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May 12, 2009 - Phil Hodgen

Do foreigners now file FBAR disclosures?

Here’s an interesting problem. I think some nonresidents of the United States are now required to file a form with the U.S. government reporting their worldwide bank accounts to Uncle Sam. Read this and tell me what you think.

Old Instructions, New Instructions

First, go get the new Form TD F 90-22.1. (PDF). This is the one that says October, 2008 on it. Print page 6. That’s the first page of the instructions.

Second, go get the old Form TD F 90-22.1. (PDF). This is the one that says July, 2000 on it. Print page 3. That’s the first page of the instructions.

What you have in your hands is the old version and the new version of the Foreign Bank Account Report. The FBAR. Penalty for failure to file = 10 years in prison and $500,000 fine, plus a rack of potential civil penalties. Bad stuff.

Now go back to the instructions that I asked you to print out. Let’s look at who is required to file this form. That’s the paragraph that is titled “Who Must File This Report.” The old and new versions are almost identical. No problems here–“U.S. persons” who have certain types of accounts outside the U.S., above the $10,000 minimum, must file the FBAR.

“U.S. Person” includes foreign persons

Wait. Here comes the change.

Compare the definitions of “U.S. person” on the old form and the new form.

The old instructions define a U.S. person (who is required to file the FBAR) as follows:

The term “United States person” means (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust.

Pretty straightforward. If you are a nonresident of the United States, a foreign corporation, a foreign partnership, or a foreign estate or trust you aren’t a U.S. person and therefore you won’t have to file Form TD F 90-22.1.

Now let’s look at the definition of “U.S. person” on the new Form TD F 90-22.1:

The term “United States person”means a citizen or resident of the United States, or a person in and doing business in the United States. See 31 C.F.R. 103.11(z) for a complete definition of “person.” The United States includes the states, territories and possessions of the United States. See the definition of United States at 31 C.F.R. 103.11(nn) for a complete definition of United States. A foreign subsidiary of a United States person is not required to file this report, although its United States parent corporation may be required to do so. A branch of a foreign entity that is doing business in the United States is required to file this report even if not separately incorporated under U.S. law.

I have helpfully 🙂 put the important stuff in bold and italicized text.

How it applies

Clearly (because the IRS said so) a foreign corporation with direct business operations in the U.S. will have to file Form TD F 90-22.1. You don’t have direct business operations in the U.S., you say? Well, do you ever send your employees to the United States for a couple of weeks to meet with customers? Does the foreign corporation own rental real estate in the U.S.? Etc.

I think that a foreign human being is at risk if he/she travels to the U.S. and conducts business here. Now the filing requirement for this bank account disclosure form depends on whether the activity of the person rises to the level of “doing business.” This is a question that has been worked over for decades in the Tax Court.

Here’s a not so funny example. Let’s say a nonresident is the director of a U.S. corporation and travels to the U.S. several times a year for Board meetings. Guess what! That person may be doing business in the U.S. and have to disclose his/her worldwide bank accounts to the U.S. government.

Underlying statute allows this

Can the IRS do this? I think so. 31 U.S.C. Section 5314(a) has the magic language in it:

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. . . .

What do you think?

US Real Estate Investments Voluntary Disclosure