) that exceed the applicable threshold. The
FATCA filing requirement exists for all tax years ending after
December 19, 2011.52
While the FBAR rules discussed earlier reaches those individuals
and entities included in the definition of "U.S. person" as
explained earlier, FATCA affects "specified persons." A
specified person is generally an individual who is required to file
an annual tax return, and includes:53
- A U.S. citizen or resident alien (including those who are
resident aliens for any part of a tax year)
- A nonresident alien married to a U.S. citizen who elects to be
treated as a U.S. resident for tax purposes (such as those
nonresident aliens making the joint election under IRC §§6013(g) or
(h) with their U.S. citizen spouse)54
- A nonresident alien who is a bona fide resident of Puerto Rico
or a U.S. possession55 who is required to file an
annual U.S. federal income tax return
While proposed regulations56 have been drafted to
include certain entities, these regulations have not yet been
finalized and are not presently effective. Accordingly, no entities
currently have compliance issues under the FATCA rules discussed
herein. Only individuals falling under the definition of "specified
person" have compliance obligations under this asset disclosure
aspect of FATCA, which is mandated by IRC §6038D.
Interest in the SFFA
To be subject to the FATCA disclosure rules, the specified
person must have the type of interest in an SFFA that FATCA
encompasses. FATCA applies if the interest is such that the
specified person is, or would be, required to report any income,
gains, losses, deductions, or credits generated by the asset (even
if there are no such items generated by the asset to actually
report in the tax year).57
For a parent making an election to report a child's unearned
income on the parent's return, the parent is considered to be the
specified person having an interest in an SFFA held by the
Generally, if an entity (such as a trust, partnership or
corporation) holds SFFAs, the specified person is not considered to
have an interest in those SFFAs solely because of their status as a
beneficiary, partner or shareholder of the entity.58
However, a specified person who owns a foreign disregarded entity
is treated as directly owning the SFFAs within that entity. If a
specified person is considered the owner of a trust under the Code,
they are treated as having an interest in the SFFAs held in the
trust.59 The grantor trust rules found in Code sections
671 through 679 are referred to in order to determine trust
Note that these rules regarding interest in an SFFA are quite
different than the legal ownership, constructive ownership and
deemed ownership rules associated with the FBAR rules discussed
Specified foreign financial asset
Generally, a specified foreign financial asset (SFFA) is a
financial account60 maintained with a foreign financial
institution (FFI).61 Some accounts are specifically
excluded such as accounts maintained by a U.S. payor, and accounts
that are subject to the "mark to market" rules of IRC
§475.62 A U.S. payor is generally:63
- Any U.S. person64
- The U.S. or a state government or any agency thereof
- A foreign corporation in which more than half of the stock
(measured by either voting power or value) is owned by U.S.
shareholders on any day of the foreign corporation's tax year
- A foreign partnership in which one or more partners are U.S.
persons owning (in aggregate) more than half of the capital or
income interest at any time during the partnership's tax year
- A foreign partnership engaged in the conduct of a trade or
business within the U.S. at any time during the tax year, or
- A foreign person who has more than half their gross income
effectively connected with a U.S. trade or business for the
previous three years
Furthermore, the following assets are SFFAs even if they are not
held within an account at an FFI but are held for investment
- A stock or security issued by a non-U.S. person
- A financial instrument or contract having an issuer or
counterparty who is non-U.S. person66
- An interest in a foreign entity
The definition of "U.S. person" under this rule is found in IRC
§7701(a)(30). Under this definition, a U.S. person includes a U.S.
citizen or resident, as well as a U.S. domestic corporation,
partnership or estate67 and certain
While the FBAR rules mentioned earlier require an asset to be
located outside the geographic bounds of the U.S., it should be
noted that under FATCA, the physical location of the asset is
irrelevant: it is quite possible for the taxpayer to have the
requisite interest in an SFFA that is physically located within the
Trade or business exception
The concept of "held for investment purposes" under this rule is
juxtaposed with the concept of use of the asset in a trade or
business. A trade or business exception exists for assets so used,
and such assets need not be disclosed. An asset is considered used
in a trade or business if the asset is:
- Held for the principal purpose of promoting the present
conduct69 of the business
- Acquired and held in the ordinary course of business
- Otherwise held in direct relationship to the business
Regulatory guidance indicates that there is a presumption that
an asset is held in direct relationship to the business if the
asset's use is in connection with a present, (not future), need of
the business and the following three factors
- The asset was acquired with funds generated by the trade or
- Income from the asset is retained or reinvested in the
- Persons actively managing the business exercise significant
management and control over the asset's investment
Unless the asset meets the requirements of this trade or
business exception, the asset is considered to be held for
investment purposes (and will constitute a SFFA subject to
disclosure if the taxpayer meets the other requirements that will
trigger a reporting requirement). Under these rules, shares of
stock are never considered to be held for use in a trade or
business (and are therefore always considered to be held for
Special rule for interests in trusts or estates
Frequently in estate and trust planning situations, beneficial
interests are created without the beneficiary having knowledge of
that interest at the time the interest is created. Beneficiaries
frequently are unaware of an interest until a contingent event or
death occurs. Because an interest in any foreign entity, including
a trust or estate, may constitute an SFFA, FATCA compliance may
prove problematic for a beneficiary with an interest in a trust or
estate of which they are unaware. The FATCA compliance rules
take this situation into account by providing a "knowledge rule"
for interests in foreign trusts and estates.72 Under
this rule, an interest in a foreign trust or estate does not
constitute an SFFA unless the interest holder knows of their
interest, or has reason to know of that interest based on readily
accessible information. Under this rule, if the interest
holder receives a distribution from the trust or estate, such
distribution will impute the requisite knowledge necessary to make
their interest an SFFA, which may need to be disclosed if other
requirements are met that make disclosure necessary.
While the FBAR rules provide a straightforward USD$10,000 filing
threshold, a taxpayer's applicable threshold under FATCA varies
according to their filing status, residency, and the aggregate
value of their SFFAs (measured both during the year and at the end
of the year). The taxpayer exceeds their applicable filing
threshold, and may have a disclosure obligation if other
requirements are met, if either the "during the year" or "end of
year" threshold is exceeded. It is not necessary to exceed
both thresholds. The "during the year" threshold is exceeded if the
taxpayer has an aggregate SFFA value that exceeds their applicable
"during the year" threshold at any time during the tax year.
The "end of year" threshold is exceeded if that aggregate value
exceeds the taxpayer's applicable "end of year" threshold on the
last day of the tax year. The following table summarizes
these applicable threshold amounts for taxpayers based on their
filing status and residency.
Taxpayers Living in the U.S.
Taxpayers Living Outside the U.S.
SFFA Value at Year-End
SFFA Value During the Year
SFFA Value at Year-End
SFFA Value During the Year
Single, Head of Household or Qualified Widow(er)
Married Filing Jointly
Married Filing Separately
Generally, the maximum fair market value (MFMV) of an SFFA is
used for both threshold determination and reporting
purposes.73 However, a reasonable estimate of an asset's
MFMV may be used for these purposes. 74
Generally, assets denominated in foreign currencies must be
converted to U.S. dollars for threshold determination and reporting
purposes. Under relevant guidance, the correct exchange rate
used is the rate used to purchase U.S. dollars on the last day of
the specified person's tax year, even if the SFFA was disposed of
earlier within the year.75 Generally, for a calendar
year taxpayer, the same December 31 Treasury Department Financial
Management Service exchange rates are used as required under the
The IRS has provided regulatory valuation guidance for both
SFFAs that are financial accounts and for SFFAs that are not
For financial accounts, if the foreign financial institution
provides periodic statements indicating an account value, and such
statements are produced at least annually, those statements may be
relied upon to determine the financial account's MFMV for threshold
and reporting purposes unless there is reason to know, based on
readily accessible information, that such statements do not reflect
a reasonable estimate of the MFMV of the account during the year.
Where accurate statements are used and relied upon, a currency
conversion to U.S. dollars indicated on the statement may also be
For an SFFA that is not a financial account maintained at a
financial institution, the value of the asset on the last day of
the tax year may serve as the MFMV for threshold determination and
reporting purposes. This last-day-of-year value may be used unless
the taxpayer has reason to know that this value is not a reasonable
estimate of the asset's MFMV. If readily accessible information
exists to indicate that the last-day-of-year value is not
reflective of a reasonable estimate of the SFFA's MFMV, either an
actual maximum value or another more reasonable estimate should be
Special valuation rules for estates, pension plans and
deferred compensation plans
Arriving at an appropriate value for interests in estates,
pension plans and deferred compensation plans is a frequently
challenging process. Generally, for these assets, IRS guidance
indicates that the FMV of the total beneficial interest in the
asset on the final day of the tax year must be used. However, where
this value proves difficult or impossible to determine, the FMV of
any currency or other property actually distributed to the
specified person may be used. If no distributions are received
during the tax year and there is no reason to know what the FMV of
the interest is on the last day of the tax year, a zero value may
Special valuation rules for trusts
The rules regarding valuation of SFFAs also recognize the
difficulties frequently inherent in valuing an interest in a trust.
Under the rules, the appropriate value for a foreign trust interest
is generally the value of distributions to the specified person,
plus the value of their right to receive mandatory distributions
from the trust.78
Special rule for joint interests.79
Generally, each specified person who is a joint SFFA owner must
include the full value of the SFFA for both threshold determination
and reporting purposes. However, special rules apply to married
taxpayers who file jointly (MFJ) and to those filing separately
(MFS). For MFS taxpayers, when both spouses are specified
individuals, the SFFA value to include for threshold determination
purposes is different than the value actually reported. The
following table summarizes the threshold determination and
reporting rules for joint interests for MFJ and MFS taxpayers.
Threshold Determination Rule for Jointly Held
Amount of Jointly Held SFFAs to Report
Include the value of jointly owned SFFAs only once.
Report all assets in which there is a joint interest only
MFS (when both spouses are specified
Each spouse includes only half of any jointly owned SFFAs.
Each spouse reports the entire value of jointly held SFFAs.
MFS (where one spouse is a specified
The specified person includes the entire value of jointly owned
The specified person reports the entire value of a jointly owned
Reporting specified foreign financial
To meet the disclosure requirements for a specified person with
SFFAs having aggregate values in excess of the specified person's
applicable threshold amount, IRS Form 8938 is used. Form 8938 is
attached to the taxpayer's annual tax return and is due on the same
date as the tax return (including extensions).
SFFAs do not need to be reported on Form 8938 if the same SFFAs
are reported on Forms 3520, 3520-A, 5471, 8621, or
8865.80 However, Form 8938 must still be filed, and part
IV must be completed to indicate which other of these international
information returns were used to report the SFFAs that do not
appear on Form 8938.
Under the terms of IRC §6038D, the penalty associated with
failure to file Form 8938 is $10,000, plus an additional $10,000
for each subsequent month of noncompliance after 90 days of a
notification from the IRS of the failure to file. This penalty may
continue to accrue up to a maximum of $50,000 per delinquent Form
8938.81 This penalty may be waived if the failure to
file is due to reasonable cause and there was no willful neglect on
part of the non-filing taxpayer.
The disclosure rules mandated by the Bank Secrecy Act and FATCA
that may respectively require the filing of FinCen Form 114 or IRS
Form 8938 involve very different definitions, thresholds and cover
different types of accounts and assets. While substantial penalties
may result for willful failure to disclose assets outside the U.S.,
the Bank Secrecy Act and FATCA disclosure requirements are
routinely triggered by clients who have no intention of hiding
offshore assets. Increasingly, unwary clients with no
intention of hiding offshore assets are caught in the widespread
net of these rules that require the tax practitioner to exercise
the requisite due diligence82 in asking relevant and
probing questions about seemingly innocuous situations (such as
inheritances, foreign business interests, or children obtaining an
education in a foreign country) that may lead to the creation or
acquisition of the types of accounts or other assets implicated by
these rules. Since specified foreign financial assets do not
necessarily need to be physically located outside the geographic
bounds of the U.S., clients may not even think of various assets
encompassed by those rules as being "offshore" or "foreign." In
addition, the absence of any annual inflation indexing provision
for either the $10,000 FBAR threshold or the various applicable
FATCA thresholds means that these rules affect an increasing number
of taxpayers each year who might otherwise be unaffected.
While these Bank Secrecy Act and FATCA rules associated with
FinCen Form 114 and IRS Form 8938 are only part of a much larger
foreign asset disclosure regime, their widespread applicability
makes them among the most important rules for attorneys to bear in
mind when advising clients.
1Internal Revenue Service Data Book, 2014,
Letter from the Commissioner. It is anticipated that the
release date for the 2015 IRS Data Book will be March,
2016. Actual appropriation amounts and other sources and
amounts of IRS operating funds, such as those from special programs
and user fees, may be found in Budget in Brief, Internal
Revenue Service. This is a publication of the Department of
the Treasury. The 2015 Budget in Brief may be found
2 National Taxpayer Advocate, Annual Report to
Congress, 2014. The 2015 Annual Report to Congress is expected
in January, 2016.
3 Internal Revenue Service Data Book, 2014,
Letter from the Commissioner.
4 Resource Center, FATCA Archive, U.S. Department of
the Treasury, Nov. 5, 2015.
Accessed on Nov. 10, 2015.
5 See IRS Information Release IR-2015-108, Sep. 24,
6 For further information and resources on IDES, see
7Rev. Proc. 2014-38, 2014-29 IRB 131 (Jul. 14,
8 The list of FFIs registered with the IRS may be
downloaded from https://apps.irs.gov/app/fatcaFfiList/flu.jsf
9Offshore Compliance Initiative, United States
Department of Justice. Nov. 5, 2015.
[www.justice.gov/tax/offshore-compliance-initiative] Accessed on
Nov. 10, 2015.
10 For example, there are several "international
information returns" that may need to be filed by various types of
taxpayers with interests in foreign corporations, trusts, estates,
or partnerships. Many of
11 Such programs include the Streamlined Compliance
Procedures (for taxpayers who have not willfully failed to disclose
assets) and the Offshore Voluntary Disclosure Program (OVDP) for
taxpayers who have willfully failed to comply). More information on
these programs, respectively, may be found at
12 31 CFR §1010.350.
13 31 CFR §1010.350(b).
14 An entity is subject to the FBAR rules even if it
is treated as a disregarded entity under federal income tax
rules. FinCen Final Rule RIN 1506-AB08, 76 Fed. Reg.
15 IRC §7701(b).
16 See IRC §7701(b)(3)(A) and Treas. Reg.
§301.7701(b)-(4)(a) for further details on the substantial presence
17 FinCen Final Rule RIN 1506-AB08, 76 Fed. Reg.
10,234, 10238; 31 CFR 103.11(nn).
18 FinCen Final Rule RIN 1506-AB08, 76 Fed. Reg.
20 IRC §6013(a)(1); S.R. Nico, Jr. v.
Comm'r, 67 TC 647 (Jan. 10, 1977), aff'd in part, rev'd in
part, and remanded, 565 F.2d 1234 (2nd Cir.
21 FinCen Final Rule RIN 1506-AB08, 76 Fed. Reg.
10,234, 10238. For further details on this election, see IRC
§6013(g) and Treas. Reg. §1.6013-6.
22 FinCen Final Rule RIN 1506-AB08, 76 Fed. Reg.
10,234, 10238. Generally, FIRPTA imposes special rules, including
tax withholding rules, upon the sale of foreign-held U.S. real
property interests. For an overview of FIRPTA, see IRM 4.61.12,
Foreign Investment in Real Property Tax Act as well as IRC
§897, 1445, 6039C and underlying regulations.
23 FinCen Final Rule RIN 1506-AB08, 76 Fed. Reg.
25 These grantor trust rules are found at IRC
26 FinCen Final Rule RIN 1506-AB08, 76 Fed. Reg.
27 IRS FBAR Reference Guide, found at
29 These five exceptions are found at 31 CFR
§1010.350(f)(2). Further guidance on these exceptions is also found
in the FinCen Final Rule RIN 1506-AB08, 76 Fed. Reg. 10,234, at
30 FinCen Final Rule RIN 1506-AB08, 76 Fed. Reg.
10,234, 10240, referencing 31 CFR 103.11(nn).
31 31 CFR §1010.350(c).
32 While 31 CFR §1010.350(c)(3)(iv)(B) specifically
includes "other investment fund", further explanation or guidance
has been reserved regarding what constitutes such an
33 While 31 CFR §1010.350(c)(4)(iii).
34 U.S. v. Hom, 2014 U.S. Dist.
LEXIS 77489 (N.D. CA 2014).
35 31 CFR §1010.350(g)(4).
37 FinCen Final Rule RIN 1506-AB08, 76 Fed. Reg.
10,234, 10237; IRS FBAR Reference Guide.
38 These rates are found at
39 IRS FBAR Reference Guide.
40 2015 Surface Transportation and Veterans Health
Care Choice Improvement Act of 2015, Section 2006(b)(11).
41 To file FinCen Forms 114 on behalf of clients, the
practitioner must enroll as an "institution" at http://bsaefiling.fincen.treas.gov/Enroll.html
42 See the IRS FBAR Reference Guide, found
43 31 CFR 103.24; IRS FBAR Reference
44 31 USC §5321(a)(5)(B).
46 31 USC §5321(a)(5)(C).
47 31 USC §5322(b).
48 31 USC §5322(a), (b).
49 Specifically, the Offshore Voluntary Disclosure
Program (OVDP) or either Streamlined Filing Compliance Procedure
(SFCPs). For further information on the OVDP, see
and for further details on the SFCPs, see
52 Treas. Reg. §1.6038D-2(g).
53 Treas. Reg. §1.6038D-1(a)(1).
54 A dual resident taxpayer who files a U.S. Form
1040NR with a Form 8833 to be taxed as a resident of a foreign
country under terms of a tax treaty is exempt from the FATCA filing
requirement. See Treas. Reg. §1.6038D-2(e) for special rules
regarding dual resident taxpayers.
55 Other relevant U.S. possessions covered for
purposes of these FATCA rules are covered by IRC §931.
56 See Prop. Treas. Reg. §1.6038D-6 and IRS Notice
57 Treas. Reg. §1.6038D-2(b)(1).
58 Treas. Reg. §1.6038D-2(b)(4)(i).
59 Treas. Reg. §1.6038D-2(b)(4)(ii).
60 "Financial account" is defined at IRC §1471(d)(2),
which defines a financial account as any depository or custodial
account at the FFI or any debt or equity interest in the FFI
61 "Foreign financial institution" is defined by IRC
§1471(d)(4), which defines an FFI as a foreign entity that: accepts
deposits in the ordinary course of business, holds financial assets
for others as a substantial portion of its business, or that is
engaged primarily in the securities or commodities business.
62 Treas. Reg. §1.6038D-3(a)(3).
63 Treas. Reg. §1.6038D-3(a)(3), referencing Treas.
64 The IRC §7701(a)(30) definition of "U.S. person"
is referenced, and includes a foreign branch or office of such
65 Instructions for Form 8938.
66 "U.S. person" for purposes of this rule is defined
by IRC §7701(a)(30).
67 An estate is not a "U.S. person" if it does not
have income reportable under U.S. federal tax law. See IRC
68 A trust is a "U.S. person" if a U.S. court has
jurisdiction to supervise its administration and U.S. persons have
authority to control substantial trust decisions. See IRC
69 "Present conduct Assets held for future business
conduct, such as for future acquisitions or diversification of
product line, do not qualify.
70 Treas. Reg. §1.6038D-3(b)(5).
71 Treas. Reg. §1.6038D-3(b)(5).
72 Treas. Reg. §1.6038D-3(c).
73 Treas. Reg. §1.6038D-5(b)(1).
74 Treas. Reg. §1.6038D-5(b)(2).
75 Treas. Reg. §1.6038D-5(c)(4).
77 See Treas. Reg. §1.6038D-5(f)(3) and the
Instructions for Form 8938.
78 The valuation of these mandatory distribution
rights involves the use of valuation tables under IRC §7520. See
Treas. Reg. §1.6038D-5(f)(2) and IRC §7520 for further details.
79 Treas. Reg. §1.6038D-2(c).
80 Instructions for Form 8938.
81 IRC §6038D(d).
82 For the most recent IRS statement regarding
Circular 230 due diligence relating to the FBAR requirement, see