F-Bar

Report of Foreign Bank and Financial Accounts (FBAR)— TD F 90.22-1
The Currency and Foreign Transactions Reporting Act, otherwise known as the Bank Secrecy Act, was enacted in 1970 to address the fact that financial institutions in certain tax havens were being used by U.S. taxpayers to hide income, evade taxes and facilitate other illegal activities.1 The Bank Secrecy Act authorized the Department of Treasury to establish recordkeeping and filing requirements, and to promulgate regulations. Under 31 CFR §103.24(a), "each person subject to the jurisdiction of the United States (except a foreign subsidiary of a U.S. person) having a financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country shall report such relationship to the Commissioner of the IRS for each year in which such relationship exists, and shall provide such information as shall be specified in a reporting form … ."

The FBAR is designed to provide information for use in criminal, tax or regulatory investigations or proceedings, and to create leads that "facilitate the identification and tracking of illicit funds or unreported income, as well as providing additional prosecutorial tools to combat money laundering and other crimes."3 The information derived from the FBAR is entered into the Detroit Computing Center’s Currency and Banking Retrieval System database ("the Database") administered by the Financial Crimes Enforcement Network ("FinCEN") and the IRS.4
The Database can be accessed by various government agencies to assist in law enforcement efforts, including those "officers and employees of any constituent unit of the Department of Treasury who have a need for the records in the performance of their duties"; "any other department or agency of the United States upon the request of the head of such department or agency for use in a criminal, tax, or regulatory investigation or proceeding"; and "appropriate state, local, and foreign law enforcement and regulatory personnel in the performance of their official duties."5

An FBAR must be filed by any U.S. person having a financial interest in, or signatory or other authority over, financial accounts maintained with financial institutions in foreign countries if the aggregate balances of such foreign accounts exceed $10,000 at any time during the year. This directive has spawned much debate and more scholarly articles and "tax alerts" than one can imagine. It is not the purpose of this article to debate the finer points of who should file an FBAR; that discussion will last long past this writer’s deadline. Instead, we simply summarize the definitions.
A "U.S. person" includes any citizen or resident of the United States, or person in or doing business in the United States.6 For purposes of the FBAR, a "person" includes individuals and all business entities, trusts and estates. Prior to October 2008, the FBAR instructions identified a more narrow group of persons subject to FBAR filing requirements and the INTERNAL REVENUE MANUAL instructed examiners to follow those instructions when determining whether a person had an FBAR filing obligation.7
In October 2008, the IRS revised the FBAR instructions, expanding the definition of U.S. person to match 31 USC §5314 by adding "person in or doing business in the United States." This revision caused significant confusion among tax practitioners and other parties affected by the FBAR requirements. On June 5, 2009, the IRS issued Announcement 2009-51, which suspended the reporting obligation for any "person in or doing business in the United States," and returned to the prior definition.8
A "resident" of the United States is a "permanent resident," a term that is not defined in the FBAR instructions. The INTERNAL REVENUE MANUAL offers some assistance in this regard, noting that an individual can establish nonresidency by showing that he or she (i) does not hold a green card, (ii) does not meet the substantial presence test of Code Sec. 7701(b)(3), or (iii) has not made the first-year residency election under Code Sec. 7701(b)(4).9
A person has a "financial interest" in an account if the person is the owner of record or holds title to the account, regardless of how the account is titled or whether the account is maintained for that person’s own benefit. This includes persons acting as an agent, nominee or in some other capacity for a third party. A person who holds an account indirectly through ownership in a corporation (more than 50 percent of the shares by value or vote), a partnership (more-than-50-percent interest in the profits or capital), or a trust (present beneficial interest in more than 50 percent of the assets or receiving more than 50 percent of the current income) also holds a financial interest.
There has been significant discussion, and there remain unanswered questions, regarding the definitions of "financial interest" and "financial accounts," particularly with respect to interests in commingled funds.10 On August 7, 2009, in recognition of these concerns, the IRS issued Notice 2009-62 offering administrative relief for persons with a financial interest in a foreign financial account in which the assets are held in a commingled fund. For such persons, the deadline to file an FBAR for 2008 and earlier calendar years with respect to commingled funds is extended to June 30, 2010.
The following are examples provided by the IRS in its Workbook on Report of Foreign Bank and Financial Accounts:11
Example 1. John, a U.S. citizen who resides in Mexico, granted his brother Paul, a U.S. citizen, a Power of Attorney to access his Mexican bank accounts. Paul is the owner of record. John has a financial interest in the account. Paul is acting only as an attorney on behalf of John. Paul also has a financial interest in the account, since he is the owner of record. Both John and Paul must file an FBAR.
Example 2. Given the information in the above example, if Paul is a Mexican citizen, must he file the FBAR? No, Paul is not considered to be a U.S. person. Financial interest in an account also includes a corporation in which a U.S. person directly or indirectly owns more than 50 percent of the total value of the shares of stock.
Example 3. A Florida corporation that owns 100 percent of a foreign company that has foreign financial accounts has to file an FBAR because the corporation is a U.S. person and the owner of record or holder of legal title is a corporation that directly owns more than 50 percent of the total value of the shares of stock.
Example 4. A U.S. person who owns 75 percent of the Florida corporation in the previous example has to file an FBAR because he indirectly owns more than 50 percent of the total value of shares of stock of the foreign corporation.
A U.S. person has "signatory authority" if the person can control the disposition of the funds in the account by delivering a document containing his or her signature to the financial institution with which the account is maintained. "Other authority" expands to any exercise of power of the account by direct communication. For example, if Joe can direct a third party, who has signatory authority on the account, to withdraw funds for Joe’s benefit (or for the benefit of anyone else), Joe has "other authority" over the account.
"Financial accounts" include traditional bank accounts such as savings accounts, checking accounts, and time deposits, as well as securities accounts, such as mutual funds, brokerage accounts and securities derivatives accounts. Also included are commingled funds where the account holder owns an equity interest in the fund. The debate over whether hedge funds and private equity funds are included in the definition of "financial accounts" rages on. Due to those taxpayers and practitioners erring on the side of caution, the FBAR filings dramatically increased with the filings by thousands of U.S. persons who, within the scope of their employment, maintain signatory or other authority over a hedge fund. Anecdotally, one particular hedge fund filed more than 15,000 FBARs prior to June 30, 2009.12 As noted, on August 7, 2009, the IRS issued Notice 2009-62, extending the FBAR filing date to June 30, 2010, for U.S. persons having signatory authority over, but no financial interest in, a foreign financial account, and for U.S. persons with financial interest in, or signatory authority over, foreign commingled funds. The IRS’s ultimate decision on this issue remains to be seen, and additional notices certainly may be issued once again changing the landscape in this area. Finally, at least one court has held that an account similar to a capital account in a foreign corporation constitutes a "financial account" where the U.S. person was able to direct the disbursement of funds by a Swiss financial company charged with maintaining the books and records related to the capital account.13
So when is a financial account "foreign"? A financial account is "foreign" if the account’s geographic location is outside the following jurisdictions:
• United States
• Northern Mariana Islands
• District of Columbia
• American Samoa
• Guam
• Puerto Rico
• U.S. Virgin Islands
• Trust Territories of the Pacific Islands
An account opened with Bank of America’s branch overseas constitutes a foreign account, but an account with the New York branch of an international bank does not. U.S. persons with accounts at U.S. military banking facilities or financial institutions designated to serve the U.S. government overseas are not subject to FBAR filing requirements.
Certain individuals are exempt from FBAR filing requirements as long as they have no personal financial interest in the account at issue. These include "officers or employees of a bank under the supervision of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, or the Federal Deposit Insurance Corporation," and "officers or employees of a domestic corporation whose equity securities are listed on national securities exchanges, or which has assets exceeding $10 million and 500 or more shareholders of record."14 The corporate officers and employees must receive written notice from the chief financial officer of the corporation that the corporation has filed a current FBAR that includes the account at issue.
What Information Is Required?
Having now established "who," we turn to the question of "what" information must be provided on the FBAR. The TD F 90.22-1 is generally self-explanatory and providing the basics should not present a problem: name, address, Social Security number, date of birth, name on account, financial institution and its location, account number, etc.
The request that causes some concern is for the "maximum value of the account" during the calendar year. Let’s begin with the instructions, which define the maximum value of an account as "the largest amount of currency or non-monetary assets that appear on any quarterly or more frequent account statement issued for the applicable year." In cases where periodic account statements are not issued, the instructions appear to penalize the filer by requiring the largest amount of currency and nonmonetary assets in the account on any given day during the year. The instructions raise a myriad of questions. For example, if an account contains stock and currency, can you choose between using periodic statements and valuing at year end? And if you withdraw foreign currency, do you use the exchange rate at year end, at the time of the withdrawal, or based on the date of a periodic statement? The answers to these questions are sure to be debated during FBAR penalty discussions.
Of course, if you don’t have periodic statements, the obvious question is how to determine the largest value at any time during the year. Many practitioners are simply using the information available—such as year end statements—and expressly noting the source of the maximum account value on the face of the FBAR.
For accounts holding foreign currency, filers are directed to use the official exchange rate at the end of the year. For currency with multiple exchange rates, use the rate for converting to U.S. dollars at year end. Stocks, other securities and nonmonetary assets should be valued at year end, unless withdrawn from the account during the year in which case the filer should use the fair market value at the time of the withdrawals.
When and Where the FBAR Is Filed
The FBAR must be received by the IRS by June 30 of the year following the calendar year in which the U.S. person is subject to the FBAR filing requirements. Because the FBAR is not a form required by the Internal Revenue Code, the mailbox rule ("timely mailing is timely filing") of Code Sec. 7502(a)(1) does not apply. An FBAR is not filed with the taxpayer’s income tax return. Instead, the FBAR must be filed by mailing it to the Department of Treasury, P.O. Box 32621, Detroit, MI 48232-0621; hand delivering it to any IRS office; or delivering to a tax attaché at a U.S. embassy. To verify filing, filers may call the Detroit Computing Center Hotline at (800) 800-2877.
Record Keeping Requirements
FBAR filers are required to maintain certain records for five years from the due date of the FBAR.15 These records include the name in which each account is held or maintained; the number or other designation of the account; the name and address of the foreign financial institution with which the account is maintained; the type of account; and the maximum value of each account during the reporting period.16 Filers can request verification and/or a copy of an FBAR filed 60 days after the date of filing by making a written request (and paying a nominal fee) to the IRS Detroit Computing Center, P.O. Box 32063, Detroit, MI 48232, Attn: Verification.
The five-year retention period does not include any period in which the taxpayer is under indictment or subject to an information filed with respect to filing a false federal income tax return, or failing to file a federal income tax return, ending with the final disposition of the criminal proceeding.17
Enforcement and Delegation
The IRS was initially authorized to investigate possible civil FBAR violations, while enforcement was delegated to FinCen.18 On April 10, 2003, in a Memorandum of Understanding, FinCen delegated its authority to enforce the provisions of 31 USC §5314 and 31 CFR §§103.24 and 103.32 to the IRS.19 The IRS is now authorized to do the following:20
• Investigate possible civil violations of these provisions
• Assess and collect civil FBAR penalties
• Employ the summons power of Subpart F of part 103
• Issue administrative rulings under Subpart G of part 103
• Take any other action reasonably necessary for the enforcement of these and related provisions, including pursuit of injunctions
In addition, the IRS Criminal Investigation Division (CID) has had the authority to examine for criminal FBAR violations since 1992, with expanded authority to investigate money laundering offenses under "18 U.S.C. §§1956 and 1957 where the underlying conduct is subject to investigation under Title 26 or under the [Bank Secrecy Act]."21
Penalties
Prior to the American Jobs Creation Act of 2004 (P.L. 108-357) (AJCA), trades or businesses committing negligent FBAR violations were subject to general penalties under the Bank Secrecy Act (31 USC §5321(a)(6)) up to $500 per violation and an additional penalty of up to $50,000 for a pattern of negligent violations. For willful violations, the IRS could impose a minimum FBAR penalty of $25,000 and maximum penalty of $100,000.22 Although Reg. §1.6664-4, Reasonable Cause and Good Faith Exception to Code Sec. 6662 penalties, does not apply, the IRM directs examiners to that regulation and describes it as "useful guidance in determining the factors to consider" when determining whether the negligence penalties should apply.23
The AJCA added a new penalty for nonwillful FBAR violations occurring after October 22, 2004, up to $10,000 for each nonwillful failure to file, and dramatically increased the penalties for willful violations.24 The penalties may be imposed for each foreign account, for each year, and for each violation. The current penalties, shown in Chart 1, are from the IRS Web site.25
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Nonwillful Penalties and Reasonable Cause
The government is statutorily barred from imposing FBAR penalties if the FBAR violation is due to reasonable cause and "the amount of the transaction or the balance in the account at the time of the transaction was properly reported."26 While it may appear that the reasonable cause exception does not apply unless an FBAR is filed, the IRS clearly states that the reporting requirement under the reasonable cause exception "means that the examiner must receive the delinquent FBARs from the nonfiler in order to avoid application of the non-willfulness penalty."27 In guidance issued to the Large and Mid-Sized Business (LMSB) division on October 31, 2008, the IRS stated: "However, no [civil FBAR] penalty will be assessed if there is reasonable cause for not filing the FBAR."28 In addition, "examiners are to use discretion, taking into account the facts and circumstances of each case, in determining whether a warning letter or penalties that are less than the total amounts provided for in the mitigation guidelines are appropriate."29 "The sole purpose for the FBAR penalties is to serve as a tool to promote compliance with respect to the FBAR reporting and recordkeeping requirements."30
Under the IRS Offshore Voluntary Disclosure Initiative announced on March 23, 2009, the IRS will not impose penalties on taxpayers who reported and paid tax on all their taxable income, including the income from the foreign accounts, for prior years but did not file the FBARs.31
Mitigation
It will come as no surprise that no reasonable cause exception exists for willful violations.32 Prior to the enactment of the AJCA, the IRS issued Guidelines for Calculation of the FBAR Civil Penalty for Willful Violations, which instructed IRS employees to consider the following as grounds for imposing less than the maximum penalty:33
• No history of past FBAR penalty assessments exists.
• No money in the foreign account was from an illegal source or used for a criminal purpose (based on available information—the revenue agent is not required to conduct a criminal investigation).
• The person is cooperating with the IRS.
• A civil fraud penalty has not been asserted against the person for an underpayment of tax that was connected to the person’s failure to file the FBAR.
The maximum penalty was the amount in the foreign account at the time of the violation up to $100,000, unless the maximum amount in the account at the time of the violation was less than $25,000 (in which case the maximum penalty was $25,000).34
If a person satisfied the mitigation criteria for violations before October 23, 2004, IRS examiners were instructed to impose penalties as follows:35
• Level I—If the highest aggregate balance for all unreported accounts does not exceed $20,000, the penalty is five percent of the maximum balance during the year for each of the unreported accounts.
• Level II—If the maximum balance of an unreported account does not exceed $250,000, the penalty is 10 percent of the maximum amount during the year for each unreported account. The maximum Level II penalty is $25,000.
• Level III—If the maximum balance of an unreported account is greater than $250,000 but does not exceed $1 million, the penalty is the lesser of:
• (a) 10 percent of the maximum amount in each unreported account during the year, or
• (b) the amount in the account as of the last day for filing the FBAR, unless this amount is less than or equal to $25,000 (in which case the penalty is $25,000, the maximum penalty in such cases, under section 5321).
Level IV—If the maximum balance of an unreported account is greater than $1 million, The amount of the penalty is the lesser of:
• (a) $100,000 for each unreported account; or
• (b) the amount in the account as of the last day for filing the FBAR unless this amount is less than $25,000 (in which case the penalty is $25,000).
For violations occurring after October 22, 2004, the IRS notes that discretion in determining the amount of FBAR penalties has been delegated to the FBAR examiner, who "may determine that the facts and circumstances of a particular case do not justify a penalty."36 The mitigation criteria for violations occurring after October 22, 2004, follow:37
• The person has no history of criminal tax or BSA convictions for the preceding 10 years and has no history of prior FBAR penalty assessments.
• No money passing through any of the foreign accounts associated with the person has been from an illegal source or used to further a criminal purpose.
• The person cooperated during the examination.
• IRS did not determine a fraud penalty against the person for an underpayment of income tax for the year in question due to the failure to report income related to any amount in a foreign account.
According to the INTERNAL REVENUE MANUAL, in cases where an FBAR violation occurred but no penalty is appropriate, the examiner will issue the FBAR warning letter—Letter 3800. In cases where a penalty is warranted, the INTERNAL REVENUE MANUAL directs the examiner to consider the post–October 22, 2004, mitigation guidelines to promote uniformity, but does not require that the guidelines be strictly applied.38 The examiners are instructed to consider the following:39
• Whether compliance objectives would be achieved by issuance of a warning letter
• Whether the person who committed the violation had been previously issued a warning letter or has been assessed the FBAR penalty
• The nature of the violation and the amounts involved
• The cooperation of the taxpayer during the examination
The examiner’s work papers must document the mitigating factors, and his or her decision is subject to manager approval.
Burden of Proof
To establish a willful violation for purposes of the civil FBAR penalty under 31 USC §5321 or to sustain the heavy burden of proof to obtain a criminal conviction under 31 USC §5322, the government must establish "a voluntary intentional violation of a known legal duty."40 The government must prove that the taxpayer was aware of the requirement to file the FBAR and intentionally failed to do so (or filed a false FBAR).41 Short of a concession or a confession, the government will rely on circumstantial evidence and infer willfulness based on a course of conduct.42
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In Sturman, the defendant was convicted of willfully failing to maintain records and file FBARs. The Sixth Circuit affirmed the conviction, holding that the government proved willfulness through circumstantial evidence.43 Specifically, Sturman "concealed his signature authority, his interests in various transactions, and his interest in corporations transferring cash to foreign banks."44 The court also noted that Sturman admitted knowledge of and failure to answer a question concerning signature authority at foreign banks on Schedule B of his income tax return.45 Since Schedule B made specific reference to a "booklet" that referenced the duty to file an FBAR, the court found:46
... that the defendant could have learned of the additional requirements quite easily. It is reasonable to assume that a person who has foreign bank accounts would read the information specified by the government in tax forms. Evidence of acts to conceal income and financial information, combined with the defendant’s failure to pursue to knowledge of further reporting requirements as suggested on Schedule B, provide a sufficient basis to establish willfulness on the part of the defendant.
Of interest is the government’s use of records obtained from Switzerland under the Treaty Between the United States of America and the Swiss Confederation on Mutual Assistance in Criminal Matters.47 In addressing Sturman’s objection to the government’s request and ultimate use of the Swiss records, the court analyzed the Treaty and found that Sturman’s constitutional rights to privacy and due process had not been violated. Sturman also objected to the use of depositions taken of four Swiss bank officials in Switzerland on due process grounds. The Sixth Circuit affirmed the district court’s finding that the foreign depositions were taken and introduced in accordance with Federal Rule of Criminal Procedure 15(d).48
In considering whether to impose the civil penalty for willful violations, the IRS will use the same criteria established for the civil fraud penalty under Code Sec. 6663, and bear the same burden of proving willfulness by clear and convincing evidence.49 To assist in their review, FBAR examiners may request a wide range of documents, from the tax returns to correspondence with investment managers and brokers.50
Unlike assessments of tax or civil tax penalties, there is no presumption of correctness in connection with the imposition of FBAR penalties.51 Similarly, Code Sec. 7491(c), which imposes on the IRS the burden of production with respect to all penalties and additions to tax asserted under Title 26, does not apply to the FBAR penalty.
Statute of Limitations for Civil FBAR Penalties
The IRS has six years after "the transaction with respect to which the penalty is assessed" to assess a civil penalty related to an FBAR violation. [31 USC §5321(b)(1).] While the civil statutes on assessment and collection of the FBAR penalty can be waived, a waiver of limitations for purposes of a Title 26 audit will not extend the limitations with respect to the FBAR penalties.52 The IRS has two years from the later of the date of assessment or the date any judgment becomes final in a criminal action involving the same transaction that resulted in the penalty, to sue to recover the civil penalty.53 The FBAR assessment date is the date the IRS stamps the Form 13448.54
FBAR Examination Procedures
The procedures for FBAR examinations are unlike those established for tax cases under the Internal Revenue Code and regulations. The IRS instructs an examiner to set up a separate FBAR file if an FBAR violation has occurred, regardless of whether the examiner intends to assert penalty.55 The first step is to determine if an FBAR should have been filed, whether it was in fact filed, and what records have been retained.56 If a revenue agent conducting a Title 26 audit seeks information regarding potential FBAR violations, the agent must obtain a "relevant statute memorandum" (Form 13535) (RSM) signed by a Territory Manager before the information from the tax examination can be obtained and used in the FBAR investigation.57 An RSM is required because the audit involves information subject to the disclosure rules of Code Sec. 6103. In a pure Bank Secrecy Act (BSA) investigation, no RSM is required, but the examiner is also prevented from accessing Code Sec. 6103 protected information using the IRS databases.
In the October 2008 Guidance to LMSB, the IRS noted the need to "heighten awareness among LMSB personnel" of the FBAR reporting requirements.58 The memorandum noted that while FBAR filings had increased from 205,000 in 2003, to more than 322,000 in 2007, based on available information, the IRS believed that "as many as one million U.S. taxpayers are required to file the FBAR in any given year." LMSB examiners were advised to determine the existence of foreign bank accounts and whether an FBAR was required, whether the records were being maintained, whether the income was being reported and whether any FBAR violations were in furtherance of Title 26 offenses.
The RSM is the "initial input document for the monitoring of FBAR cases."59 It is a "good faith determination" by the revenue agent, group manager and Territory Manager that "the apparent FBAR violation was in furtherance of an apparent Title 26 violation."60 If the Territory Manager determines that the FBAR violations are not in furtherance of a Title 26 violation, this determination terminates the examiner’s FBAR responsibilities.61 The RSM is placed in the audit file and the FBAR examination will not be pursued.62 If the Territory Manager believes that the FBAR violation was in furtherance of a Title 26 violation, the FBAR investigation will proceed.63
In requesting the administrative files related to FBAR penalties pursuant to the Freedom of Information Act, it is important to know what should be there. In a Bank Secrecy Act investigation, the examiner is instructed to use the Title 31 FBAR lead sheet to commence the investigation. If the examiner finds an FBAR violation, he or she must establish a separate file, distinct from the Bank Secrecy Act file, since the FBAR penalties are imposed by the IRS, while non–FBAR-related Bank Secrecy Act penalties are assessed by FinCEN.64 An FBAR examination case file may include the following documents:
• Agent Activity Record—FBAR Activity Code 545
• Related Statute Determination, if appropriate
• FBAR lead sheet and work papers
• Brief summary memorandum explaining any FBAR violation(s)
• Copy of any delinquent FBAR(s) annotated in red on the top "Secured by Examination"
When the FBAR examination is closed, the following documents should be added to the file (where applicable):65
• FBAR Monitoring Document (FMD), providing closing information for the FBAR database
• Letter 3800, Warning Letter for Apparent Foreign Bank and Financial Accounts Report Violations
• Letter 3709, FBAR 30-Day Letter (transmitting Agreement for Assessment and Collection, F-13449)
• Form 13449, Agreement to Assessment and Collection of Penalties Under 31 USC §§5321(a)(5) and 5321(a)(6)
• Notice 1330, Information on Making FBAR Penalty Payment by Check
• Power of Attorney (Form 2848) or general power of attorney
• Form 13448, Penalty Assessments Certification Summary
• Letter 3708, Notice and Demand for Payment of FBAR Penalty
• Notice 1330, Information on Making FBAR Penalty Payment by Check
Examiners have various resources within the IRS when in need of assistance with an FBAR investigation, including Technical Services FBAR specialists, SB/SE Counsel Area FBAR Coordinators (and other SB/SE attorneys), and Bank Secrecy Act FBAR Analysts. If an examiner is seeking information that is limited to Bank Secrecy Act violations, he may not issue a Title 26 summons; he is limited to a Bank Secrecy Act summons (TD F 90.22-31). If the case also involves a tax related offense, a Title 26 summons may be used.66 Under either option, if a taxpayer refuses to comply, the examiner will consult with Counsel with regard to summons enforcement action under Code Sec. 7604.
If the examiner decides that a FBAR penalty is appropriate, and either has opted not to refer the case to Criminal Investigation or a referral was declined, the examiner determines the penalty based on the FBAR penalty Guidelines and submits the case file to SB/SE Counsel Area FBAR Coordinator for review.67 If Counsel finds that a penalty should not be asserted, the memorandum should state the basis for disagreement with the examiner and whether further investigation is recommended. If Counsel agrees with the examiner, he or she will prepare a memorandum recommending the issuance of a Letter 3709 (the FBAR 30-day letter) and stating the basis for that decision to assist in the event the taxpayer appeals.
With the approval of Counsel, the examiner issues a Letter 3709 and Form 13449 (FBAR Agreement to Assessment and Collection), which also serves as the examiner’s report and the basis for the assessment.68 If the taxpayer agrees to the penalty, he or she may file the delinquent FBARs and send in full payment of the penalty within 30 days of the date on the Letter 3709 without incurring interest.69 If the taxpayer fails to pay within 30 days of the date of the notice, interest will accrue from the date of assessment and a six-percent delinquency penalty will be assessed based on the amount of penalty that remains unpaid 90 days after the notice date.70 If the taxpayer is unable to pay the penalty in full, a Letter 3708 (Notice and Demand for Payment of FBAR Penalty) will be issued reflecting the interest accrued.
Administrative Appeal Rights
If the taxpayer does not agree with the penalty, the taxpayer has 30 days from the date of the Letter 3709 to file an appeal. The written protest is filed with the examiner and must be postmarked by the deadline set forth in the Letter 3709.71 The examiner forwards the file to his or her group manager, who then sends the file to Appeals.72 The Appeals Officer assigned to the case will contact the Appeals FBAR Coordinator prior to scheduling the initial appeals conference with the taxpayer, and will follow the IRS Foreign Bank and Financial Account Requirements Guidance for Appeal Officers.73 If the case involves both FBAR reporting violations and Title 26 offenses, the examiner may choose to hold the FBAR case until the tax issues are resolved.74 The INTERNAL REVENUE MANUAL cautions the examiner to monitor the period of limitations.75
FBAR penalties are considered an Appeals Coordinated Issue, Category of Case (ACIcc) and are listed on the Appeals Technical Guidance Issues Index (July 2009). The IRS defines an Appeals Coordinated Issue (ACI) or ACIcc as:76
An issue or category of case, is an issue of Service-wide impact or importance that requires Appeals’ coordination to ensure uniformity and consistency nationwide. This is achieved through the coordination of efforts between Appeals Officers (AO) and designated Appeals Technical Guidance Coordinators (TGC). The ACI program encompasses legal issues and factual issues and category of case.
When an Appeals Officer is assigned a case involving an ACI, as opposed to an ACIcc, he or she is required to consult with the TGC prior to scheduling the initial conference to obtain current information. Since the FBAR penalty appeals are considered an ACIcc, not an ACI, the TGC need not review and concur with any settlement proposals before the Appeals Officer discusses the proposal with the taxpayer.
Judicial Review (U.S. Tax Court)
In J.B. Williams III, the U.S. Tax Court held that it does not have jurisdiction to review the IRS’s decision to impose an FBAR penalty. The court noted that the FBAR penalties arise under Title 31, and are not subject to the deficiency procedures under Code Secs. 6212–6214.77 The court acknowledged that if a taxpayer receives a Final Notice of Intent to Levy under Code Sec. 6331 or Notice of Federal Tax Lien under Code Sec. 6321 with respect to an assessable penalty not otherwise subject to deficiency procedures under Code Sec. 6212, and files a timely Collection Due Process appeal under Code Sec. 6330 or 6320, a resulting notice of determination issued by the IRS Appeals Office would be subject to the court’s review.78 However, unlike other assessable penalties, the FBAR penalty does not fall within the scope of the collection procedures under Title 26 and therefore, there is no opportunity to file a collection due process appeal or seek the Tax Court’s review.79
With the door to the Tax Court firmly closed, those persons facing FBAR penalties appear to be left with two options to obtain judicial review. Either pay the penalty and file a refund suit, or wait until the government files suit in district court to collect the penalty and challenge the assessment.80
Suits to Collect the FBAR Penalty
The government has two years from the date of assessment of the FBAR penalty to file suit to collect in U.S. district court.81 In Simonelli,82 the government filed a complaint seeking a judgment for the FBAR penalty, accrued interest and the failure to pay penalty that arises under 31 USC §3717(e)(2). Simonelli conceded liability for the FBAR penalty but argued that the liability was discharged in his bankruptcy. After rejecting this contention, an issue addressed in greater detail infra, the district court entered judgment on behalf of the United States.
It appears that a person assessed with the FBAR penalty may challenge liability in response to a suit to collect. An exception would arise in cases where the FBAR penalty was assessed following a criminal conviction under 31 USC §5322 for willful failure to file an FBAR penalty. In such a case, it appears clear that the person against whom the penalty is assessed would be estopped from challenging liability in a later civil proceeding. For those individuals and entities that are permitted to challenge liability, it appears that there is a right a jury trial.83
Dischargeability of FBAR Penalty
In Simonelli, the government moved for summary judgment on the issue of whether the FBAR penalty was subject to discharge in bankruptcy. It argued that the penalty is a civil penalty and therefore excepted from discharge under 11 USC §523(a)(7), which provides that a debtor will not be discharged from any debt "for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty."
The court agreed, noting that 11 USC §523(a)(7) "creates a broad [exception to discharge in bankruptcy] for all penal sanctions, whether they be denominated fines, penalties, or forfeitures. Congress included two qualifying phrases; the fines must be both ‘to and for the benefit of a governmental unit,’ and ‘not compensation for actual pecuniary loss.’"84 There are two types of tax penalties that are specifically excluded from this broad exception to discharge: certain kinds of "tax or customs dut[ies]" listed at 11 USC §523(a)(1), and penalties for taxes that are "imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition."85
Simonelli argued that the FBAR penalty is a tax penalty that, in this case, was "imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition."86 He asserted that the FBAR penalty was assessed "in lieu of assessing taxes on him because his failure to file the FBAR deprived the IRS of any information about his foreign bank transactions, making it impossible for the IRS to know how much tax to assess on him."87 Simonelli maintained that "the FBAR penalty is a tax penalty because the IRS uses it to penalize persons who fail to file FBARs, frustrating the IRS’s ability to track, assess and collect their would-be taxes."88
The court rejected these arguments, finding that the FBAR penalty is a civil penalty under the BSA, not a tax or tax penalty, and nothing ties the amount of the FBAR penalty to an amount of tax due.89 Accordingly, the court held that the FBAR penalty is not subject to discharge in bankruptcy.
If a taxpayer is under an FBAR examination at the time the taxpayer files for bankruptcy, the IRS will notify the IRS Insolvency Unit and then complete the FBAR examination. The Insolvency Unit will file the proof of claim and collection will be handled by Financial Management Service (FMS).90
Criminal Violations
In addition to substantial civil penalties, a willful violation of the FBAR reporting requirements is subject to a maximum term of imprisonment of five years, a maximum fine of $250,000, or both.91 If the defendant violates any other U.S. law or if the violation was part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, the penalties are increased to a fine of not more than $500,000 and imprisonment of not more than 10 years.92 Willful violations of 31 USC §5314 can also result in charges for false statements under 18 USC §1001, for filing false returns under Code Sec. 7206(1),93 or for evasion under Code Sec. 7201.94 Each FBAR filing or lack thereof constitutes a separate violation and is subject to a five-year statute of limitations.95
In Clines,96 Thomas Clines participated in a covert operation supervised by Air Force Major General Richard V. Secord to provide arms and ammunition to the Nicaraguan Contras ("the Iran Contra affair"). Secord also enlisted Albert Hakim, who retained Compagnie de Services Fiduciaires S.A. ("CSF"), a Swiss company offering financial and investment management services, to form shell corporations to collect funds to finance the weapon purchases. CSF also invested funds in bonds, securities and commodities. Clines’ compensation was a percentage of the profits. Secord and Hakim calculated the profit after each sale and directed CSF to credit Clines’ share to "TC capital account," a ledger account of one of the shell corporations.
After the funds were credited to the TC capital account, Clines was able to direct CSF to withdraw or transfer funds on his behalf. CSF would record the request on the TC capital account ledger and disburse the funds in accordance with Clines’ instructions. Clines did not report all of these earnings on his income tax return and did not file FBARs with respect to the TC capital account.
Clines was convicted of filing false tax returns in violation of Code Sec. 7206(1), and failing to file FBARs in violation of 31 USC §5314. On appeal, Clines argued that the shell corporation holding the TC capital account was not a "financial institution"; that the TC capital account was not an "other financial account"; and that he had no reportable "financial interest in, or signature or other authority over" the TC capital account.
The Fourth Circuit held that CSF, not the shell corporation, constituted a financial institution for purposes of the FBAR requirements because it held funds for third parties, invested those funds on their behalf, and disbursed or wired funds at their direction. In offering these services, CSF functioned as a bank,97 an "investment banker or investment company,"98 and "a licensed sender of money."99 The court also rejected Clines’ contention that the TC capital account was merely a bookkeeping entry on a corporate ledger and therefore, was not an "other financial account" within the meaning of 31 USC §5314, since the broad definition of "other financial account" includes "any other account maintained with a financial institution or other person who accepts deposits, exchanges or transmits funds."100 Finally, the court found no merit in the claim that Clines lacked a "financial interest" in the TC capital account since he had no control over the funds until Secord and Hakim allocated his share of the profits.101 Based on Clines’ ability to direct CSF to wire or transfer the funds at his direction, the court found that the definition of "financial interest" in FBAR Instruction H was satisfied.102
International Information Returns
U.S. persons are required to file certain information returns depending on their interests in, control over, transfers to or distributions from foreign corporations, partnerships, other entities and trusts. Penalties are imposed under various sections of the Internal Revenue Code for failure to file or filing incomplete or inaccurate required returns. Most of these penalties are considered "assessable penalties" that are not subject to the deficiency procedures under Code Sec. 6211. The IRS may assess such penalties without prior notice, although the INTERNAL REVENUE MANUAL provides that examiners should (not must) inform the taxpayer prior to assessing the penalties.103 To make matters worse, these penalties generally have no statute of limitations for assessment.104 With that cheery opening, we review some of the information returns frequently required with offshore accounts.
Form 5471—Information Return of U.S. Persons with Respect to Certain Foreign Corporations
The Form 5471 must be filed by U.S. persons that have a certain level of control (i.e., officers, directors or shareholders) of certain foreign corporations to report information required by Code Secs. 6038 and 6046. This information includes foreign corporation entity data, stock ownership data, financial statements and intercompany transactions with related persons.105 The taxpayer must report the information required by Code Secs. 6038 and 6046, and must compute income from controlled foreign corporations under Code Secs. 951–964. The Form 5471 must be filed with a taxpayer’s income tax return.106
Persons subject to the Form 5471 reporting requirements fall within five filing categories.107 Penalties imposed for failure to file complete and accurate Forms 5471 are outlined in Code Sec. 6046 (filing category 2 and 3) and Code Sec. 6038 (filing category 4).108
Penalties
Any person who fails to report information required by Code Sec. 6046 on a Form 5471 (filing category 2 and 3) is subject to a $10,000 penalty per reportable transaction.109 Failing to report information required by Code Sec. 6038(a) (filing category 4 and 5), results in a similar penalty of $10,000 for each Form 5471 that is filed after the due date of the income tax return (including extensions) or that does not include the complete and accurate information described in Code Sec. 6038(a).110
If the required information is not provided within 90 days of a notice from the IRS of such failure (a "notice letter"), an additional penalty of $10,000 will be imposed for each 30-day period, or fraction thereof, during which the failure continues up to a maximum of $50,000 per return (the "continuation penalty").111
Continuation penalties apply to many of the information returns addressed in this article. Examiners are instructed to issue notice letters "at the earliest date possible."112 Examiners also may send reminder letters 45 days after a notice letter is issued.113 If no response is received, the penalty is assessed with manager approval.114
In addition to the foregoing, U.S. persons failing to file a required Form 5471 will be subject to a 10-percent reduction of the foreign tax credit available under Code Secs. 901, 902 and 960.115 If the IRS mails a notice of the delinquency to the taxpayer, and the taxpayer fails to correct the problem within 90 days, an additional reduction of five percent will be imposed for each three-month period, or fraction thereof, that the failure continues, subject to limitations set forth in Code Sec. 6038(c).
In addition to the foregoing penalties, failure to file a complete and accurate Form 5471 will extend the period of limitations on assessment and collection of any tax imposed with respect to any event or period to which the Form 5471 applies to three years after the date on which the required information is reported.116
Since January 1, 2009, the IRS Service Center has been automatically asserting penalties with regard to taxpayers that file late Forms 1120 with Forms 5471 attached.117 Information return penalties that are not subject to deficiency proceedings are assessed on a Form 8278 with a Form 886-A attached.118
When imposing information return penalties, examiners are advised to send the initial assessment package between 125 and 150 days after the notice letter has been issued. The penalty assessed will include the initial penalty, plus two months of the continuation penalty.119
Reasonable Cause
Penalties for failure to timely file a complete and accurate Form 5471 may be avoided or abated for reasonable cause. The requirements for establishing reasonable cause are set forth in Reg. §1.6038-2(k)(3)(ii):120
To show that reasonable cause existed for failure to furnish information as required by section 6038 and this section, the person required to report such information must make an affirmative showing of all facts alleged as reasonable cause for such failure in a written statement containing a declaration that it is made under the penalties of perjury. The statement must be filed with the district director for the district or the director of the service center where the return is required to be filed. The district director or the director of the service center shall determine whether the failure to furnish information was due to reasonable cause, and if so, the period of time for which such reasonable cause existed. In the case of a return that has been filed as required by this section except for an omission of, or error with respect to, some of the information required, if the person who filed the return establishes to the satisfaction of the district director or the director of the service center that the person has substantially complied with this section, then the omission or error shall not constitute a failure under this section.
An examiner should consider reasonable cause prior to assessing any information return penalty.121 "Examiners must consider any reason a taxpayer provides in conjunction with the guidelines, principles and evaluating factors relating to reasonable cause based on the facts and circumstances."122 A taxpayer must be in full compliance before reasonable cause will be considered.123
IRS Campus employees are authorized to abate information return penalties that are assessed by the Campus. Other abatements must be approved by the organizational unit that asserted the penalty (LMSB or SBSE Examination).124
With respect to Form 5471 penalties, the IRS has taken the position that "[a]ny person required to file Form 5471 and Schedule J, M, or O who agrees to have another person file the form and schedules for him or her may be subject to the above penalties if the other person does not file a correct and proper form and schedule."125
In late 2008, the IRS issued recommendations for seeking reasonable cause relief with respect to amended Forms 5471. For amended Forms 5471 filed with Forms 1120 after December 31, 2008, the IRS recommends that taxpayers wait to submit any request for reasonable cause relief until the IRS notifies the taxpayer that penalties will be proposed. For amended Forms 5471 filed with other income tax returns, the IRS suggests that taxpayers attach a statement titled "Reasonable Cause 5471" to the return.126
Post-Assessment Review and Reconsideration
Persons against whom information return penalties have been imposed may seek reconsideration of the penalty determination.127 The examiner is advised to determine whether all relevant facts were considered and, in appropriate cases involving hardship or specific requests for referral to the Taxpayer Advocate Service, to refer to the TAS Guidelines for Referral or TAS Criteria.128
Under Code Secs. 6320 and 6330, after the IRS files a Notice of Federal Tax Lien under Code Sec. 6321 and prior to the IRS issuing a Notice of Levy under Code Sec. 6331, a person is entitled to notice and a hearing with respect to the collection action. If the Appeals Office issues an adverse notice of determination with respect to a timely collection appeal, the person may, within 30 days of that notice, appeal the determination to the U.S. Tax Court.129
Judicial Review
A penalty imposed for failure to file a Form 5471 is an "assessable penalty" that is not subject to the deficiency procedures under Code Secs. 6211–6214. To obtain judicial review, a person must pay the amount due and file suit for refund.130
In Wheaton,131 the court acknowledged the heavy burden this imposes on taxpayers, but was without authority to rule otherwise under the Anti-Injunction Act.132 In that case, the IRS issued several notices advising Wheaton of his obligation to file Form 5471 based on his ownership of numerous foreign corporations. The IRS also issued statutory notices of deficiency proposing income tax adjustments, but omitting any reference to Form 5471 penalties. Wheaton filed timely petitions with the U.S. Tax Court. When he failed to file the required Forms 5471, the IRS assessed the applicable penalties and subsequently denied Wheaton’s request for reasonable cause relief.
In response to Wheaton’s administrative appeal, the appeals officer abated certain penalties related to corporations for which Wheaton filed late Form 5471, reserved ruling on penalties related to the corporations at issue in the U.S. Tax Court proceedings, and refused to consider abatement of the remaining penalties. The IRS eventually filed a Notice of Federal Tax Lien in the amount of $2,599,432.39 representing the penalties imposed under Code Sec. 6038, and issued a Notice of Levy in an effort to collect the amounts due.133
Wheaton filed a complaint in district court seeking a preliminary injunction compelling the government to release the tax liens, to prevent any further collection proceedings, and to require the government to adjudicate the penalties in the U.S. Tax Court. The government moved to dismiss, arguing that Wheaton’s claims were barred by the Tax Anti-Injunction Act, Code Sec. 7421, which provides in relevant part, "Except as provided in §§6212(a) and (c), 6213(a), ... no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed."
The court rejected Wheaton’s argument that penalties asserted under Code Sec. 6038(b) are subject to the deficiency proceedings under Code Secs. 6212 and 6213, finding that the penalties, which arise under Subtitle F, Chapter 61 of the Code, did not fall within the definition of "deficiency," which is limited by Code Sec. 6211 to "income, estate, and gift taxes imposed by subtitles A and B and excise taxes imposed by chapters 41, 42, 43, and 44."134 The court also rejected Wheaton’s attempt to bootstrap the Form 5471 penalties to the statutory exception provided in Code Sec. 6665(b) for additions to tax (i.e., late filing penalties under Code Sec. 6651(a)) where the additions are "attributable to a deficiency."135 Finally, while the court recognized that a reduction to foreign tax credits under Code Sec. 6038(c) is subject to the deficiency procedures, since the credit arises under Code Sec. 901, Subtitle A, Chapter 1 (falling within Code Secs. 6211–213), it maintained that penalties for failure to file a Form 5471 under Code Sec. 6038(b) clearly fall outside any exception to the Anti-Injunction Act.136
In Heydemann,137 the district court considered whether the bankruptcy court erred in refusing to abate penalties imposed for failure to file Form 5471 under Code Sec. 6038. Heydemann argued that "the bankruptcy court erred because: (1) her cooperation with the IRS obviated the need for her to file Form 5471, (2) she was entitled to prior notice of the penalties, and (3) the bankruptcy court had the discretion to waive the penalties."138
The district court reviewed the penalty scheme under Code Sec. 6038 and found that while Heydemann provided the IRS with the required information during the IRS’s investigation of her husband, she did not file the Form 5471 and, therefore, was subject to the penalties. The court further held that the IRS is not required to provide notice prior to assessing penalties under Code Sec. 6038.139 Finally, the court held that it lacked authority under 11 USC §505(a)(1) to waive the penalties.140
Criminal Violations
Willful failure to file a required Form 5471 constitutes a criminal offense under Code Sec. 7203. Filing a false or fraudulent Form 5471 falls within the scope of Code Secs. 7206 and 7207.141
Form 5472—Information Return of a 25-Percent Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
The Form 5472 reports transactions between a 25-percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by Code Secs. 6038A and 6038C.142
Penalties
The penalty for failing to file a Form 5472, or to keep certain records regarding reportable transactions, is $10,000 for each tax year with respect to which such failure occurs.143 A continuation penalty of $10,000 will be added for each 30-day period, or fraction thereof, that such failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.144 No penalties will be imposed if the failure is due to reasonable cause.145
Enforcement
Under Code Sec. 6038A, the IRS may issue a summons to enforce a request for certain records pursuant to Code Secs. 7602–7604.146 A taxpayer served with a summons may move to quash within 90 days after the summons is issued.147 In response to a determination by the IRS that a taxpayer has not substantially complied with a summons, the taxpayer has 90 days to appeal that determination or the determination becomes final and is not subject to judicial review.148 Any motion to quash or appeal of an adverse determination suspends the period of limitations for assessment and collection of the tax, and for criminal prosecution, during the pending action.149 A penalty will be asserted for failure to comply with the summons provisions of Code Sec. 6038A.150 If such a penalty is asserted, there is no reasonable cause relief.151
Criminal Violations
Willful failure to file a required Form 5472 constitutes a criminal offense under Code Sec. 7203.152
Form 926—Return by a U.S. Transferor of Property to a Foreign Corporation
U.S. persons, U.S. domestic corporations and domestic estates and trusts must report any exchanges of property to a foreign corporation as set forth in Code Sec. 6038B(a)(1)(A) and Reg. §§1.6038B-1 and 1.6038B-1T. The information is reported on a Form 926 and filed with the taxpayer’s income tax return for the tax year that includes the date of the transfer. There are certain exceptions to these filing requirements, as well as additional rules that must be considered for transfers by U.S. partnerships, transfers by a husband and wife, and transfers of cash to a foreign corporation.153
Penalties
The penalty for failing to file a Form 926 is 10 percent of the fair market value of the property at the time of the transfer, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.154 In addition, the period of limitations to assess tax due on the transfer is extended to three years after the required information under Code Sec. 6038B is provided. The penalty will not apply if the failure to file is due to reasonable cause.155
Limitations
In addition to the foregoing penalties, failure to file a complete and accurate Form 926 will extend the period of limitations on assessment and collection of any tax imposed with respect to any event or period to which the Form 926 applies to three years after the date on which the required information is reported.156
Form 3520—Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts
The Form 3520 reports various transactions involving foreign trusts, including creation of a foreign trust by a U.S. person, transfers of property from a U.S. person to a foreign trust and receipt of distributions from foreign trusts under Code Sec. 6048. This return also reports the receipt of gifts that, in the aggregate, exceed $10,000 from foreign entities under Code Sec. 6039F.157 Subject to certain exceptions set forth in the Instructions, you are required to file the Form 3520 in any of the following circumstances:
• You are the responsible party for reporting a reportable event that occurred during the current tax year, or you held an outstanding obligation of a related foreign trust (or a person related to the trust) that you treated as a qualified obligation during the current tax year.
• You are a U.S. person who, during the current tax year, is treated as the owner of any part of the assets of a foreign trust under the grantor trust rules.
• You are a U.S. person who received (directly or indirectly) a distribution from a foreign trust during the current tax year or a related foreign trust held an outstanding obligation issued by you (or a person related to you) that you treated as a qualified obligation during the current tax year.
• You are a U.S. person who, during the current tax year, received either:
• more than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests; or
• more than $13,561 (adjusted each year) from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.
The Form 3520 is due on the same date as the related income or estate tax return (including extensions), but must be filed separately with the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.
Penalties
The penalty for failing to file a complete and accurate Form 3520 with information required by Code Sec. 6048 is 35 percent of the gross reportable amount.158 For U.S. donees that fail to file the Form 3520, the penalty is five percent of the gift per month, up to 25 percent of the gift pursuant to Code Sec. 6039F(c)(1)(B). A continuation penalty of $10,000 will be added for each 30-day period, or fraction thereof, that such failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.159
Reasonable Cause
The total penalty cannot exceed the amount of money transferred. The penalties will not apply if the failure to file is due to reasonable cause and not willful neglect.160 The fact that a foreign country would impose penalties for disclosing the required information, or reluctance of a foreign fiduciary to provide such information, does not constitute reasonable cause.161
Limitations
In addition to the foregoing penalties, failure to file a complete and accurate Form 3520 will extend the period of limitations on assessment and collection of any tax imposed with respect to any event or period to which the Form 3520 applies to three years after the date on which the required information is reported.162
Judicial Review
Deficiency procedures do not apply to the initial monetary penalties assessed for failure to timely file a complete and accurate Form 3520.163 However, when the required information under Code Sec. 6048 is not provided, the IRS is authorized to treat any distribution from a foreign trust to a U.S. beneficiary as an accumulation distribution includible in gross income of the distributee.164 Moreover, when information required by Code Sec. 6039F is not provided to the IRS, it can determine the tax consequences of a gift.165 These determinations and related adjustments to tax are subject to deficiency procedures.166
Form 3520-A—Annual Information Return of Foreign Trust with a U.S. Owner
Any U.S. person with ownership interests in a foreign trust is responsible for ensuring that the trustee files a Form 3520-A for each tax year of the trust, setting forth a full and complete accounting of all trust activities and operations, Code Sec. 6048(b)(1)(A), and issues income information to each U.S. grantor and trust beneficiary who directly or indirectly receives a trust distribution for that year.167 The Form 3520-A is due on the 15th day of third month after the end of the trust’s tax year and is filed with the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.
Penalties
The penalty for failing to file a Form 3520-A is five percent of the gross reportable amount.168 A continuation penalty of $10,000 will be added for each 30-day period, or fraction thereof, that such failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.169
Reasonable Cause
No penalties shall be imposed if the failure to file is due to reasonable cause and not willful neglect.170 The fact that a foreign country would impose penalties for disclosing the required information, or reluctance of a foreign fiduciary to provide such information, does not constitute reasonable cause.171
Judicial Review
Deficiency procedures do not apply to the penalties assessed under Code Sec. 6677.172
Criminal Violations
Willful failure to file a required Form 3520-A constitutes a criminal offense under Code Sec. 7203. Filing a false or fraudulent Form 3520-A falls within the scope of Code Secs. 7206 and 7207.
Form 8865—Return of U.S. Persons with Respect to Certain Foreign Partnerships
U.S. persons with certain interests in foreign partnerships must file Form 8865 to report interests in and transactions of the foreign partnerships (Code Sec. 6038) (category 1 and 2 filers), transfers of property to the foreign partnerships (Code Sec. 6038B) (category 3 filers), and acquisitions, dispositions and changes in foreign partnership interests (Code Sec. 6046A) (category 4 filers).173
Form 8865 must be attached to the related income tax return (or partnership or exempt organization return) or, if no income tax return is required, filed by the date and to the same place you would have filed that return.
Penalties
Penalties depend on the filing category. Category 1 and 2 filers who fail to timely submit all information required by Form 8865 face penalties of $10,000 for each year of each foreign partnership. An additional $10,000 penalty is imposed for 30-day period, or fraction thereof, that such the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to $50,000 per return. Those persons failing to submit the required information will also face a reduction in their foreign tax credits under Code Secs. 901, 902 and 960. Code Sec. 6038(c). Willful violations can also result in criminal penalties under Code Secs. 7203, 7206 and 7207.
Category 3 filers that fail to report a contribution to a foreign partnership that is required to be reported under Code Sec. 6038B can be assessed a penalty equal to 10 percent of the fair market value of the property at the time of the contribution, not to exceed $100,000 unless the failure is due to intentional disregard.174 In addition, the transferor must recognize gain on the contribution as if the contributed property had been sold for its fair market value at the time of the contribution.175
Category 4 filers who fail to properly report all the information requested by Code Sec. 6046A are subject to a $10,000 penalty.176 A continuation $10,000 penalty is imposed for 30-day period, or fraction thereof, that such the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to $50,000 per return. Those persons failing to submit the required information will also face a reduction in their foreign tax credits under Code Secs. 901, 902 and 960.177 As is the case with other penalties imposed under Code Sec. 6677, deficiency procedures to not apply.
Limitations
Failure to file a complete and accurate Form 8865 will extend the period of limitations on assessment and collection of any tax imposed with respect to any event or period to which the Form 8865 applies to three years after the date on which the required information is reported.178

Footnotes


*
I want to thank Lucy S. Lee, Caplin & Drysdale, Chartered in Washington, D.C., for laying a foundation with her article, Information Reporting and Civil Penalties (in a Nutshell), J. Tax Practice & Procedure, Apr.–May 2009, along with Steve Toscher and Michel R. Stein of Hochman, Salkin, Rettig, Toscher & Perez, P.C. for their seminal articles on this subject: FBAR Enforcement is Coming! J. Tax Practice & Procedure, Dec. 2003–Jan. 2004; FBAR Enforcement—An Update, J. Tax Practice & Procedure, Apr.–May 2006; and FBAR Enforcement—Five Years Later, J. Tax Practice & Procedure, June–July 2008. In reviewing this article, they will recognize their work and I have tried to give proper attribution. Thank you for letting us stand on your shoulders. Finally, I need to thank Diana L. Erbsen of DLA Piper US, LLP, and Paula M. Junghans of Zuckerman, Spaeder, LLP, whose time spent reviewing and editing this article is immensely appreciated.
1
12 USC §§1951–1959, 31 USC §§5311–5330.
2
See Lee A. Sheppard, FBAR Filing For Hedge Funds, Tax Notes, Aug. 10, 2009, at 509–18.
3
IRS Workbook on Report of Foreign Bank and Financial Accounts (last visited Sept. 7, 2009), www.irs.gov/businesses/small/article/0,,id=159757,00.html ("IRS Workbook").
4
IRM §4.26.16.3.7.3 (July 1, 2008).
5
TD F 90.22-1 (Revised Oct. 2008) ("Privacy Act Notification").
6
31 USC §5314; 31 CFR §103.24.
7
IRM §4.26.16.3.1 (July 1, 2008).
8
Announcement 2009-51, IRB 2009-25, 1105.

9
IRM §4.26.16.3.1.1; see also Arthur V. Pearson, Foreign Bank Account Reporting, www.camico.com/portal/server.pt?in_hi_space=SearchResult & in_hi_control=bannerstart & in_hi_userid=45684 & in_tx_query=FBAR, Murphy, Pearson, Bradley & Feeney, San Francisco, CA (2009).
10
New York State Bar Association, Tax Section, Request for Formal Guidance on FBAR Reporting Obligations (July 17, 2009), 2009 TNT 137-13; Letter from Managed Funds Assoc. to IRS Commissioner Shulman (June 19, 2009), Application of FBAR Requirements to Private Investment Funds.
11
IRS Workbook, supra note 3.
12
See Sheppard, supra note 2, at 517.
13
See United States v. Clines, 958 F2d 578, 582–83 (4th Cir. 1992).
14
IRS Workbook, supra note 3.
15
31 CFR §103.32.
16
IRM 4.26.16.3.8 (July 1, 2008).
17
Id.
18
See Treasury Directive 15-41 (Dec. 1, 1992), 31 CFR §103.56(b).
19
See 31 CFR §103.56(g); IR-2003-48 (Apr. 10, 2003).

20
IRM 4.26.16.2.2. (July 1, 2008).
21
31 CFR §103.56(c)(2); IRM §§4.26.16.4.1 (July 1, 2008) and 4.26.17.5.4 (May 5, 2008).
22
31 USC §5321(a)(5).
23
IRM §4.26.16.4.3.1 (July 1, 2008).
24
31 USC §5321(a)(5)(B)(i); Act Sec. 821(a) of P.L. 108-357.
25
IRS Workbook, supra note 3.
26
31 USC §5321(a)(5)(B)(ii); IRS Frequently Asked Questions Regarding Report of the Foreign Bank and Financial Accounts, Q & A 18 (Mar. 13, 2009).
27
IRM §4.26.16.4.4 (July 1, 2008) (emphasis added).
28
LMSB-4-0908-047 (Oct. 31, 2008).
30
Id.
31
IRS Voluntary Disclosure Frequently Asked Questions, Q & A 9 (May 6, 2009).
32
31 USC §5321(a)(5)(C)(ii).
33
IRM §4.26.16-1 (Pre–Oct. 23, 2004, Normal FBAR Civil Penalty Mitigation Guidelines) (July 1, 2008); see also Toscher & Stein, supra note *.
34
Id.
35
IRM §4.26.16-1 (Pre–Oct. 23, 2004, Normal FBAR Civil Penalty Mitigation Guidelines) (July 1, 2008).
36
IRM §4.26.16-2 (July 1, 2008).
37
IRM §4.26.16.4.6.1(3) (July 1, 2008).
38
IRM §4.26.16.4.6 (July 1, 2008).
39
IRM §4.26.16.4.7 (July 1, 2008).
40
W. Ratzlaf, SCt, 94-1 ustc ¶50,015, 510 US 135; IRM 4.26.16.4.5.3 (July 1, 2008).

41
CCA 200603026 (Jan. 20, 2006); Dollar Bank Money Market Account, 980 F2d 233, 238, note 2 (3d Cir. 1992).
42
See Sturman, 951 F2d 1466, 1476 (6th Cir. 1991); see also R.L. Lerch, 53 TCM 1101, Dec. 43,977(M), TC Memo. 1987-295 (court characterized failure to disclose foreign bank account, failure to report income from foreign bank account, and failure to file accurate FBARs as clear and convincing evidence of fraud for purposes of Code Sec. 6653(b)).

43
Id. (citing J.L. Check, SCt, 91-1 ustc ¶50,012, 498 US 192; M.R. Spies, SCt, 43-1 ustc ¶9243, 317 US 492).

44
Sturman, supra note 42, 951 F2d, at 1476.
45
Id., at 1477.
46
Id.; see also Bank of New England, N.A., 821 F2d 844, 855 (1st Cir. 1987) (finding willfulness can be inferred from a conscious effort to avoid learning about reporting requirements); IRM §4.26.16.4.5.3 (July 1, 2008) (examples of willfulness).
47
United States—Switzerland, 27 U.S.T. 209, T.I.A.S. 8302 (May 25, 1973).
48
Sturman, supra note 42, 951 F2d, at 1480–81 (citing Salim, 855 F2d 944, 953 (2d Cir. 1988), and Casamento, 887 F2d 1141, at 1172–75 (2d Cir. 1989)).
49
CCA 200603026 (Jan. 20, 2006).
50
See IRM 4.26.16.4.5.4 (July 1, 2008) (list of documents helpful in establishing willfulness).
51
18 USC §3282.
52
IRM §4.26.17.3.1 (May 5, 2008).
53
31 USC §5321(b)(2).
54
IRM §4.26.17.5.5.2 (Jan. 1, 2007).
55
IRM §4.26.17.1 (May 5, 2008).
56
Id.
57
IRM §4.26.17.2 (Jan. 1, 2007).
58
LMSB-4-0908-047 (Oct. 30, 2008).
59
IRM §4.26.17.2.1 (Jan. 1, 2007).
60
Id.
61
IRM §4.26.17.2.2 (May 5, 2008).
62
Id.
63
Id.
64
IRM §4.26.17.2.3 (May 5, 2008).
65
IRM §4.26.17.3 (May 5, 2008).
66
IRM §4.26.17.3 (May 5, 2008).
67
IRM §4.26.17.4.3 (May 5, 2008) (Counsel review is not required if a taxpayer enters a special program, such as the Last Chance Compliance Initiative in 2003 or the current Offshore Voluntary Disclosure Program).
68
IRM §4.26.17.4.3 (May 5, 2008).
69
31 USC §3717(b).
70
IRM §4.26.17.4.3 (May 5, 2008).
71
IRM §4.26.17.4.6 (Jan. 1, 2007).
72
IRM §4.26.17.4.7 (Jan. 1, 2007).
73
Id.
74
Id.
75
Id.
76
IRS Technical Guidance Programs, www.irs.gov/individuals/article/0,,id=128327,00.html (last visited Sept. 11, 2009).
77
J.B. Williams III, 131 TC No. 6 (Oct. 2, 2008), at *3.
78
Id., at *3–4, note 4–5; see also Callahan, 130 TC 44, 48 (2008) (court has jurisdiction to review collection efforts directed to assessable penalties not otherwise subject to deficiency procedures); Mason, 132 TC No. 14 (May 6, 2009) (court considered liability for trust fund recovery penalty under Code Sec. 6672).

79
Williams, supra note 75, at *4, note 6.
80
31 USC §5321(b)(2); 28 USC §§1345 and 1346(a).
81
31 USC §5321(b)(2); 28 USC §1345.
82
United States v. Simonelli, 614 FSupp2d 241 (D. Conn. 2008).
83
See Tull v. United States, 481 US 412, 425 (1987) (finding right to jury trial in suit by government to assess penalties under Clean Water Act).
84
Simonelli, supra note 82, 614 FSupp2d, at 242 (quoting Kelly v. Robinson, 479 US 36, 52 (1986)).
85
11 USC §§523(a)(7)(A), (B).
86
11 USC §532(a)(7)(B).
87
Simonelli, supra note 82, 614 FSupp2d, at 243.
88
Id.
89
Simonelli, supra note 82, 614 FSupp2d, at 244 (citing 29 CFR §§103.56(g) (2004) (authorizing the IRS "to assess and collect civil penalties under 31 U.S.C. §5321 ... [and] investigate possible civil violations of these provisions")).
90
IRM §4.26.17.5.6. (Jan. 1, 2007).
91
31 USC §5322(a); see McCarthy, CR No. 09-00784 (C.D. Calif.) (Aug. 14, 2009) (plea to failing to file FBAR (31 USC §5322(a)), civil FBAR penalties equal to 50 percent of highest year balance in the account (31 USC §5321(a)(5)), and 75-percent civil tax fraud penalty (Code Sec. 6663)); Clines, 958 F2d 578 (4th Cir. 1992) (defendant convicted of FBAR violation under 31 USC §5322); Sturman, supra note 42, 951 F2d, at 1473 (defendant convicted of FBAR violation under 31 USC §5322).
92
31 USC §5322(b).
93
Chernick, CR No. 09-60182 (S.D. Fl.) (July 13, 2009) (plea to filing false return under Code Sec. 7206(1) for failing to disclose interest in foreign account); Rubenstein, CR No. 09-60166 (S.D. Fl.) (June 25, 2009) (plea to filing false return under Code Sec. 7206(1) for failing to disclose interest in foreign account); Gosman, CR No. 09-80041 (S.D. Fl.) (Mar. 27, 2009) (plea to filing false return under Code Sec. 7206(1) for failing to disclose interest in foreign account); King, 2000 WL 362026 (W.D.N.Y. March 24, 2000) (court rejects argument that failure to answer question on income tax return regarding filer’s interest in a foreign account is not a material omission or affirmatively false statement for purposes of Code Sec. 7206(1)); R.D. Franks, CA-10, 84-1 ustc ¶9118, 723 F2d 1482, 1485 (affirming convictions for filing false returns under Code Sec. 7206(1) for failing to disclose foreign accounts, where defendants also convicted of evasion under Code Sec. 7201 for the same years).

94
See Comisky, Feld & Harris, Tax Fraud & Evasion, WG & L §11.06[3][b].
95
18 USC §3282; see also Lowry, 409 FSupp2d 732, 740–41 (W.D. Va. 2006).
96
Clines, supra note 91.
97
31 USC §5312(a)(2)(C); 31 CFR §103.11(e)(1).
98
31 USC §5312(a)(2)(I).
99
31 USC §5312(a)(2)(R)); 31 CFR §103.11(e)(5).
100
Clines, supra note 91, at 582.
101
Id., at 583.
102
Id.
103
IRM §§20.1.9.1.1 and 20.1.9.2 (Nov. 20, 2007); see also Wheaton, 888 FSupp 622, 625–26 (D.N.J. 1995).
104
Id.
105
Reg. §1.6038-2; IRM §20.1.9.3.1 (Nov. 20, 2007).

106
See Heydemann, 2008 WL 2502188 (D. Md. Apr. 23, 2008).
107
The Form 5471 Instructions define each category as follows:
• Category 1 Filer. This filing requirement was repealed by Act Sec. 413(c)(26) of the American Jobs Creation Act of 2004.
• Category 2 Filer. This includes a U.S. citizen or resident who is an officer or director of a foreign corporation in which a U.S. person (defined below) has acquired (in one or more transactions): stock which meets the 10 percent stock ownership requirement (described below) with respect to the foreign corporation or an additional 10 percent or more (in value or voting power) of the outstanding stock of the foreign corporation. A U.S. person has acquired stock in a foreign corporation when that person has an unqualified right to receive the stock, even though the stock is not actually issued. See Reg. §1.6046-1(f)(1) for more details.
• Stock ownership requirement. For purposes of Category 2 and Category 3, the stock ownership threshold is met if a U.S. person owns: 10 percent or more of the total value of the foreign corporation’s stock; or 10 percent or more of the total combined voting power of all classes of stock with voting rights.
• U.S. person. For purposes of Category 2 and Category 3, a U.S. person is: a citizen or resident of the United States; a domestic partnership; a domestic corporation; and an estate or trust that is not a foreign estate or trust defined in Code Sec. 7701(a)(31). See Regulations §1.6046-1(f)(3) for exceptions.
• Category 3 Filer. This category includes: a U.S. person (defined above) who acquires stock in a foreign corporation which, when added to any stock owned on the date of acquisition, meets the 10 percent stock ownership requirement (described above) with respect to the foreign corporation; a U.S. person who acquires stock which, without regard to stock already owned on the date of acquisition, meets the 10 percent stock ownership requirement with respect to the foreign corporation; a person who is treated as a U.S. shareholder under §953(c) with respect to the foreign corporation; a person who becomes a U.S. person while meeting the 10 percent stock ownership requirement with respect to the foreign corporation; or a U.S. person who disposes of sufficient stock in the foreign corporation to reduce his or her interest to less than the stock ownership requirement. For more information, see Code Sec. 6046 and Reg. §1.6046-1.
• Category 4 Filer. This includes a U.S. person who had control (defined below) of a foreign corporation for an uninterrupted period of at least 30 days during the annual accounting period of the foreign corporation.
• U.S. person. For purposes of Category 4, a U.S. person is: a citizen or resident of the United States; a nonresident alien for whom an election is in effect under Code Sec. 6013(g) to be treated as a resident of the United States; an individual for whom an election is in effect under Code Sec. 6013(h), relating to nonresident aliens who become residents of the United States during the tax year and are married at the close of the tax year to a citizen or resident of the United States; a domestic partnership; a domestic corporation; and an estate or trust that is not a foreign estate or trust defined in Code Sec. 7701(a)(31). See Reg. §1.6038-2(d) for exceptions.
• Control. A U.S. person has control of a foreign corporation if, at any time during that person’s tax year, it owns stock possessing: more than 50 percent of the total combined voting power of all classes of stock of the foreign corporation entitled to vote or more than 50 percent of the total value of shares of all classes of stock of the foreign corporation. A person in control of a corporation that, in turn, owns more than 50 percent of the combined voting power, or the value, of all classes of stock of another corporation is also treated as being in control of such other corporation. For more details on "control," see Regs. §§1.6038-2(b) and (c).
• Example. Corporation A owns 51 percent of the voting stock in Corporation B. Corporation B owns 51 percent of the voting stock in Corporation C. Corporation C owns 51 percent of the voting stock in Corporation D. Therefore, Corporation D is controlled by Corporation A.
• Category 5 Filer. This includes a U.S. shareholder who owns stock in a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during any tax year of the foreign corporation, and who owned that stock on the last day of that year.
• U.S. shareholder. For purposes of Category 5, a U.S. shareholder is a U.S. person who: (1) owns (directly, indirectly, or constructively, within the meaning of Code Secs. 958(a) and (b)) 10 percent or more of the total combined voting power of all classes of voting stock of a CFC or (2) owns (either directly or indirectly, within the meaning of Code Sec. 958(a)) any stock of a CFC (as defined in Code Sec. 953(c)(1)(B) and 957(b)) that is also a captive insurance company.
• U.S. person. For purposes of Category 5, a U.S. person is: a citizen or resident of the United States; a domestic partnership; a domestic corporation; and an estate or trust that is not a foreign estate or trust defined in Code Sec. 7701(a)(31). See Code Sec. 957(c) for exceptions.
• CFC. A CFC is a foreign corporation that has U.S. shareholders that own (directly, indirectly, or constructively, within the meaning of Code Secs. 958(a) and (b)) on any day of the tax year of the foreign corporation, more than 50 percent of: the total combined voting power of all classes of its voting stock; or the total value of the stock of the corporation.
108
Heydemann, supra note 106 (affirming penalties imposed under Code Sec. 6038).

109
Code Sec. 6679(a)(1).

110
Code Sec. 6038(b)(1).

111
Code Sec. 6038(b)(2); Code Sec. 6679(a)(2); IRM §20.1.9.2 (Nov. 20, 2007).

112
IRM §20.1.9.2 (Nov. 20, 2007).
113
Id.
114
Id.; Code Sec. 6751.

115
Code Sec. 6038(c)(3).

116
Code Sec. 6501(c)(8).

117
See www.irs.gov/businesses/corporations/article/0,,id=188039,00.html (last visited Sept. 12, 2009).
118
IRM §20.1.9.1.1 (Nov. 20, 2007).
119
IRM §20.1.9.2 (Nov. 20, 2007).
120
Reg. §1.6038-2(k)(3)(ii); see also Code Sec. 6679(a) (imposing penalties for failure to provide information required by Code Sec. 6046 "unless it is shown that such failure is due to reasonable cause").
121
IRM §20.1.9.1.1 (Nov. 20, 2007) (referencing IRM §20.1.1).
122
IRM §20.1.9.2 (Nov. 20, 2007).
123
Id.; see also CCA 200645023 (Nov. 10, 2006) (request for reasonable cause relief denied based on large number of incomplete Forms 5471 filed and despite history of compliance and belief that Forms 5471 were not required).
124
IRM §20.1.9.1.
125
Instructions to Form 5471.
126
www.irs.gov/businesses/corporations/article/0,,id=188039,00.html (last visited Sept. 12, 2009).
127
IRM §20.1.9.2.3 (Nov. 20, 2007).
128
TAS Guidelines for Referral, IRM §21.1.3.18; TAS Criteria, IRM §13.1.7.2.
129
Code Sec. 6330(d)(1); Wagenknecht, 533 F3d 412, 415, note 3 (6th Cir. 2008) (recognizing expansion of U.S. Tax Court jurisdiction in collection due process appeals by the Pension Protection Act of 2006 (P.L. 109-280), Act Sec. 855).
130
28 USC §1346(a); see also Wheaton, supra note 103, 888 FSupp, at 627 (citing W.W. Flora, SCt, 60-1 ustc ¶9347, 362 US 145).

131
Wheaton, supra note 103.
132
Id. (citing Iannelli v. Long, CA-3, 73-2 ustc ¶16,098, 487 F2d 317, 318 (Anti-Injunction Act "reflects an evident purpose to protect the public revenue from court imposed delays in the collection of taxes, leaving aggrieved taxpayers to sue for refunds of any amounts improperly collected").
133
Wheaton, supra note 103, arose prior to the enactment of the collection appeal procedures in Code Secs. 6320 and 6330.

134
Wheaton, supra note 103, at 625.
135
Code Sec. 6665(b)(1).

136
Wheaton, supra note 103, at 626.
137
Heydemann, supra note 106.
138
Id.
139
Id. (citing Wheaton, supra note 103, 888 FSupp, at 625–26).
140
Id.
141
Reg. §1.6038-2(k)(4).

142
Reg. §1.6038A-2.

143
Code Sec. 6038A(d)(1).

144
Code Sec. 6038A(d)(2).

145
Code Sec. 6038A(d)(3); Reg. §1.6038A-4(b).

146
Code Sec. 6038A(e)(2).

147
Code Sec. 6038A(e)(4)(A).

148
Code Sec. 6038A(e)(4)(B).

149
Code Sec. 6038A(e)(4)(D).

150
See Code Sec. 6038A(e)(3).

151
IRM §20.1.9.6.1 (Nov. 20, 2007).
152
Code Sec. 6038A(f).

153
See Instructions to Form 926.
154
Code Sec. 6038B(c).

155
Code Sec. 6038B(c)(2).

156
Code Sec. 6501(c)(8).

157
See Notice 97-34 1997-1 CB 422.

158
Code Sec. 6677(a).

159
Id.
160
Code Secs. 6039F(c)(2) and 6677(d).

161
Code Sec. 6677(d).

162
Code Sec. 6501(c)(8).

163
Code Sec. 6677(e).

164
Code Sec. 6048(c)(2).

165
Code Sec. 6039F(c)(1)(A).

166
IRM §20.1.9.10 (Nov. 20, 2007).
167
Code Sec. 6048(b)(1)(B).

168
Code Sec. 6677(b).

169
Code Sec. 6677(a).

170
Code Sec. 6677(d).

171
Code Sec. 6677(d).

172
Code Sec. 6677(e).

173
Category 1 filer. A Category 1 filer is a U.S. person who controlled the foreign partnership at any time during the partnership’s tax year. Control of a partnershkjhgspoisaip is ownership of more than a 50 percent interest in the partnership. There may be more than one Category 1 filer for a partnership for a particular partnership tax year.
• Category 2 filer. A Category 2 filer is a U.S. person who at any time during the tax year of the foreign partnership owned a 10 percent or greater interest in the partnership while the partnership was controlled by U.S. persons each owning at least 10 percent interests. However, if the foreign partnership had a Category 1 filer at any time during that tax year, no person will be considered a Category 2 filer.
• Category 3 filer. A Category 3 filer is a U.S. person who contributed property during that person’s tax year to a foreign partnership in exchange for an interest in the partnership (a Code Sec. 721 transfer), if that person either: (1) owned directly or constructively at least a 10 percent interest in the foreign partnership immediately after the contribution, or (2) the value of the property contributed (when added to the value of any other property contributed to the partnership by such person, or any related person, during the 12-month period ending on the date of transfer) exceeds $100,000. If a domestic partnership contributes property to a foreign partnership, the domestic partnership’s partners are considered to have transferred a proportionate share of the contributed property to the foreign partnership. However, if the domestic partnership files Form 8865 and properly reports all the required information with respect to the contribution, its partners will not be required to report the transfer. Category 3 also includes a U.S. person that previously transferred appreciated property to the partnership and was required to report that transfer under Code Sec. 6038B, if the foreign partnership disposed of such property while the U.S. person remained a direct or indirect partner in the partnership.
• Category 4 filer. A Category 4 filer is a U.S. person that had a reportable event under Code Sec. 6046A during that person’s tax year. There are three categories of reportable events under Code Sec. 6046A: acquisitions, dispositions, and changes in proportional interests.
174
Code Sec. 6038B(c).