Do You Have to Report Your Business’s Foreign Financial Accounts on Your FBAR?
If you are operating a business with accounts overseas, it may make sense to maintain foreign financial accounts in those countries to make doing business easier. But as a business owner, choosing to open bank accounts in other countries may create tax problems back home, unless you report your business’s foreign financial accounts on your FBAR.
International Business Creates FBAR Headaches for U.S. Permanent Resident
Changlin Wu was a Chinese national living as a lawful permanent resident in the United states. After working for Kerr-McGee (later Anadarko Petroleum) for more than a decade, in 2007, he launched his own business, Longwoods Resources, LLC (Longwoods US). According to a complaint filed by the IRS, at some point, Mr. Wu created a subsidiary company, Longwoods Science & Technology Development, Inc. (Longwoods China).
Longwooods China maintained an account with the Bank of China with an account balance of 322,438 Renminbi (RMB) as of May 2012. At the time, that account had an approximate balance of $48,000 USD. Eventually, through the course of an investigation by the IRS, Mr. Wu reported five additional foreign bank accounts, and two that were “likely associated” with him. All together, the accounts had an aggregate balance of $1,526,932 in 2011, $1,364,062 in 2012, and $653,195 in 2013.
Despite his complex business holdings, Mr. Wu chose to file his own tax returns using an online tax preparation service. He reported his income from Longwoods US, but failed to disclose the existence of the Bank of China accounts or his business’s foreign financial affairs. After an investigation that spanned nearly 3 years from October 2014 to April 2017, the IRS determined that Mr. Wu had willfully failed to file Reports of Foreign Bank Accounts (FBARs), and imposed a total FBAR penalty of $763,466, allocated across the three years.
When Must You Report Your Business’s Foreign Financial Accounts on Your FBAR
Limited liability companies, corporations, and other business structures are designed to separate an individual from the risks they take in operating a business. If you are a business owner with financial accounts overseas, you may assume it is enough for your company to disclose the foreign accounts on its tax returns. However, the Bank Secrecy Act (which creates the FBAR filing requirement) is not so limited.
Under the Bank Secrecy Act, any U.S. taxpayer with a financial interest in a foreign financial account with a balance that surpasses $10,000 at any point in the tax year has an obligation to report that account -- even if they are a joint owner or share control over the account. The IRS’s reporting rules apply to:
- Legal title holders
- Trusts or other accounts operated for the benefit of others
- Joint accounts
- Agents or attorneys of the title holder on the account
- Corporations or partnerships at least 50% owned by a U.S. taxpayer
- Trusts if the grantor had an ownership interest at the time the trust was created
- Trust beneficiaries
That regulation also specifically states that U.S. taxpayers who create business entities or trusts to avoid filing FBAR are also deemed to have a financial interest in the accounts owned by that entity.
This is where Mr. Wu ran into trouble. At one point during the IRS investigation, it appeared he had only a 13% ownership interest in Longwoods China. However, when it later appeared that he was the sole owner of the company, it triggered the Bank Secrecy Act’s reporting requirements. Because Wu had taken active steps to hide the accounts -- including failing to disclose them at the outset of the IRS investigation, the IRS determined that he had willfully failed to report the accounts and assessed willful FBAR penalties to each.
IRS Investigation Creates Paper Chase for Chinese Bank Statements
Mr. Wu’s case also demonstrates a challenge that business owners and others maintaining foreign bank accounts can sometimes face. The IRS’s complaint states that Mr. Wu was not able to obtain bank statements from his Bank of China accounts because:
- “The ID card he presented to the banks was not the same as the one used to open the account, and
- He would have to travel to the bank’s district branch office to access archived files for the account because the account was closed.”
Wu had to battle with bureaucracy within the Bank of China, particularly because the accounts had already been closed. International banks are often resistant to IRS investigations into their accounts. They may make it difficult for US taxpayers to get bank statements or other documentation of their accounts if they believe doing so will threaten the privacy of their other account holders. Obtaining the documents you need to comply with an IRS investigation and avoid a determination that you “wilfully” failed to file FBAR reports can often take skillful negotiating and persistence in dealing with the international banking industry. Don’t face these kinds of investigations alone. By bringing a tax attorney with FBAR experience on early in the process, you can smooth interactions with the IRS and your international bank, to help mitigate the damage done if you failed to report your business’s foreign financial accounts.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding FBAR requirements or penalties, contact Joe Viola to schedule a consultation.