KEY POINTS

• FBAR and FATCA have overlapping reporting requirements for taxpayers with foreign accounts and financial interests. 
• FBAR report filing is governed by Title 31 of the U.S. Code and attendant regulations.  Taxpayers must file Form TD F 90-22.1 separately from Form 1040 on or before June 30 of each year following the calendar year being reported and must report ownership of foreign accounts on Form 1040.  In general, no extensions are available for Form TD F 90-22.1. 
• FATCA resulted in the addition of sections 6038D and 1471 – 1474 to the IRC and attendant regulations.   Form 8938 is filed with the taxpayer’s annual return, including extensions. 

Introduction
Two years ago, we first wrote about CPA responsibility with respect to client reporting of foreign financial accounts and filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). Since then, federal regulators have provided additional FBAR guidance as summarized in recent developments below. Recently, the voluntary disclosure program for people not previously reporting offshore accounts was reopened, providing them with another opportunity to become current with their taxes and filing obligations.

In addition, the Hiring Incentives to Restore Employment (HIRE) Act added another reporting requirement, under the Foreign Account Tax Compliance Act (FATCA).  Specified individuals (which, in the future will include business entities) must report interests in specified foreign financial assets for tax years beginning after March 18, 2010.  Reporting under FATCA applies to a broader range of offshore assets than the FBAR reporting requirements. FATCA also requires foreign financial institutions (FFIs) to report certain information to the IRS about financial accounts held by U.S. taxpayers, or by foreign entities in which a U.S. taxpayer(s) may have a substantial ownership interest.

Professional Liability Risks
Some taxpayers cited for noncompliance may blame their tax return preparers for failing to inquire about foreign accounts and failing to explain FBAR and FATCA reporting requirements.  Substantial claims alleging malpractice have been made for failure to properly advise clients of reporting obligations related to the FBAR.

In addition to filing the annual FBAR to report the foreign accounts, federal income tax returns for prior years may require amendment if clients did not report income from foreign assets.

If a practitioner becomes aware that a client has these reporting obligations but fails to properly report the foreign income on the client’s return, or the interests in foreign accounts, the practitioner may be exposed to malpractice claims from the client.

Guidance issued by the IRS and the Office of Professional Responsibilities (OPR) indicates that preparers must comply with the due diligence requirement under Circular 230 §10.22 by making reasonable inquiries when information provided by clients suggests the possible existence of foreign financial transactions, bank accounts or other foreign assets.  The requirement is similar to the American Institute of Certified Public Accountant’s (AICPA) Statement on Standards for Tax Services (SSTS) No. 3, Certain Procedural Aspects of Preparing Returns. Noncompliance can result in the imposition of civil and criminal penalties against the preparer, as well as disciplinary action by the OPR.
Risk Control
From a risk control perspective, the following may help reduce the risk of exposure to malpractice claims related to client non-compliance with FBAR and FATCA filing requirements:

• Include a statement in tax engagement letters that clients are responsible for reporting ALL income in their income tax returns, including income originating from foreign sources, and for reporting the correct balance or value of foreign accounts and foreign financial assets.  Recommended language is included in the CNA sample engagement letters for tax engagements.

• Consider supplementing the tax organizer with questions designed to identify all of the different foreign reporting requirements clients may be required to make, rather than the limited information typically addressed in the tax organizer.
• Use newsletters or similar written communications to inform clients and prospective clients of FBAR and FATCA filing requirements, due dates, and consequences of non-compliance.
• Conduct inquiries and request further information in writing if the information provided by a client for income tax return preparation, or other information obtained by the practitioner indicates that the client may have foreign assets.  Make sure to document any information provided by the client.
• Advise in writing of the reporting and disclosure requirements and consequences of non-compliance for those clients who indicate they have recently acquired a financial interest or authority over foreign assets. Send a confirming letter or e-mail documenting oral discussions of FBAR and FATCA reporting requirements.
• Advise the client orally and in writing to immediately consult with a tax attorney regarding voluntary disclosures if a client discloses authority over foreign bank accounts, income from foreign sources, or investments in foreign assets which were not disclosed in prior years.  Any further client discussions should be provided through the client’s attorney to afford the client the protections of the attorney-client privilege.
• Consider withdrawing from the engagement if a client refuses to comply with the reporting and disclosure requirements. If the engagement is terminated, issue a letter documenting the reporting and disclosure requirements and identifying the civil and criminal penalties that can be assessed for non-compliance.
• Monitor legislative changes closely, as well as regulatory and other developments, regarding foreign bank and financial accounts under both Title 26 and Title 31 of the United States Code. The requirements under FATCA will change considerably in the next year as the Treasury finalizes regulations and clarifies the reporting and withholding requirements by foreign financial institutions.

Recent Developments
As of the date of this alert, recent developments include:

• February 24, 2011: The Financial Crimes Enforcement Network (FinCEN) published a final rule amending the Bank Secrecy Act (BSA) Regulations—Reports of Foreign Financial Accounts—which defines the scope of who must file the FBAR report, delineates the types of reportable accounts, and identifies those qualifying for exemption.  See 76 Fed. Reg. 10234 (2011) (to be codified at 31 C.F.R. § 1010).

• July 18, 2011:  The FinCEN announced the availability of the option of filing the FBAR reports electronically.  See FinCEN Offers Optional Electronic Filing for FBAR Forms.

• January 9, 2012:  The IRS announced that the offshore voluntary disclosure program was being reopened for an indefinite period until further notice. See IR 2012-5, IRS Offshore Program Produce $4.4 Billion To Date for Nation’s Taxpayers; Offshore Voluntary Disclosure Program Reopens.

• February 14, 2012: The FinCEN announced that it was extending the FBAR reporting deadline to June 30, 2013 for certain individuals who have signature authority over, but no financial interest in certain foreign financial accounts. See FinCEN Notice 2012-1,FBAR Filing Requirement – Extending Filing Date related to Notices 2011-1 and 2011-2.

• February 24, 2012: The FinCEN announced a temporary exemption from mandatory electronic filing of the FBAR until July 1, 2013, and the process for requesting the exemption. See Important Notice About Mandatory Electronic Filing of Reports to FinCEN.

Firms are responsible for performing research on current guidance before advising clients.

Resources

• OPR article, Professional Responsibility and the Report of Foreign Bank and Financial Accounts.
• Joint Committee on Taxation, Technical Explanation of the “Foreign Account Tax Compliance Act of 2009” (JCX-42-09), p. 28 (October 27, 2009).
• Report of Foreign Bank and Financial Accounts: Significant Revisions and Severe Penalties, by Philip T. Pasmanik and Neil A.J. Sullivan, Journal of Accountancy (July 2009).
• Undeclared Foreign Accounts-Voluntary Disclosures and FBARs After the IRS Settlement Initiative, by Scott D. Michel, Journal of Tax Practice & Procedure, December 2009-January 2010.
• Third Offshore Voluntary Disclosure Program Launched, by Alstair M. Nevius, JD, 43 The Tax Advisor 149 (March 2012).
• FATCA Adds Layer of Complexity, Penalty Exposure to Offshore Asset Reporting, by Andrew M. Mattson, The Tax Advisor (April 1, 2012).
• FATCA regulations are expected to be finalized soon (in relation to the date of this Risk Alert) and temporary and proposed regulations have been published.
• IRS guidance on FBAR and FATCA requirements is available on the IRS’s web site.
• AICPA resources and guidance related to FBAR is available on the AICPA’s web site.
• Sample tax engagement letters are available to AICPA Professional Liability Insurance Program policyholders in the Policyholder Resource Center.

May 2012
By Accountants Professional Liability Risk Control, CNA,   333 South Wabash Avenue, 36S, Chicago, IL 60604.
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