DATELINE: May 10, 2009, Chicago
We just got back from the ABA Tax Section meeting in Washington, D.C. where we spent many hours ensconced deep in the bowels of the Hyatt Regency. No air, no light. What a way to spend two days.
We did hear a number of interesting presentations. Most notably, three of the presentations covered something called FBAR. Be forewarned, tax-exempt entities should be worried about FBAR, and sooner than latter. The critical filing deadline, which is independent of the filing deadline for the Form 990, is...
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Jack Siegel's book, A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good, has quickly become the go-to guide for nonprofit executives and advisors. So what are people saying about the Guide? In the October 2007 edition of the The Federal Lawyer, New York lawyer George W. Gowen and nonprofit authority, wrote:
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issued an June 30, 2009. THAT DEADLINE CANNOT BE EXTENDED.
FBAR stands for Report of Foreign Bank and Financial Accounts. Tax-exempt entities completing Form 990 will get their first inkling of FBAR when they complete Question 4a of Part V of the Core Form 990, which asks: At any time during the calendar year, did the organization have an interest in, or a signature or other authority over, a financial account in a foreign country (such as a bank account, securities account, or other financial account)? The organization must answer “Yes” if (i) the combined value of all such accounts was more than $10,000 at any time during the calendar year and the account was not with a U.S. military banking facility operated by a U.S. financial institution; or (ii) the organization owners more than 50% of the stock in any corporation that would answer “Yes” to (i). If the organization answers “Yes,” it is told to review the instructions and filing requirements for Form TD F 90-22.1. The instructions to Form TD-F 90.22.1 clarify the filing requirements. A form must be filed in when the entity owns more than a 50% interest in a partnership or trust that wold answer "Yes" to (i). There are exceptions to the FBAR reporting requirements, including ones for commercial banks, publicly-traded domestic corporations
In all likelihood, a small social services agency in a small town will not have or be deemed to have a foreign bank account, but the following organization’s do or are likely to have foreign bank accounts:
(i) A relief organization that provides relief in other countries.
(ii) An organization that has missionaries abroad.
(iii) An organization with employees abroad.
(iv) A college, university, or hospital that provides technical assistance to or that has joint operations with a foreign college or university.
(v) Organizations that fund foreign grants using a foreign bank account.
(vi) An organization that invests in a hedge fund through a blocker corporation.
(vii) An organization that invests in a partnership or joint venture if it holds a large enough interest in the investment.
We checked with the FBAR compliance desk about whether churches are required to file the FBAR report. Marion Formigan, BSA Tax Law Specialist of the SB/SE BSA Compliance Branch responded:
Forms required or exceptions allowed under Title 26, US Tax Code, do not apply to Title 31, Bank Secrecy Act, which governs the requirement to file the FBAR.
Yes, Churches are required to file the FBAR for foreign bank accounts they hold.
There are a number of key definitions, including:
A “foreign country” includes all geographical areas outside the United States, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, and the territories and possessions of the United States (including Guam, American Samoa, and the United States Virgin Islands).
A “financial account” includes any bank, securities, securities derivatives or other financial instruments accounts. The term includes any savings, demand, checking, deposit, or any other account maintained with a financial institution or other person engaged in the business of a financial institution. Individual bonds, notes, or stock certificates held by the filer are not a financial account nor is an unsecured loan to a foreign trade or business that is not a financial institution.
A financial account includes mutual funds and investment accounts.
A person has signature authority over an account if such person can control the disposition of money or other property in it by delivery of a document containing his or her signature (or his or her signature and that of one or more other persons) to the bank or other person with whom the account is maintained. Other authority exists in a person who can exercise power that is comparable to signature authority over an account by direct communication to the bank or other person with whom the account is maintained, either orally or by some other means.
More than one person can have the type of interest or authority over an account to trigger FBAR reporting requirements for each person. A person with the ability to address how an account is invested, but who does not have disbursement authority over the account does not have "other authority" over the account.
The FBAR is due by June 30th of the year following the year that the account holder meets the $10,000 threshold. As noted, but worth emphasizing, a grant by the the IRS of an extension to file the Form 990 does not extend the due date for filing an FBAR. There is no extension available for filing the FBAR. If an account holder does not have all the available information to file the return by June 30th, they should file as complete a return as they can and amend the document when the additional or new information becomes available.
The completed form is sent to:
U.S. Department of the Treasury
P.O. Box 32621
Detroit, MI 48232-0621
UNDER NO CIRCUMSTANCES IS THE FBAR TO BE FILED WITH THE ORGANIZATION’S TAX RETURN.
Failure to file an FBAR when required to do so may potentially result in civil penalties, criminal penalties, or both. If an organization learns that is was required to file an FBAR for earlier years, it should file the delinquent FBAR reports and attach a statement explaining why the reports are filed late. No penalty will be asserted if the IRS determines that the late filings were due to reasonable cause. Organizations should maintain records. Section 5321(a)(5)(A) of Title 31 to the United States Code authorizes a civil monetary penalty for any person who fails to file the FBAR report of an amount not to exceed $10,000. This penalty can be reduced when there is reasonable cause. If the failure is willful, the penalty cannot exceed the greater of 50% of the account balance at the time of violation, or $100,000. Penalties can be asserted for each violation.
The same Fbar form can be used to report multiple accounts. If the filer holds a financial interest in more than 25 accounts, check the yes box in item 14 and indicate the number of accounts in the space provided. Do not complete any further items in Part II or Part III of the report. Sign the form in item 44/45 and enter the date signed in item 46. Any person who lists more than 25 accounts in item 14 must provide all the information called for in Part II and Part III when requested by the Department of the Treasury.
Here is the bottom line: Curbing the evasion of U.S. tax through the use of secret foreign bank accounts has become a top priority of the IRS and the Justice Department. During the last several years, the U.S. has instigated investigations into these schemes and begun prosecutions. Most tax-exempt entities have very little incentive to evade taxes given their status. They most likely have foreign bank accounts for legitimate business reasons. Therefore the reporting requirements are more ministerial from their standpoint. Unfortunately, failure to report potentially brings them into contact with government officials who are actively pursuing wrongdoers and who likely have little feel for tax-exempt entities. In short, just because a charity is doing good may not shield it from harsh penalties.
Any entity that should have been filing FBAR reports in prior years, but that hasn't, should consult with legal counsel to determine how to bring themselves into compliance.
At this point, we should note that we are not experts on FBAR so no reliance should be placed on what we have written. This is a heads up, designed to cause people and organizations to seek the advice of professionals who are more familiar with these rules than we are.
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
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THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NONPROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL.
