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When Do You Have a Financial Interest in Foreign Bank Accounts for FBAR Filings?

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If you have a complicated banking situation, including business entities and shared accounts with non-U.S. taxpayers, it may not be clear when you have a financial interest in foreign bank accounts that requires disclosure under the IRS regulations requiring Reports of Foreign Bank and Financial Accounts (FBARs). Find out what a financial interest in foreign bank accounts triggering reporting requirements looked like for one naturalized woman and the businesses she owned with her Mexican ex-husband.

Naturalized Citizen Said to Have Hidden $4.3 Million in Mexican Bank Accounts

Maria Rosales immigrated from Mexico to the United States, becoming a lawful permanent resident in 1996. Before that, she had received a law degree from the Universadad Autonoma De Mexico, followed by a customs broker’s license in 1983. Ms. Rosales became a naturalized U.S. citizen in 2002. Between 2005 and 2012, she and her now-ex-husband, Hector Carmona (they were divorced in 2014), owned and controlled companies in Mexico and the United States providing customs brokerage services, distribution services, air and maritime freight and ground transportation. Many of these Mexican business entities had bank accounts in Mexico.

The IRS says that Ms. Rosales had a legal obligation to report those accounts, along with personal bank accounts in her own name, and one account titled in her maid’s name, on her tax returns, corporate disclosures, and foreign financial account reports (FBARs). Because she didn’t, the Department of Treasury has sued Ms. Rosales in the United States District Court for the Southern District of Texas to collect nearly $3.7 million in willful FBAR penalties assessed for tax years 2005 through 2012, along with an additional 10% surcharge for having to collect the debt.

Ms. Rosales’s complicated banking situation provides a useful summary of many of the ways a U.S. taxpayer may have a financial interest in foreign bank accounts to trigger FBAR filings. This information comes from the Department of Treasury’s complaint, so it only represents one side of the story. However, it can be informative about what the IRS looks for when determining if a taxpayer has a financial interest in an account.

When Do You Have to Disclose Foreign Financial Accounts, Generally?

The United States Bank Secrecy Act, and the IRS regulations implementing that law require U.S. taxpayers to disclose each foreign financial account they have “a financial interest in, or signature authority over” including “bank, securities, or other financial account[s] in a foreign country.” The IRS requires this disclosure any time the aggregate (total) amount in those accounts exceeds $10,000 USD at any time during the tax year. The disclosure must happen by April 15 (formerly June 30) of the following year, by completing a “Report of Foreign Bank and Financial Accounts” (FBAR) in addition to the taxpayer’s personal and corporate tax returns.

Do You Have to Disclose Business Accounts on FBARs?

According to the IRS, between 2005 and 2012, Rosales and her former husband had financial interests in 46 - 75 different foreign financial accounts as a result of their ownership of seven different Mexican corporations. These corporate accounts contained substantial assets. Together with the other accounts included in the IRS’s complaint, Rosales is said to have a financial interest in accounts totalling between $1.6 million in 2005 and $4.4 million in 2011 (the accounts decreased to $3.4 million in 2012).

According to IRS regulations, because Rosales and her former husband owned more than 50% of each of the Mexican corporations, they were required to report those accounts on their personal tax returns, corporate disclosures, and on their FBARs every year. In addition, Rosales should have reported salaries she received from those Mexican entities on her U.S. tax returns, as well as her Mexican tax returns.

Does it Matter Whose Name is on the Foreign Financial Account?

The IRS says that Ms. Rosales had at least 5 personal foreign financial accounts in her own name, which she owned, controlled, and should have reported. However, the Department of Treasury’s complaint also includes at least one personal account without her name on it. According to the complaint, in 2005, Rosales and her husband opened a bank account at Bancomber bank in Mexico to help their maid become a permanent resident in the U.S.

The complaint says that Rosales should have reported this as one of her foreign financial accounts. It alleges that while the account was in the maid’s name, that was only to make it appear the housekeeper had assets so the U.S. would approve her immigration request. Rosales maintained signatory authority over the account through 2009, deposited over $1.3 million into the account, and used those funds to construct a house and pay for other personal expenses. Because of this control, she was required to disclose the account, even though it was not titled in her name.

What Does it Mean to Have Signatory Authority on an Account?

In addition to the corporate ownership described above, Ms. Rosales also had signature authority over 23 of her Mexican company’s accounts. The IRS also said Ms. Rosales’s duty to report her maid’s account was based on her signatory authority over that account. According to the IRS, “signature authority” means a person has control over how the assets held in a foreign financial account are distributed, and can communicate directly with the bank about the account. While there are certain exceptions, anyone with signatory authority on a foreign bank account must report that account once it hits the $10,000 threshold. According to its complaint, the IRS said that requirement applied to 23 corporate accounts, Ms. Rosales’s personal bank accounts, and the maid’s account.

One way the IRS proves signatory authority is to show money from the accounts was used for personal expenses. According to the IRS, Ms. Rosales transferred funds from the Mexican entities’ accounts into her own U.S. bank accounts and then used those funds to pay for credit card bills, home mortgage payments, personal expenses, and to settle a personal lawsuit. The complaint says in 2010, she and her then-husband transferred $434,683 to invest in real estate in the U.S. As for the maid’s account, the IRS says Ms. Rosales used the funds in that account “for her own purposes including paying for construction of her residence.” By putting those funds to personal use, the IRS says Ms. Rosales showed she had signatory authority over the accounts.

How Do You Know Which Foreign Financial Accounts to Report?

If you have ownership interests in foreign businesses, help an aging parent or loved one manage their affairs, share accounts with friends or loved ones, or generally hold assets overseas, it can be difficult to know which foreign financial accounts you need to report on your annual FBAR and tax returns. The best strategy is to fully disclose all your foreign assets and interests to an accountant experienced in dealing with international tax issues before the FBARs are due for that year. If you miss that deadline, you may need to also hire a tax attorney familiar with the Bank Secrecy Act to help you avoid willful FBAR penalties like the nearly $3.7 million Ms. Rosales may have to face, all because she didn’t disclose her financial interests in foreign bank accounts and businesses.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding disclosing foreign financial interests on your tax returns or FBARs, contact Joe Viola to schedule a free consultation.

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