Page 1 - Understanding FBAR Disclosure Responsibilities: When Must an Entity or Connected Individual File?

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COLUMNS I Tax Practice & Procedure

Understanding FBAR Disclosure

Responsibilities

When Must an Entity or Connected Individual File?
By Ian Weinstock

he Treasury Department’s Financial Crimes Enforcement A United States person will be deemed to have a financial interest
Network (FinCEN) Form 114, the Report of Foreign Bank in an account when, among other things, the United States person
Tand Financial Accounts—colloquially known as FBAR— is the owner of record or holder of legal title of the account.
has become famous due to the huge potential penalties imposed Thus, an entity will itself need to file an FBAR whenever the
on taxpayers whose failure to file is deemed to be willful. As a entity 1) owns a foreign account and 2) is a United States person.
result, tax preparers know to ask whether individual clients own Unfortunately, what constitutes a United States person is not nec-
foreign accounts before preparing those clients’ income tax returns. essarily intuitive, because there is a meaningful difference between
But not all foreign accounts are owned by individuals. If an entity the definition in the FBAR regulations and the standard definition
under Internal Revenue Code (IRC) section
7701(a)(30). Specifically, although both defini-
tions refer to U.S. citizens and U.S. resident
individuals, and both refer to corporations and
partnerships organized or formed in the United
States, an estate or trust is a United States person
for FBAR purposes if it is organized or formed
in the United States, even if the estate or trust
would be foreign for purposes of the IRC.
That difference will rarely be an issue for
estates; the IRC definition of a foreign estate
provides a facts-and-circumstances test, and
if an estate is organized or formed in the
United States, it should also be treated as a
U.S. estate under said test. But for trusts, the
difference has real, practical significance. The
IRC treats a trust as foreign unless a court in
the United States exercises primary supervi-
sion over the administration of the trust and
one or more U.S. persons control all substan-
tial decisions of the trust. Many trusts are
organized in the United States because it has
(i.e., a nonnatural person) owns a foreign account, when does the excellent substantive (i.e., nontax) trust law but are nonetheless
entity itself need to file an FBAR, and when does an FBAR need foreign trusts under the IRC because a non–U.S. person controls
to be filed by someone connected to the entity? a substantial decision of the trust. Those trusts are not U.S. tax-
payers, but they do have FBAR filing obligations.
When Does an Entity Itself Need to File?
Under the FBAR regulations—31 CFR 1010.350—an FBAR Who Else Needs to File on Account of an Entity?
must be filed by a United States person with a financial interest As indicated above, a United States person with a financial
in, or signature authority over, a bank, securities, or other financial interest in a foreign account is required to report the account on
account in a foreign country. (It is worth noting that a foreign an FBAR. An entity that itself owns a foreign account has a finan-
insurance policy or annuity falls within the definition of “other cial interest in the account. In addition, the FBAR regulations
financial account,” as does an interest in a foreign mutual fund.) specify the circumstances under which a United States person will

58 MARCH 2019 / THE CPA JOURNAL