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  September 2012

FBAR Relief for Non-Residents with Offshore Bank Accounts --
Too Little, Too Late

Relief from penalties for failure to file Foreign Bank Account Reports (FBAR), TD F 90-22.1 for non-resident U.S. persons with offshore bank accounts was first announced by the IRS on June 26, 2012 with further guidance promised before the procedure's September 1 effective date. On Friday, August 31, 2012 (with minutes to spare), the IRS announced the new "Streamlined" Filing Compliance Procedures for Non-Resident, Non-Filer U.S. persons. Those who qualify will only have to file tax returns for three years (rather than eight under the Offshore Disclosure Program (OVDP)) and no FBAR or other penalties will be imposed. 


Prospective participants will have to fill out a questionnaire. They will answer such loaded questions as, "Did you know you had a Report of Foreign Bank and Financial Accounts (FBAR), Form TD F 90-22.1, filing requirement when you failed to file an FBAR?" and "If you used a tax professional, did you disclose the existence of the accounts/entities you hold outside your country of residence to your tax professional?"


Who Is Eligible?

To qualify, the taxpayer:

  • Must have lived outside the United States since Jan. 1, 2009;
  • Cannot have filed a U.S. tax return during the same period; and
  • Must present a "low level" compliance risk.


How is Compliance Risk Determined?


The tax due for 2009, 2010, and 2011 must be less than $1,500 in each year. However, even if the tax due meets this low level if any of the following factors are present then the compliance risk rises, and the taxpayer may not be eligible to participate. The factors are:


  • If any of the returns submitted through this program claim a refund;
  • If there is material economic activity in the United States;
  • If the taxpayer has not declared all of his/her income in his/her country of residence;
  • If the taxpayer is under audit or investigation by the IRS;
  • If FBAR penalties have been previously assessed against the taxpayer or if the taxpayer has previously received an FBAR warning letter; 
  • If the taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence;
  • If the taxpayer has a financial interest in an entity or entities located outside his/her country of residence;
  • If there is U.S. source income; or
  • If there are indications of "sophisticated tax planning or avoidance."


Taxpayers who meet all of these requirements will be few and far between. For example, consider a U.S. citizen who has immigrated to Israel. Generally, new Israeli residents are granted a 10-year exemption from taxes for any income, including interest or dividends generated outside of Israel. For this reason, the individual may have investments outside of Israel. However, since he or she has accounts outside of his or her country of residence, the U.S. emigrant would be excluded from the new IRS streamlined program.


Another requirement excludes people from participation if they are claiming a refund. However, why should someone have to forego a legitimate refund just to be free of FBAR penalties? Why should persons with offshore bank accounts who filed tax returns be treated worse than those who didn't file any tax returns at all? For that matter, why should someone with U.S. source income (perhaps social security or pension income) not be able to obtain relief?


It is important to note that individuals who became aware of the FBAR requirements for offshore bank account owners and filed timely and accurate returns for 2010 or 2011 may be barred from participating in the program based upon the literal requirements.


Do You Need A Reason Not to Participate in the Streamlined Compliance Procedure?


According to the IRS, the new procedure provides no protection from the risk of criminal prosecution. Once a submission is made, if the IRS determines that the Streamlined Compliance Procedure is not appropriate, the taxpayer may not participate in the Offshore Voluntary Disclosure Program (OVDP). For these reasons, the new procedure is extremely risky for taxpayers who meet the guidelines for the 2009 through 2011 period, but have substantial offshore compliance issues in prior years.


Once again, tax attorneys will be working full time to guide their clients through another thicket of IRS rules, which seem only to reinforce the notion that the IRS is not serious about providing FBAR relief to those taxpayers who legitimately lost their way.


If any of your clients have an undeclared off-shore bank account, please call us so we can discuss the best possible options. 



Dennis Brager
(310) 208-6200
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Dennis N. Brager, Esq.
Nationally recognized California State Bar Certified Tax Specialist
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