Increasing Regulation for U.S. Foreign Investors

Jun 24, 2015   

June 24th, 2015

The United States Department of Commerce Bureau of Economic Analysis (BEA) is authorized to conduct benchmark surveys of U.S. direct investment abroad every five years pursuant to the International Investment and Trade in Services Survey Act (P.L. 94-472, 90 Stat. 2059, 22 U.S.C. 3101-3108, as amended –hereinafter “the Act”).  Compliance with the benchmark survey, Form BE-10, has always been mandatory pursuant to the Act, but until November of 2014, it was only required of U.S. persons who received notices from the BEA.  However, following public notice on November 20, 2014 provided via publication in the Federal Registrar of the Final Rule by the BEA, the 2014 survey is now mandatory for all U.S. persons who fall under the specific foreign interest ownership threshold, including any person resident in the United States or subject to the jurisdiction of the United States.  The purpose of the Act is to authorize the President “to collect information on international investment and United States foreign trade in services, whether directly or by affiliates, including related information necessary for assessing the impact of such investment and trade, to authorize the collection and use of information on direct investments owned or controlled directly or indirectly by foreign governments or persons, and to provide analyses of such information to the Congress, the executive agencies, and the general public” (22 U.S.C. 3101).  More specifically, the President is to utilize the data collected “to determine the magnitude and aggregate value of portfolio investment, form of investments, types of investors, nationality of investors and recorded residence of foreign private holders, diversification of holdings by economic sector, and holders of record” (22 U.S.C. 3101).

Background

Form BE-10 can be seen as the latest in a long line of requirements arising out of the federal government’s emphasis on gathering information about U.S. taxpayers’ offshore economic activities.  While many laws requiring U.S. persons to report offshore economic interests have been on the books for decades, the government’s enforcement of these laws, and its effort to add new and stricter requirements, has been much more pronounced since revelations in 2007 that Swiss banking giant UBS had for years affirmatively engaged in efforts to assist U.S. taxpayers in evading their tax obligations under the veil of Swiss bank secrecy laws.  As a result, UBS was fined $780 million and the names of hundreds of UBS depositors were provided to the government.  (See the Department of Justice announcement here).  Since that time, the IRS and the Department of Justice have been active in prosecuting U.S. taxpayers for failing to report income from, or just the existence of, offshore bank and financial accounts and have been pursuing the identity of undeclared U.S. depositors with accounts in Switzerland, Israel, the Caribbean, and elsewhere.  (See related FIDJ blog post here).

Largely in response to the UBS case, Congress passed the Foreign Account Tax Compliance Act (FATCA) in 2010.  While much of the focus regarding FATCA has been centered on its requirement that foreign financial institutions provide information regarding U.S. account holders to the U.S. government or face automatic 30 percent withholding on all U.S. source payments, FATCA also included new filing requirements for U.S. taxpayers holding assets abroad.  In conjunction, the U.S. ramped up its enforcement of preexisting reporting obligations, such as the Foreign Bank Account Report (FBAR) obligation, discussed below.  As it is imperative that all U.S. persons with foreign interests familiarize themselves with the varied forms, the following is a brief summary of the forms and their applicable penalties:

U.S. Department of Commerce

Form BE-10 – Benchmark Survey of U.S. Direct Investment Abroad

Form BE-10A

Form BE-10A is a report that must be submitted by U.S. Reporters with foreign affiliates.  This includes any U.S person or entity, including private funds, which directly or indirectly owned or controlled at least 10 percent of the voting stock of an incorporated foreign business enterprise, or an equivalent interest in an unincorporated foreign business enterprise or fund – at any time during the entity’s 2014 fiscal year.  Irrespective of any equity (financial) interest in the foreign business enterprise, U.S. private fund parents with at least 10 percent voting interest in a foreign business enterprise are required to report.  If the U.S. person is an incorporated business enterprise, the U.S. Reporter is considered the fully consolidated U.S. domestic enterprise excluding foreign branches and all other foreign affiliates.

Form BE-10B

Form BE-10B must be submitted by U.S. Reporters for each foreign affiliate that is a majority-owned foreign affiliate with total assets, sales, or net income were greater than $80 million (positive or negative) during the 2014 fiscal year.

Form BE-10C

Form BE-10C must be submitted by U.S. Reporters for foreign affiliates that were (i) majority-owned foreign affiliates for which total assets, sales, or net income was greater than $25 million (positive or negative), and none of these items was greater than $80 million (positive or negative) at any time during the 2014 fiscal year; (ii) minority-owned foreign affiliates for which total assets, sales, or net income was greater than $25 million at any time during the 2014 fiscal year; or (iii) foreign affiliates for which total assets, sales or operating revenue did not exceed $25 million (positive or negative) at any time during the 2014 fiscal year and that is a foreign affiliate parent of another foreign affiliate being filed on Form BE-10B or BE-10C.

Form BE-10D

Form BE-10D must be submitted by U.S. Reporters for each foreign affiliate for which assets, sales, and net income did not exceed $25 million (positive or negative) at any time during the 2014 fiscal year and the affiliate is not a foreign affiliate parent of another foreign affiliate being filed on Form BE-10B or BE-10C.

The deadline to file the BE-10 reports for U.S. Reporters with fewer than 50 reports was May 29, 2015 and the deadline for U.S. Reporters with more than 50 reports is June 30, 2015.  The deadline for first time filers, however, has been extended to June 30, 2015.  An extension may also be granted by the BEA for those who file a Request for Extension if the request is filed prior to the applicable reporting deadline.  Failure to file the BE-10 report shall subject the U.S. Reporter to a civil penalty of not less than $2,500, and not more than $25,000, and to injunctive relief commanding such person to comply, or both.  A willful failure to report shall be fined not more than $10,000 and, if an individual, may be imprisoned for not more than one year, or both.  Similar fines and/or imprisonment may also be imposed on any convicted officer, director, employee, or agent of any corporation who knowingly participates in such violations (22 U.S.C. 3105), subject to inflationary adjustments.

Form BE-13 – Survey of New Foreign Direct Investment in the United States

On November 21, 2014, just one day following public notice of the new mandatory requirements for Form BE-10, the BEA announced on its website that the survey of new foreign direct investment (Form BE-13) was being reinstated and would also be required of all U.S. entities subject to the reporting requirements, regardless of whether they are contacted by the BEA or not.  The BEA announcement states that Form BE-13 “captures information about new investments made when a foreign investor establishes or acquires a U.S. business (either directly, or indirectly through a U.S. business it already owns) or expands an existing U.S. business.”

Form BE-13A

Form BE-13A must be submitted for a U.S. business enterprise when a foreign entity acquires a voting interest (directly, or indirectly through an existing U.S. affiliate) in that enterprise, segment, or operating unit and (i) the total cost of the acquisition is greater than $3 million, (ii) the U.S. business enterprise will operate as a separate legal entity, and (iii) by this acquisition, at least 10 percent of the voting interest in the acquired entity is now held (directly or indirectly) by the foreign entity.

Form BE-13B

Form BE-13B must be submitted for a U.S. business enterprise when a foreign entity, or an existing U.S. affiliate of a foreign entity, establishes a new legal entity in the United States and (i) the projected total cost to establish the new legal entity is greater than $3 million, and (ii) the foreign entity owns 10 percent or more of the new business enterprise’s voting interest (directly or indirectly).

Form BE-13C

Form BE-13C must be submitted for an existing U.S. affiliate of a foreign parent when it acquires a U.S. business enterprise or segment that it then merges into its operations and the total cost to acquire the business enterprise is greater than $3 million.

Form BE-13D

Form BE-13D must be submitted for an existing U.S. affiliate of a foreign parent when it expands its operations to include a new facility where business is conducted and the projected total cost of the expansion is greater than $3 million.

Form BE-13E

Form BE-13E must be submitted for a U.S. business enterprise that previously filed a Form BE-13B or BE-13D indicating that the established or expanded entity is still under construction.

Form BE-13 is due no later than 45 days after the reportable acquisition is completed, the new legal entity is established, or the expansion is commenced.  Failure to report may subject the U.S. Reporter to a civil penalty of not less than $2,500, and not more than $32,500, and to injunctive relief commanding such person to comply, or both.  Willful failures to report shall be fined not more than $10,000 and, if an individual, may be imprisoned for not more than one year, or both.  Similar fines and/or imprisonment may also be imposed on any officer, director, employee, or agent of any corporation who knowingly participates in such violation, subject to inflationary adjustments.  Claims for Exemption from Form BE-13 may be filed for U.S. business enterprises that meet all of the requirements for filing Forms BE-13A, BE-13B, BE-13C, or BE-13D except the $3 million reporting threshold.

Form BE-12 – Benchmark Survey of Foreign Direct Investment In The United States

Form BE-12 is a benchmark survey of foreign direct investment in the U.S. conducted every five years in lieu of the Annual Survey, described below.  Form BE-12 applies to any U.S. entity in which foreign investors hold at least 10 percent of the voting interests at the end of the reporting calendar year where the entity’s total revenue, total assets, or net income exceeds $60 million.  A Claim for Not Filing may be filed for Form BE-12 if (i) a foreign person did not own 10 percent or more of the voting ownership (or the equivalent) in the U.S business enterprise, (ii) the U.S. business enterprise is fully consolidated or merged into another U.S. affiliate, or (iii) the U.S. business enterprise was liquidated or dissolved.  This survey was recently completed in 2012 and will not be issued again until 2017.

Form BE-12A

Form BE-12A must be submitted for a majority-owned U.S. affiliate with total assets, sales or gross operating revenues, or net income greater than $300 million (positive or negative).

Form BE-12B

Form BE-12B must be submitted for (i) a majority-owned U.S. affiliate with total assets, sales or gross operating revenues, or net income greater than $60 million (positive or negative), but no one of these items was greater than $300 million (positive or negative), and (ii) a minority-owned U.S. affiliate with total assets, sales or gross operating revenues, or net income greater than $60 million (positive or negative).

Form BE-12C

Form BE-12C must be submitted for a U.S. affiliate for which no one of these items was greater than $60 million (positive or negative): total assets, sales or gross operating revenues, and net income.

Form BE-577 – Quarterly Survey of U.S. Direct Investment Abroad required only for those directly contacted by BEA.

Form BE-577 should be submitted for (i) each directly-owned foreign affiliate for which total assets; annual sales or gross operating revenues, excluding sales taxes; or annual net income after provision for foreign income taxes was greater than $60 million (positive or negative) at any time during the affiliate’s fiscal reporting year, and (ii) each indirectly-owned foreign affiliate that met the $60 million threshold and had an intercompany debt balance with the U.S. reporter that exceeded $1 million.  Entities not contacted by BEA have no reporting responsibilities.

Form BE-11 – Annual Survey of U.S. Direct Investment Abroad required only for those directly contacted by BEA.

Form BE-11A

Form BE-11A should be submitted for the fully consolidated U.S. domestic business enterprise of a U.S. reporter that has a reportable foreign affiliate.

Form BE-11B

Form BE-11B should be submitted for a majority-owned foreign affiliate with total assets, sales or gross operating revenues, or net income greater than $60 million (positive or negative).  If the majority-owned affiliate is a foreign affiliate parent of another foreign affiliate being filed on Form BE-11B or BE-11C, Form BE-11B must be filed for the foreign affiliate parent even if total assets, sales or gross operating revenues, or net income did not exceed $60 million (positive or negative).

Form BE-11C

Form BE-11C should be submitted for a minority-owned foreign affiliate with total assets, sales or gross operating revenues, or net income greater than $60 million (positive or negative).  If the minority-owned affiliate is a foreign affiliate parent of another foreign affiliate being filed on Form BE-11C, Form BE-11C must be filed for the foreign affiliate parent even if total assets, sales or gross operating revenues, or net income did not exceed $60 million (positive or negative).

Form BE-11D

Form BE-11D should be submitted for a foreign affiliate established or acquired during the fiscal year with total assets, sales or gross operating revenues, or net income greater than $25 million (positive or negative), but for which no one of these items was greater than $60 million (positive or negative) at the end of, or for, the affiliate’s fiscal year.

Form BE-605 – BEA’s Quarterly Survey of Foreign Direct Investment in the U.S. required only for those directly contacted by BEA.

Form BE-605 should be submitted for every U.S. affiliate for which total assets, annual sales, or gross operating revenues, OR annual net income (not just the foreign parent’s share) were greater than $60 million (positive or negative).  Reports are required even though the U.S. business enterprise may have been established, acquired, liquidated, sold, or inactivated during the reporting period.  Entities not contacted by BEA have no reporting responsibilities.

Form BE-15 – BEA’s Annual Survey of Foreign Direct Investment in the U.S. required only for those directly contacted by BEA.

Form BE-15A

Form BE-15A should be submitted for a majority-owned (exceed 50 percent) U.S. affiliate with total assets, sales or gross operating revenues, or net income greater than $300 million (positive or negative).

Form BE-15B

Form BE-15B should be submitted for 1) a majority-owned (at least 10 percent, but not more than 50 percent) U.S. affiliate with total assets, sales or gross operating revenues, or net income greater than $120 million (positive or negative), but no one

of these items was greater than $300 million (positive or negative) and, 2) a minority-owned U.S. affiliate with total assets, sales or gross operating revenues, or net income greater than $120 million (positive or negative).

Form BE-15C

Form BE-15C should be submitted for a U.S. affiliate with total assets, sales or gross operating revenues, or net income greater than $40 million (positive or negative), but none of these items was greater than $120 million (positive or negative).

Form BE-9 – Quarterly Survey of Foreign Airline Operators’ Revenues and Expenses in the United States required only for those directly contacted by BEA

Form BE-9 is mailed to about 50 persons each quarter.  This quarterly survey collects data from U.S. offices, agents, or other representatives of foreign airline operators that transport passengers or freight and express to or from the United States.  A report is required if the carrier’s total covered revenues or total covered expenses were $5 million or more in the previous year or are expected to be $5 million or more during the current year.

Form BE-29 – Annual Survey of Foreign Ocean Carriers’ Expenses in the United States required only for those directly contacted by BEA

Form BE-29 is mailed to about 85 persons each year.  This annual survey collects data from U.S. agents of foreign ocean carriers who must report all relevant transactions in port services provided by them or obtained by them for foreign carriers and on port services provided by third persons.  A report is required if the U.S. agent handled at least 40 port calls by foreign vessels and if total covered expenses were $250,000 or more in the reporting period.

Form BE-30 – Quarterly Survey of Ocean Freight Revenues and Foreign Expenses of United States Carriers required only for those directly contacted by BEA

Form BE-30 is mailed to about 25 persons each quarter.  The quarterly survey collects data from U.S. airline operators engaged in the international transportation of U.S. export freight and the transportation of freight and passengers between foreign points.  A report is required if the U.S. airline operator’s total covered revenues or total covered expenses were $500,000 or more in the previous year or are expected to be $500,000 or more in the current year.

BE-180 – Benchmark Survey of Financial Services Transactions between U.S. Financial Services Providers and Foreign Persons required only for those directly contacted by BEA

Form BE-180 was mailed to about 6,200 firms in 2009.  The benchmark survey covers financial services transactions (including, payments to, and receipts from) affiliated and unaffiliated foreign persons.  A report is required if in the fiscal year covered by the survey, the U.S. person transacted with a foreign person in any of the covered financial services.  The U.S person is required to provide detailed information by type of service and by country if the U.S person had more than $3 million of receipts or payments in all financial services combined.  If the U.S. person’s total transactions fell below the threshold, estimates of total receipts and total payments must be provided.  In addition, the U.S. person is asked, but not required, to provide an estimate of the total transactions for each type of financial service.

Form BE-185 – Quarterly Survey of Financial Services Transactions between U.S. Financial Services Providers and Foreign Persons required only for those directly contacted by BEA

Form BE-185 is mailed to about 675 firms each quarter.  This quarterly survey covers payments to, and receipts from, affiliated and unaffiliated foreign persons.  A report is required if a U.S. person had (i) receipts from affiliated and unaffiliated foreign persons for all financial services combined of more than $20 million in the previous fiscal year or expects to have receipts of more than $20 million in the current fiscal year or (ii) payments to affiliated and unaffiliated foreign persons for all financial services combined of more than $15 million in the previous fiscal year or expects to have payments of more than $15 million in the current fiscal year.

Form BE-140 – Benchmark Survey of Insurance Transactions by U.S. Insurance Companies With Foreign Persons required only for those directly contacted by BEA

Form BE-140 was mailed to about 1,100 firms in 2008.  This benchmark survey collects data from U.S. insurance companies that have engaged in insurance transactions with foreign persons during the reporting period.  A report is required if a U.S. insurance company had transactions in any of the covered items that were less than $2 million or were more than $2 million in the calendar year covered by the survey.

Form BE-45 – Quarterly Survey of Insurance Transactions by U.S. Insurance Companies with Foreign Persons required only for those directly contacted by BEA

Form BE-45 is mailed to about 550 firms each quarter.  This quarterly survey collects data from U.S. insurance companies that have engaged in insurance transactions with foreign persons during the reporting period.  A report is required if transactions in any of the covered items were less than $8 million or more than $8 million in the previous year or are expected to be in the current calendar year.

Form BE-120 – Benchmark Survey of Transactions in Selected Services and Intellectual Property with Foreign Persons required only for those directly contacted by BEA

Form BE-120 was mailed to about 14,500 persons in 2011.  This benchmark survey collects data from U.S. persons who had transactions (receipts and/or payments) with affiliated and unaffiliated foreign persons during the reporting period.  A report is required if the U.S. person transacted with a foreign person in any of the covered services during the fiscal year.  The U.S. person is required to provide detailed information by type of service and by country if the total transactions (affiliated and unaffiliated) in any of the categories exceeded $2 million for receipts or $1 million for payments.  If the U.S. person’s transactions fell below the threshold, estimates of total receipts and total payments must be provided.  In addition, the U.S. person is asked, but not required, to provide estimates of the total transactions for each type of service.

Form BE-125 – Quarterly Survey of Transactions in Selected Services and Intellectual Property with Foreign Persons required only for those directly contacted by BEA

Form BE-125 is mailed to about 2,000 persons each quarter.  This quarterly survey collects data from U.S. persons who had transactions (receipts and/or payments) with affiliated and unaffiliated foreign persons during the reporting period.  A report is required if a U.S. person had (i) receipts from affiliated and unaffiliated foreign persons in any of the covered categories of more than $6 million in the previous fiscal year or expects to have receipts of more than $6 million in the current fiscal year or (ii) payments to affiliated and unaffiliated foreign persons in any of the covered categories of more than $4 million in the previous fiscal year or expects to have payments of more than $4 million in the current fiscal year.

Form BE-150 – Quarterly Survey of Payment Card and Bank Card Transactions Related to International Travel

Form BE-150 is filed by all U.S. credit card companies and by debit networks that are based on personal identification numbers.  These companies are required to report (i) transactions between U.S. cardholders traveling abroad and foreign businesses and (ii) transactions between foreign cardholders traveling in the United States and U.S. businesses.

Internal Revenue Service

Form 926

Under Internal Revenue Code (IRC) §6038B, each United States person (generally defined for Form 926 and the other forms described herein as a citizen or resident of the United States, or a domestic entity (i.e. partnership, corporation, estate, or trust formed under the laws of the United States)) who transfers property to a foreign corporation in an exchange described in IRC §§332, 351, 354, 355, 356, or 361, or a corporation that makes a distribution described in IRC §336 (i.e. a liquidating distribution) to a non-U.S. person must report the transfer to the IRS on Form 926.  This provision is intended to provide the U.S. government with information regarding capitalization, liquidation, or reorganization of a foreign corporation in which a U.S. person holds an interest.

Any U.S. person who fails to provide notice of the transfers to foreign persons as described above may be liable for a penalty equal to 10 percent of the fair market value of the property transferred, valued at the time of the exchange.  The taxpayer may also be required to recognize gain on the transaction even if the transaction would have been a non-recognition event in the normal course.

Form 3520

U.S. persons must file Form 3520 to report certain transactions with foreign trusts, ownership of foreign grantor trusts, and receipt of certain large gifts or bequests from certain foreign persons.  A separate Form 3520 must be filed with respect to each foreign trust or gift.

Failure to file the form can lead to penalties equal to the greater of $10,000, 35% of the gross value of any property transferred to a foreign trust during the year, 35% of the gross value of the distributions received from a foreign trust during the year, or 5% of the gross value of the portion of the trust’s assets treated as owned by a U.S. person in a foreign grantor trust.

Form 3520-A

Form 3520-A is the annual information return of a foreign trust (i.e. a trust formed under the laws of a foreign country, and subject to the courts of a different country) with at least one U.S. owner.  The form requires submission of information about the foreign trust, its U.S. beneficiaries, and any “U.S. person”who is treated as an owner of any portion of the foreign trust.  A foreign trust with a U.S. owner must file Form 3520-A in order to satisfy their annual information reporting requirements under IRC §6048(b).

A U.S. owner is subject to an initial penalty equal to the greater of $10,000 or 5% of the gross value of the portion of the foreign trust’s assets treated as owned by the U.S. person at the close of that tax year, if the foreign trust does not timely file the form, or files an incomplete or incorrect form.

Form 5471

IRC §6046 requires each of the following to file Form 5471, setting forth certain information with respect to a foreign corporation:

  • Each United States citizen or resident who becomes an officer or director of a foreign corporation if a United States person own 10 percent or more of the total combined voting power of all classes of stock of the foreign corporation entitled to vote, or 10 percent or more the total value of the stock of the foreign corporation.
  • Each United States person who acquires stock and, either when added to any stock owned on the date of such acquisition or without regard to stock owned on the date of such acquisition, owns 10 percent or more of the total combined voting power of all classes of stock of a foreign corporation entitled to vote, or 10 percent or more the total value of the stock of a foreign corporation.
  • Each person who is treated as a United States shareholder under IRC §953(c).
  • Each person who becomes a United States person while owning 10 percent or more of the total combined voting power of all classes of stock of a foreign corporation entitled to vote, or 10 percent or more the total value of the stock of a foreign corporation.

In determining ownership percentages, complex rules regarding attribution of ownership from family members or related entities apply, creating a trap for unwary taxpayers who look only to interests held in their name in determining their reporting obligations.  Form 5471 must be filed for each foreign corporation that gives rise to a reporting obligation.  Failure to file Form 5471 may lead to penalties of $10,000 for each failure.  Further, failure to file the form may compromise opportunities to take advantage of the foreign tax credit and may lead to criminal prosecution.

Form 8621

U.S. persons holding interests in passive foreign investment companies (PFICs) must report such interests, as well as any PFIC distributions, each year on Form 8621.  PFICs are foreign corporations whose assets are primarily devoted to the generation of passive income (interest, dividends, etc.).  A separate form must be filed for each PFIC in which the U.S. person has an interest.  Furthermore, PFIC distributions, i.e. dividends or dispositional gains, are taxed differently (and more punitively) than typical dividends or capital gains.

Form 8865

If a U.S. person holds an interest in a foreign partnership, there is good chance that person will have to file Form 8865.  The form is used to report the information required under IRC §6038 (reporting with respect to controlled foreign partnerships—where U.S. persons own more than 50 percent of the partnership), IRC §6038B (reporting of transfers to foreign partnerships), and IRC §6046A (reporting of acquisitions, dispositions, and changes in foreign partnership interests).  Form 8865 sets forth several categories of interest holders who must file the form and requires different schedules, statements, and information, depending on the category of filer.  As with the other forms discussed, failure to file a timely and accurate Form 8865 may lead to penalties of $10,000 for each failure and may lead to criminal prosecution.

Form 8938

Pursuant to IRC §6038D, any U.S. person who, during any taxable year, holds a specified interest in a specified foreign financial asset is required to attach to his individual income tax return (i.e. Form 1040), specific information regarding those assets on Form 8938.  While the filing thresholds for Form 8938 can be quite complex, generally U.S. persons living in the U.S. must file Form 8938 if their offshore financial assets (bank accounts, investment accounts, interests in foreign entities, and most other financial assets) exceeds $50,000 for a single tax return filer and $75,000 for joint tax return filers.  These thresholds rise when the U.S. taxpayer resides abroad.  Failure to file Form 8938 may lead to penalties of $10,000 per failure and criminal penalties.  Form 8938 in many circumstances is redundant with the FBAR filing obligation, but filing Form 8938 does not relieve the FBAR filing obligation, and vice versa.

FinCEN Form 114 (FBAR)

FBARs must be filed by any U.S. person that has signatory authority over, or a financial interest in, a foreign bank account(s) with a value exceeding $10,000 at any time during the preceding taxable year.  A financial interest means a person that is either the legal title holder of the account or someone who can (either independently or in conjunction with another) direct the disposition of the account assets.  The $10,000 threshold cannot be circumvented by keeping multiple accounts; all account values are aggregated.  While most of the forms discussed above are required to be filed with a taxpayer’s tax return (except for 3520 and 3520-A, which must be filed separately with the Ogden, Utah IRS service center), the FBAR must be filed online with the Bank Secrecy Act’s e-filing website, and is due by June 30 for the previous taxable year (i.e., FBARs for 2014 are due on June 30, 2015).

A $10,000 penalty is imposed for non-willful failures to file an FBAR.  For willful failures, the penalties can reach 50% of the maximum account value each year.  Strict application of this rule can lead to penalties far in excess of the account value.  Schedule B of Form 1040 requires taxpayers to affirmatively state whether they had a financial interest in, or signatory authority over, a foreign bank account during the previous year.  The presence of that question, no matter how it is answered, severely hurts any argument that a failure to file an FBAR was not willful.  (See related FIDJ FBAR blog posts here).

Other Penalties

In addition to giving rise to independent monetary penalties, failure to file Forms 5471, 3520, 3520-A, 926, 8938, or 8865 will extend the statute of limitations for making an assessment of tax with respect to the entire return, whether or not the assessed deficiency relates to the unfiled form.  IRC § 6501(d)(8).  Further, if there is a deficiency that arises out of income relating to an unfiled form, a penalty of 40% can be assessed in addition to the deficiency.  IRC § 6662(j).

Given the overlap of the various filing requirements, failing to abide by these filing requirements in just a single year can lead to huge penalties or worse.  For instance, if a taxpayer has a single offshore investment account with $400,000 in it, he will have to file an FBAR, a Form 8938, and, in some circumstances, a Form 8621 to report interests in PFICs.  Failure to do so in just a single year gives rise to almost automatic penalties of $20,000, plus additional penalties if there is any unreported income attributable to the account.  Further, the statute of limitations for the entire return will not begin to run until all forms are filed.

Years of abuse by U.S. taxpayers of foreign bank secrecy laws coupled with an increased desire to generate revenue has led to the situation we are in today.  If a U.S. person has economic interests abroad, almost invariably they have an obligation to report the interest, often on more than one form.  As shown by Form BE-10A, agencies beyond just the IRS or the Department of Treasury are beginning to impose reporting obligations with respect to foreign investment.  It is essential that taxpayers in that position seek experienced counsel to guide them through the various filing requirements.  The old adage “an ounce of prevention is worth a pound of cure” has never been more apt.

The attorneys at Fuerst Ittleman David & Joseph specialize in the complexities faced by U.S. taxpayers investing, operating business, or holding assets abroad, with a particular focus on the tax implications of those activities.  Please contact us by email at contact@fidjlaw.com or telephone at 305.350.5690 with any questions regarding this article or any other issues on which we might provide legal assistance.