Thanks to the Bank Secrecy Act of 1970, U.S. citizens must file a "Report of Foreign Bank and Financial Accounts" if they have a financial interest in, or authority over, "foreign bank accounts" or "foreign financial accounts" that have an aggregate value of $10,000 at any point in a year.
The "Report of Foreign Bank and Financial Accounts," is known as the FBAR.
What "bank accounts" have to be reported on an FBAR?
In a recent decision, the Ninth Circuit Court of Appeals found that in the Bank Secrecy Act, there is no definition of a "foreign" bank. Nor is there a definition provided by any of the regulations. The case was Hom vs. US. The government imposed four non-willful penalties for a total of $40,000. The government sued to enforce the FBAR penalties. The government won in district court.
The government claimed that the money the online gambling site held was a foreign bank and because it was over $10,000, these "accounts" had to be reported on an FBAR. The 9th Circuit Court of Appeals disagreed, finding the BSA and the regulations failed to adequately define what constituted a foreign bank. The 9th Circuit looked to a common dictionary definition of a "bank" and found that an online gambling website did not meet that definition. Compare that with another case from August 2016, Eshel v. Commissioner, a tax court appeal in which the DC Court of Appeals castigated the tax court for using the dictionary to define that status as foreign tax.
You can see how people are confused about exactly what has to be reported. And it gets worse...
What is a foreign bank?
The Bank Secrecy Act defines what a domestic bank is, but doesn't ever get around to defining a foreign bank. The instructions for the FBAR don't bother to define it either.
We recommend our clients include anything that might be considered a foreign bank on an FBAR. First reason -- FBARs don't trigger audits. Revenue Agents actually have limited access to FBARs. So putting something on an FBAR isn't going to create a "red flag." Reason number two, because the government could take a hard line -- even though Mr. Hom won this case, for most people it would have been cheaper emotionally and financially to pay the $40,000.
If you're unsure if you have unfiled or misfiled FBARs, contact us to set up a confidential, complimentary consultation. You can call us at 888-727-8796 or email firstname.lastname@example.org. Learn more about our services and fees here.