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June 18, 2007
Offshore Account Reports Rising, but Compliance Remains Low
by Martin A. Sullivan

Full Text Published by Tax Analysts®

Document originally published in Tax Notes
on June 18, 2007.

In a report to Congress mandated by the Patriot Act, the Treasury Department in April 2002 informed Congress it had received 177,000 FBARs in 2001. (FBAR is the everyday name for Form TD F 90- 22.1, "Report of Foreign Bank and Financial Accounts.") An FBAR is supposed to be filed by every U.S. taxpayer with a foreign bank account of $10,000 or more.

Then the 2002 Treasury report said something remarkable:

    The IRS estimates that there may be as many as 1 million U.S. taxpayers who have signature authority or control over a foreign bank account and may be required to file FBARs. Thus, the approximate rate of compliance with the FBAR's filing requirements based on this information could be less than 20 percent.

The one million figure cited by Treasury is probably just a guess on the IRS's part. But because we have no other data and the IRS should be the authority on the topic, analysts like me repeatedly cite the figure as a partial indicator of offshore noncompliance.

The IRS has taken a variety of steps to increase FBAR filing, including two temporary amnesty programs: the offshore voluntary compliance initiative and the last chance compliance initiative. In 2004 Congress passed the American Jobs Creation Act, which increased nonfiling penalties. In August 2006 Senate testimony, former IRS Commissioner Mark Everson reported that the IRS had "trained over 300 revenue agents with respect to foreign trusts and other offshore entities, and provided them with the tools to pursue both the information necessary to examine the offshore activities and the penalties for failure to provide such information" (see Doc 2006-14493 or 2006 TNT 148-37 )).

Foreign Bank Accounts Reported to Treasury

Sources: Financial Crimes Enforcement Network, U.S. Department
of Treasury, "Report to Congress in Accordance With Section 361(b) of
the USA PATRIOT Act" (Apr. 26, 2002), "Financial Crimes Enforcement
Network's Annual Report for FY 2004", and "Financial Crimes
Enforcement Network's Annual Report for FY 2006."

Those actions seem to have had some effect. The latest figures from Treasury indicate a total of 287,000 FBAR filings in 2006. That works out to an average increase of about 10 percent per year since 2001. If we take the one million figure as gospel, the compliance rate has increased from 18 percent to 29 percent.

In response to a Senate Finance Committee request for suggestions on closing the tax gap, the Joint Committee on Taxation has floated a proposal that would require return preparers to explain to their clients the FBAR reporting requirements and the penalties for not filing. The American Institute of Certified Public Accountants opposes the JCT's idea on the grounds that it would impose "significant recordkeeping burdens on preparers without any appreciable increase in closing the tax gap" (see Doc 2007-828 or 2007 TNT 8-32)). The administration did not include any legislative proposals to increase FBAR filings among the compliance initiatives in its latest budget.

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