Introduction – Looking For Mr. FBAR
Attention – as a U.S. Citizen your primary obligation of U.S. citizenship is to: "Report Early! Report Often! Report Everything! Keep a record of what you report!" @VlJeker and @Expatriationlaw go "Looking For Mr. #FBAR": https://t.co/94AXVYZkRl
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) February 8, 2020
I haven’t written a post about Mr. FBAR for quite some time. But, a post about the recent Boyd case at Tax Connections, by Darlene Hart got me thinking about FBAR again. For those interested – where the IRS successfully argued that it was appropriate to impose penalties on each individual account – here is the case:
And for a hint at the commentary:
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) February 5, 2020
Those who know little about Mr. FBAR might find this introduction to FBAR – although written in 2012 – helpful. Incidentally, it’s pretty obvious that Russia’s Foreign Bank account reporting laws were based on an admiration of Treasury’s success with the FBAR rules.
The purpose of this post
The purpose of this post is to explain:
1. The Congressional FBAR statute – Title 31 Section 5314 – which delegates to Treasury the responsibility of determining ALL aspects of FBAR administration including:
– who is subject to FBAR reporting
– the financial thresholds that trigger reporting
2. It is NOT the Congressional FBAR statute that defines the absurdly low $10,000 threshold for reporting. Rather it is Treasury. Although FBAR penalties are now indexed to inflation, the FBAR reporting threshold remains at $10,000. To put it simply: through inflation, Treasury has found a way to increase both the number of FBAR violations and the penalties associated with those violations. (There is a reason it’s called “The FBAR Fundraiser”).
3. It is not Congress that imposes the FBAR requirement on Americans abroad. It is Treasury. In fact, Treasury has recognized that they it has the right to exempt Americans abroad from the FBAR requirements, but has refused to do so. To be specific, Treasury’s 20111 statement found on page 10327 (middle column) was without explanation:
With respect to the comments raised by United States persons living abroad, FinCEN does not believe that an exemption is appropriate simply because a United States person chooses to live outside of the United States.
Treasury offered no reason for this decision.
Commentary on this decision at the Isaac Brock Society may be read here.
4. Treasury has by regulation “tinkered” with the meaning of “resident” over the years. I note that in 2012 (as explained by Phil Hodgen and others) the meaning of “resident” was not defined by statute. Rather, it is through Treasury regulations, that the word “resident” is given meaning. By 2017 Treasury had adopted the statutory meaning of resident used in the Internal Revenue Code (Section 7701(b)). (By expanding the definition of “United States” to include possessions and territories, it appears that Treasury has expanded the penalty base to include U.S. “Nationals”.) The FBAR statute is found in Title 31. The Internal Revenue Code is Title 26. There is neither a requirement nor a reason why Treasury should have used the definition of “resident” in Title 26 as the the meaning of “resident” in Section 5314 of Title 31. There are many different ways of defining “resident”. For example, for U.S. Estate and Gift Tax purposes, “residency” is defined in terms of domicile …
My point is this
Individuals and groups attempting to achieve justice for Americans abroad, Accidental Americans, Green Card Holders and all “U.S. Persons” would be advised to focus their efforts on U.S. Treasury. Yes, the lobbying of Congress should continue. But, meaningful change can be achieved without Congress even being aware of it. U.S. Treasury has the authority and ability to fix the FBAR related penalty and reporting injustices imposed on Americans abroad. But, FBAR is just the beginning. Almost all of the problems of Americans abroad can be fixed by Treasury.
This is the first of a series of posts in which I will explain how Treasury can solve almost all of the problems inflicted by the U.S. Government on Americans abroad.
Appendix – For those who want to better understand the technicalities: Let me explain you …
Congress – The FBAR Statute – Title 31 Section 5314
31 U.S. Code § 5314.Records and reports on foreign financial agency transactions
(a) Considering the need to avoid impeding or controlling the export or import of monetary instruments and the need to avoid burdening unreasonably a person making a transaction with a foreign financial agency, the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency. The records and reports shall contain the following information in the way and to the extent the Secretary prescribes:
(1)the identity and address of participants in a transaction or relationship.
(2)the legal capacity in which a participant is acting.
(3)the identity of real parties in interest.
(4)a description of the transaction.
(b)The Secretary may prescribe—
(1)a reasonable classification of persons subject to or exempt from a requirement under this section or a regulation under this section;
(2)a foreign country to which a requirement or a regulation under this section applies if the Secretary decides applying the requirement or regulation to all foreign countries is unnecessary or undesirable;
(3)the magnitude of transactions subject to a requirement or a regulation under this section;
(4)the kind of transaction subject to or exempt from a requirement or a regulation under this section; and
(5)other matters the Secretary considers necessary to carry out this section or a regulation under this section.
(c)A person shall be required to disclose a record required to be kept under this section or under a regulation under this section only as required by law.
JR Commentary: Yes, that’s all folks. Seriously this is nothing but a delegation to the Treasury Secretary to make up a bunch of rules. Notice (I have bolded the key points):
– it applies to “citizens”, “residents” and “a person in, and doing business in, the United States”. Note particularly the third category “a person in, and doing business in the United States”. Taken literally this would mean that an individual visiting the United States on business would have to file a FBAR #YouCantMakeThisUp!
– notice it applies to “residents”. The definition of “residents” was ambiguous up until recent revisions to the regulations. Remember that Treasury is directed to make the regulations. Let’s compare the regulations in 2012 to the current regulations.
Regulations in 2012 and (apparently up to) 2017:
§ 103.24 Reports of foreign financial accounts.
(a) Each person subject to the jurisdiction of the United States (except a foreign subsidiary of a U.S. person) having a financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country shall report such relationship to the Commissioner of the Internal Revenue for each year in which such relationship exists, and shall provide such information as shall be specified in a reporting form prescribed by the Secretary to be filed by such persons. Persons having a financial interest in 25 or more foreign financial accounts need only note that fact on the form. Such persons will be required to provide detailed information concerning each account when so requested by the Secretary or his delegate.
[42 FR 63774, Dec. 20, 1977, as amended at 52 FR 11443, Apr. 8, 1987; 52 FR 12641, Apr. 17, 1987]
A rather broad statement – definitely not a clear definition of those who are targeted by the legislation. Compare to 1010.350 below.
Regulations in 2020:
General regulation – The rules
§ 1010.350 Reports of foreign financial accounts.
(a) In general. Each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists and shall provide such information as shall be specified in a reporting form prescribed under 31 U.S.C. 5314 to be filed by such persons. The form prescribed under section 5314 is the Report of Foreign Bank and Financial Accounts (TD-F 90-22.1), or any successor form. See paragraphs (g)(1) and (g)(2) of this section for a special rule for persons with a financial interest in 25 or more accounts, or signature or other authority over 25 or more accounts.
(b) United States person. For purposes of this section, the term “United States person” means –
(1) A citizen of the United States;
(2) A resident of the United States. A resident of the United States is an individual who is a resident alien under 26 U.S.C. 7701(b) and the regulations thereunder but using the definition of “United States” provided in 31 CFR 1010.100(hhh) rather than the definition of “United States” in 26 CFR 301.7701(b)-1(c)(2)(ii);
JR Commentary: The point is that Treasury changed the regulations to to adopt the meaning of “resident” used in the Internal Revenue Code. Prior to this, it was not clear what was meant by resident.
Regulation – The $10,000 threshold:
Obviously, I have made no attempt to quote all the regulations. The point I am making is that Treasury:
1. Has the authority to decide who is subject to FBAR requirements and the reporting threshold. In fact they have recognized that authority be tinkering with the definition of “resident” in the regulations.
2. Has the authority to decide on the reporting thresholds.
There is no doubt that relief for Americans abroad is available through Treasury. Obviously, it’s also available through a Congressional fix. Treasury has the authority to exempt Americans abroad from the FBAR rules. Therefore, those involved in advocacy should direct significant effort toward Treasury!