Professional Responsibility and the FBAR by Michel Stein
We applaud the Internal Revenue Service (“IRS”) for releasing information regarding professional responsibility and the Foreign Bank and Financial Accounts Reports (“FBAR”). The FBAR reporting requirements have gain much attention in the past five years and have produced a whole host of ethical and legal concerns not historically considered by practitioners.
There have been ongoing questions and concerns regarding the level of diligence required when advising clients about foreign bank accounts and assets. The FBAR, Form TD F 90-22.1, is not a tax return. It is an information report required under the Bank Secrecy Act, 31 U.S.C. 5314, and related regulations under 31 C.F.R. § 1010.350. The FBAR, however, is referenced in U.S. tax returns. United States persons who have a financial interest in or signature authority or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year, must report their foreign accounts by completing applicable sections of U.S. tax returns (i.e., boxes 7a and7b on Form 1040 Schedule B, box 3 on Form 1041 “Other Information” section, box 10 on Form 1065 Schedule B, or boxes 6a and 6b on Form 1120 Schedule N). The boxes on tax returns request information about the existence of foreign financial accounts in which the filer of the tax return has a financial interest or over which the filer has signature or other authority. If the response to the leading question is “yes”, then the tax return filer is prompted to file an FBAR. Moreover, certain foreign bank accounts and assets need to be identified on the Form 8938 for tax years 2011 and later.
Because some taxpayers have used offshore accounts for intentional tax evasion, money laundering, or terrorist financing, the U.S. government has greatly increased both FBAR-related penalties and FBAR enforcement in recent years.[i] Prior to October 22, 2004, there was no penalty for a non-willful failure to file and the maximum civil penalty for willful violations was capped at $100,000. In 2004, Congress amended 31 U.S.C. 5321(a)(5) to establish a penalty for non-willful violations, subject to a reasonable cause exception, and increased the penalty for willful violations.[ii] Currently, the maximum civil penalty is $10,000 for each non-willful failure;[iii] and if the government establishes the failure was willful, the maximum penalty is the greater of $100,000 or 50 percent of the balance of the undisclosed account each year.[iv] As a result of the increase in penalties and the increase in IRS FBAR enforcement, there has been increased interest in compliance.
The IRS has seen that some U.S. persons required to file FBARs may claim a reasonable cause defense against penalty impositions by blaming their preparers, on whom they reasonably relied, for failing to ask about the existence of a foreign bank account or to advise about the FBAR filing requirement. Consequently, some practitioners have expressed concerns about their duties and responsibilities under Circular 230 with respect to both the responses required in designated places on U.S. income tax returns (as described above) and the preparation and filing of the FBAR Form TD F 90-22.1.
According to the IRS release:
“Practitioners who prepare income tax returns have a duty under Circular 230 to inquire of their clients with sufficient detail to prepare correct responses to the foreign bank and financial account questions. The required level of due diligence required is addressed in Circular 230, section 10.22:
§10.22 Diligence as to accuracy.
Each attorney, certified public accountant, enrolled agent, or enrolled actuary shall exercise due diligence:
a. In preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to Internal Revenue Service matters;
b. In determining the correctness of oral or written representations made by the practitioner to the Department of the Treasury; and
c. In determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the Internal Revenue Service.
Under Circular 230, section 10.34(d), a practitioner may generally rely, in good faith and without verification, on information furnished by a client. However, good faith reliance contemplates that a practitioner will make reasonable inquiries when a client provides information that implies possible participation in overseas transactions/accounts subject to FBAR requirements. A practitioner may reply on information provided by the client in good faith. However, a practitioner may not ignore the implications of any information provided to or actually known by the practitioner. If the information furnished by the client appears to be incorrect, inconsistent with other known facts, or incomplete, the practitioner is required to make further inquiry.
The practitioner is also required by Circular 230, section 10.34(c), to advise a client of any potential penalties likely to apply to a position taken on a return the practitioner is preparing or on which she or he is advising. If a determination is made that there is one or more foreign bank or financial accounts to report in designated places on U.S. tax returns as discussed above, the practitioner is not obligated to prepare the FBAR form for the client unless the practitioner feels competent to do so and the client has agreed to this additional service. Notwithstanding the lack of obligation to prepare the FBAR, the practitioner does have an affirmative obligation to advise the client of the need to file the FBAR form and the consequences of failing to do so.” (underline added).
Previous Comments on Professional Liability and FBARs was released by the IRS Office of Professional Responsibility in 2008. These Comments were reproduced in an article published in the Journal of Tax Practice & Procedure, under the title “FBAR Enforcement – Five Years Later”, written by Steven Toscher and Michel Stein, in July 2008. The IRS’s recent release does not materially alter the Comments set forth in 2008, and continues to provide a reasonable approach to the level of diligence required for those practicing in this arena.
Additional inquiries about the FBAR filing requirements may be obtained by reading FAQs Regarding Report of Foreign Bank and Financial Accounts. Specific questions and comments may be emailed to FBARquestions@irs.gov.
For more information regarding this topic please contact Michel Stein – firstname.lastname@example.org Mr. Stein is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C. He is a former Attorney-Adviser of the U.S. Tax Court and is a Certified Specialist in Taxation Law by the State Bar of California, Board of Legal Specialization. Mr. Stein represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. He has extensive experience with voluntary disclosures and foreign account and asset reporting, and he frequently lectures throughout the country on these and other tax related topics. Additional information is available at www.taxlitigator.com .
[i] See, e.g., Joint Committee on Taxation, JCS-5-05, General Explanation of Tax Legislation Enacted in the 108th Cong. 377-378 (May 2005).
[ii] The American Jobs Creation Act of 2004, Pub. L. No. 108-357, Title VIII, § 821(a), 118 Stat. 1586 (Oct. 22, 2004).
[iii] 31 U.S.C. §§ 5321(a)(5)(A)-(B).
[iv] 31 U.S.C. § 5321(a)(5)(C).