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ChatGPT: What is FBAR? [Update]

United States v. Kelly, May 2, 2023

Originally published April 25, 2023.

Since this post was published, the U.S. District Court held similarly held that a taxpayer's willful violation of th FBAR rules was 'manifest from his actions' and awarded the government a summary judgment for nearly $1M. Among other items, the court noted that that the taxpayer requested that the foreign institution retain all account related correspondence instead of sending it to his address and failed to seek professional assistance even after being warned about possible U.S. legal issues by his foreign financial institution.

United States v. Kelly, 2023 WL 3212718 (E.D. Mich. May 2, 2023)

 

Experimenting with OpenAI's ChatGPT (Chat Generative Pre-trained Transformer) by asking it about the Foreign Bank Account Reporting (FBAR) filing requirements.

 

User prompt: What is FBAR? 

ChatGPT: FBAR stands for "Foreign Bank Account Report," which is a document that U.S. citizens and residents are required to file with the Treasury Department if they have a financial interest in, or signature authority over, one or more foreign financial accounts with a total value of $10,000 or more at any point during the calendar year. The FBAR is used to help combat tax evasion and money laundering by providing the Treasury Department with information about offshore financial accounts held by U.S. taxpayers. Failure to file an FBAR can result in significant penalties.

 

How do I file an FBAR? 

FBARs are filed electronically through the Financial Crimes Enforcement Network's (FinCEN) BSA E-Filing System. Here are the general steps to file an FBAR:

  1. Determine if you are required to file an FBAR: As mentioned earlier, you are required to file an FBAR if you have a financial interest in, or signature authority over, one or more foreign financial accounts with a total value of $10,000 or more at any point during the calendar year.
  2. Gather the necessary information: You will need to gather information about your foreign financial accounts, including the account number, name and address of the financial institution, type of account, and maximum account value during the year.
  3. Create an account with the BSA E-Filing System: To file an FBAR electronically, you will need to create an account with the BSA E-Filing System on the FinCEN website.
  4. Complete the FBAR form: Once you have created an account, you can access the FBAR form and complete it with the required information.
  5. Review and submit the FBAR: After completing the FBAR form, review it carefully to ensure that all information is accurate and complete. Once you are satisfied with the information provided, submit the FBAR electronically through the BSA E-Filing System.

It's important to note that thedeadline to file an FBAR is April 15th, but an automatic extension until October 15th is available upon request.

 

What happens if I am required to file and FBAR and I fail to file one? 

Failure to file an FBAR can result in significant penalties. The penalties for failing to file an FBAR can be severe and can include civil and criminal penalties.

Civil penalties can range from a non-willful penalty of up to $12,921 per violation to a willful penalty of up to the greater of $136,532 or 50% of the account balance per violation. The IRS can also impose a penalty of $500 per violation for each year that you failed to file an FBAR.

In addition to civil penalties, criminal penalties can also be imposed for willful failure to file an FBAR or willfully filing a false FBAR. Criminal penalties can include fines of up to $250,000 or five years in prison or both.

It's important to note that the IRS has a voluntary disclosure program that allows taxpayers who have failed to file an FBAR or report foreign income to come forward voluntarily and avoid the possibility of criminal prosecution. The program may also reduce the potential civil penalties that may be assessed.

 

What is a "willful failure" to file an FBAR?

A willful failure to file an FBAR occurs when a person who is required to file an FBAR knowingly and intentionally fails to do so. A willful failure to file an FBAR can result in both civil and criminal penalties.

Under the Bank Secrecy Act, a willful violation occurs when a person acts voluntarily and intentionally with knowledge that their conduct is unlawful. In the context of FBARs, a willful violation occurs when a person knows that they have an obligation to file an FBAR and intentionally chooses not to file or files a false FBAR.

Examples of conduct that may be considered willful include:

  • Intentionally not reporting foreign accounts or income on tax returns
  • Providing false information to the IRS or FinCEN
  • Transferring funds from a U.S. account to a foreign account to evade taxes or reporting requirements

It's important to note that the determination of whether a failure to file an FBAR is willful is based on the facts and circumstances of each case.

 

What case law defines "knowingly and intentially" failing to file an FBAR?

There have been several court cases that have addressed the issue of what constitutes a "willful" failure to file an FBAR. One of the most important cases is United States v. Williams, 489 Fed. Appx. 655 (4th Cir. 2012), in which the Fourth Circuit Court of Appeals affirmed the district court's finding that the defendant's failure to file an FBAR was willful.

In Williams, the defendant was a taxpayer who had an ownership interest in a foreign bank account that he did not report on his tax returns or on an FBAR. The defendant argued that he did not act willfully because he did not know that he was required to file an FBAR.

The court rejected the defendant's argument and found that the defendant acted willfully because he had knowledge of his reporting obligations and intentionally chose not to file an FBAR. The court noted that the defendant had extensive experience in the financial industry and had received advice from an accountant that he was required to report his foreign bank account.

Other court cases have similarly found that a taxpayer's knowledge of their reporting obligations is an important factor in determining whether a failure to file an FBAR was willful. It's important to note that each case is unique and the determination of whether a failure to file an FBAR was willful will depend on the specific facts and circumstances of the case.

Another notable case is United States v. McBride, the court found that the defendant's failure to file an FBAR was willful because he received specific warnings about his reporting obligations and knowingly chose not to comply with them.

Additionally, in United States v. Bussell, in which the court found that the defendant's failure to file an FBAR was willful because he had knowledge of his reporting obligation and took steps to conceal his account by creating a shell company to hold the account.

These cases illustrate the importance of complying with reporting obligations under the Bank Secrecy Act and the potential consequences of willfully failing to do so. It's always best to consult with a tax professional or attorney if you have any questions or concerns about your reporting obligations.

 

What was the holding in United States v. McBride?

In United States v. McBride, the court upheld the district court's finding that the defendant's failure to file a Foreign Bank Account Report (FBAR) was willful. The court found that the defendant had received multiple warnings from his tax advisor and the IRS about his reporting obligations, and that he had intentionally chosen not to comply with them.

Specifically, the court noted that the defendant had received a letter from his tax advisor informing him of the FBAR reporting requirements, and that he had also received several letters from the IRS reminding him of his reporting obligations. Despite these warnings, the defendant failed to file an FBAR for several years, and also failed to disclose his foreign bank account on his tax returns.

The court found that the defendant's conduct demonstrated a "conscious effort to avoid learning about reporting requirements" and a "deliberate avoidance of the truth." As a result, the court upheld the district court's finding that the defendant's failure to file the FBAR was willful and upheld the imposition of a penalty.

Overall, the case serves as a reminder of the potential consequences of failing to comply with reporting obligations under the Bank Secrecy Act, and the importance of seeking professional advice to ensure compliance.

 

What was the holding in United States v. Bussell?

In United States v. Bussell, the court held that the defendant's failure to file a Foreign Bank Account Report (FBAR) was willful, and upheld the imposition of a penalty.

The court found that the defendant had created a shell company to hold a Swiss bank account and had transferred funds to that account to conceal them from the IRS. The court also noted that the defendant had received professional advice that she was required to report the account on an FBAR, but had chosen not to do so.

The court rejected the defendant's argument that her failure to file the FBAR was not willful because she did not understand the law. The court noted that the defendant had taken affirmative steps to conceal her account and that her actions demonstrated a "conscious effort to avoid learning about reporting requirements" and a "deliberate avoidance of the truth."

Overall, the case serves as a reminder that the failure to file an FBAR can have serious consequences, and that individuals should seek professional advice to ensure compliance with the Bank Secrecy Act.

 

What Internal Revenue Code Sections cover the FBAR reporting requirements?

The FBAR (Foreign Bank Account Report) reporting requirements are not actually found in the Internal Revenue Code (IRC), but rather in the Bank Secrecy Act (BSA), specifically in 31 U.S.C. § 5314. However, the Internal Revenue Code does provide for civil and criminal penalties for noncompliance with the FBAR reporting requirements, under sections 5321 and 7203 of the IRC, respectively.

 

What is Internal Revenue Code section 7203?

Internal Revenue Code (IRC) section 7203 is a criminal provision that makes it a misdemeanor for any person to willfully fail to file a tax return, supply information, or pay any tax due. This section applies to all federal taxes, including income taxes, payroll taxes, and excise taxes.

The penalty for violating section 7203 is a fine of up to $25,000 and/or imprisonment for up to one year. This penalty is in addition to any civil penalties or interest that may be assessed for the underlying tax liability.

The willfulness requirement for a violation of section 7203 means that the failure to file, supply information, or pay tax must be intentional and not merely the result of negligence, oversight, or mistake. The government must prove beyond a reasonable doubt that the defendant acted willfully, and not just that they failed to file or pay.

Overall, section 7203 is an important criminal provision that helps to enforce compliance with the tax laws and ensures that individuals who intentionally fail to file or pay taxes are held accountable for their actions.

 

What is the IRS voluntary disclosure program that allows taxpayers who have failed to file an FBAR to avoid criminal penalties?

The IRS voluntary disclosure program is a program that allows taxpayers who have failed to file an FBAR and/or report foreign income on their tax returns to come forward and disclose their noncompliance. By doing so, they can avoid criminal prosecution and potentially reduce the civil penalties they may face.

There are several types of voluntary disclosure programs, including the Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Filing Compliance Procedures. The OVDP was a program that ended on September 28, 2018, but the Streamlined Filing Compliance Procedures are still available.

Under the Streamlined Filing Compliance Procedures, eligible taxpayers can file delinquent or amended tax returns and FBARs for up to three years and certify that their failure to file was non-willful. If the IRS accepts the taxpayer's submission, the taxpayer will generally only face civil penalties for their noncompliance.

It's important to note that the Streamlined Filing Compliance Procedures are only available to taxpayers who meet certain eligibility requirements. Taxpayers who knowingly or willfully failed to comply with their reporting obligations may not be eligible for the program and could face criminal prosecution.

 

How do taxpayers use the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns and FBARs?

Taxpayers who wish to use the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns and FBARs must follow these steps:

  1. File delinquent or amended tax returns: The taxpayer must file delinquent or amended tax returns for up to the past three years for which a tax return has not been filed, and must include all necessary information and schedules.
  2. File delinquent FBARs: The taxpayer must file delinquent FBARs for up to the past six years for which an FBAR has not been filed, and must report all foreign financial accounts that they own or have signature authority over.
  3. Certify non-willfulness: The taxpayer must certify that their failure to report foreign income and assets was non-willful. This means that they did not intend to hide assets or income from the IRS.
  4. Submit to the IRS: The taxpayer must submit all required tax returns and FBARs, along with the non-willful certification, to the IRS at the appropriate address.
  5. Pay any tax and interest due: If the taxpayer owes tax and interest as a result of their noncompliance, they must pay the full amount due. However, under the Streamlined Filing Compliance Procedures, they will generally not be subject to additional penalties.

It's important to note that taxpayers who wish to use the Streamlined Filing Compliance Procedures should consult with a tax professional to ensure that they meet all eligibility requirements and to help them prepare their submission to the IRS.

 

How does a taxpayer "certify non-willfulness" when using the Streamlined Filing Compliance Procedures to file a delinquent FBAR?

To certify non-willfulness when using the Streamlined Filing Compliance Procedures to file a delinquent FBAR, the taxpayer must provide a statement explaining why their failure to file was non-willful. The statement should include all relevant facts and circumstances that led to the noncompliance, and should address the following points:

  1. Reasonable cause: The taxpayer should explain any reasonable cause that led to the failure to file. For example, if the taxpayer was not aware of their reporting obligations, they should explain how they became aware of the requirements and why they did not file before.
  2. No intention to conceal: The taxpayer should explain that they did not intend to hide any foreign assets or income from the IRS. They should explain why they did not realize they were required to report the foreign financial accounts and assets on their FBAR.
  3. Good faith effort: The taxpayer should explain any good faith efforts they made to comply with their reporting obligations. For example, if they consulted with a tax professional or attempted to file the FBAR but encountered technical difficulties, they should explain these efforts.

The certification of non-willfulness should be made under penalty of perjury, and the taxpayer must sign and date the statement. The statement should be submitted along with the delinquent FBARs and tax returns to the IRS as part of the Streamlined Filing Compliance Procedures.