Tax Correspondence to IRS: Exception from FBAR Requirement Needed for U.S. Persons Who Live and Work Abroad

Jay Bruno of Bruno American Tax Services has written a letter to IRS Commissioner Douglas H. Shulman in response to requests for comments in Announcement 2009-51 and Notice 2009-62.  This letter criticizes the Treasury Department's enforcement of the filing of Form TD F 90-22.1 ("FBAR") as unfair and harsh towards Americans who live and work overseas, and who don't use bank accounts for the purpose of evading taxes.  It also cites three concerns with the FBAR:

 "(1) The FBAR is a singularly confusing and demanding form. I cite just three examples of this, but there are many more: (a) The vast majority of tax preparers and tax filers have no Idea which accounts really "need" to be disclosed (joint accounts with foreign owners, business accounts, pension accounts, etc), and there are serious questions about the rights of the United States government to details on such accounts, (b) The rule that the highest account balance for the year has to be disclosed has proven almost impossible to comply with for some taxpayers due to the way banks and other financial institutions operate overseas. I cannot imagine why the information being requested was not more carefully thought out by the designers and implementers of this form given the global context it applies to. (c) There are no provisions for late filing or explanations for late filing that will allow penalties to be waived. In our imperfect world, the reasons for this being unreasonable are too numerous and too obvious to list.

 

(2) The penalties are completely out of line with the severity of the "offense". I have many clients who never even knew they had to file a tax return much less know about the FBAR -- often because they moved with their family to a foreign country when they were young. Imagine one comes to me and says he read he had to file US tax returns and wants to do the right thing. In the meantime, he saved some money for himself and his family in a foreign account and now, when he files his back year returns and reports those accounts, the Treasury Department wants 20% of the highest balance of any account in the last 6 years plus interest, accuracy-related penalties, etc. AND, he could face criminal prosecution. The rules, as written, do not rule out this scenario and it is absurdly unfair to potentially subject a US taxpayer to it.

(3) A great deal of uncertainty surrounds the enforcement of the penalties for late or non-filing of the FBAR, making it difficult, if not impossible, to offer valid and reliable advice as a tax preparer. There have been efforts to clarify the rules, such as a "Frequently Asked Questions" paper issued by the IRS on May 6, 2009, but this can hardly be the basis for policy or enforcement. In fact, the FAQ just referred to is directed to the Voluntary Disclosure program that is designed to "bring taxpayers that have used undisclosed foreign accounts . . . to avoid or evade tax into compliance with United States tax laws." What about those taxpayers who are not in that category -- who did not use these accounts to evade US tax, but simply to go about the business of living in a foreign country? I have not recommended they file using the Voluntary Disclosure program because they are not tax evaders and had no idea they were doing anything wrong. But they are worried to death about what is going to happen and I am not able to reassure them with anything other than the fact that enforcement of this policy against them surely would be a travesty of justice."

See also Return Preparer Seeks Exception from FBAR Reporting Requirement, 2010 TNT 48-16, March 12, 2010.

Posted by Neil I. Rumbak, Associate Editor, Wealth Strategies Journal.