FBAR Signature Authority Regulations — The Other · PDF fileFBAR Signature Authority Regulations — The Other FATCA? ... FBAR Signature Authority Regulations ... the asset manager

FBAR Signature AuthorityRegulations — The Other FATCA?

by Max Reed

Reprinted from Tax Notes Int’l, February 16, 2015, p. 611

Volume 77, Number 7 February 16, 2015

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FBAR Signature Authority Regulations —The Other FATCA?by Max Reed

The IRS has two ways of getting information aboutforeign financial accounts — the foreign bank ac-

count report and the Foreign Account Tax ComplianceAct. Lots of attention has been paid to FATCA; muchless to FBARs.

The Currency and Foreign Transactions ReportingAct (commonly referred to as the Bank Secrecy Act),passed by Congress in 1970, directs the Treasury secre-tary to require that U.S. persons disclose informationregarding records and reports on foreign financialagency transactions.1 Under this act and the corre-sponding regulations,2 Treasury requires a U.S. personto file an FBAR if that person has a financial interestin, or signature or other authority over, foreign finan-cial accounts in which the aggregate value of these fi-nancial accounts exceeds $10,000 at any time duringthe calendar year.3

The financial interest branch of the FBAR regula-tions is widely known, and compliance with it is rela-tively straightforward. The signatory authority branchof the FBAR regulations is less well known, and com-pliance is more challenging. Compliance with the sig-natory authority branch may cause domestic law prob-lems similar to the ones that existed with FATCAbefore implementation of the various intergovernmen-tal agreements. This article explores the signatory au-thority regulations, identifies why they cause problems,and offers some strategies for complying while not run-ning afoul of domestic privacy or other legislation.

The FBAR Signing Authority Regulations

All U.S. persons, no matter where they reside, aresubject to the FBAR regulations. As in the U.S. Inter-nal Revenue Code, the definition of ‘‘U.S. person’’ un-der the FBAR regulations is broad. It includes a U.S.citizen, a U.S. resident, and an entity (such as a trust,corporation, or partnership) organized under the lawsof the United States.4

The definition of what accounts are reportable isalso broad. It includes bank accounts, accounts with aperson in the business of accepting deposits as a finan-cial agency, accounts that hold securities, some insur-ance accounts that have a cash value, accounts with amutual fund, and commodity brokerage accounts.5 Im-portantly, U.S. persons must report all financial ac-counts over which they have signatory authority (no

131 U.S.C. section 5314.231 CFR section 1010.350.3Id.

431 CFR section 1010.350(b).531 CFR section 1010.350(c).

Max Reed is a U.S. and Canadian tax lawyer atSKL Tax, a boutique U.S. and Canadian taxadvisory firm in Vancouver. E-mail:[email protected]

This article explores the FBAR’s signatoryauthority regulations, identifies why theycause problems, and offers some strategies forcomplying while not running afoul of domesticprivacy or other legislation.

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matter the nationality of who they belong to) on theirannual FBAR form. Signatory authority is defined asthe:

authority of an individual (alone or in conjunc-tion with another) to control the disposition ofmoney, funds or other assets held in a financialaccount by direct communication (whether inwriting or otherwise) to the person with whomthe financial account is maintained.6

There is scant authority detailing what this means.The preamble to the final FBAR regulations state:

The test for determining whether an individualhas signature or other authority over an accountis whether the foreign financial institution will actupon a direct communication from that indi-vidual regarding the disposition of assets in thataccount.7

The IRS offers the example of a U.S. resident whohas power of attorney over her Canadian parents. Shemust report these accounts regardless of whether shehas exercised that authority.8 This much seems clearfrom the plain text.

Beyond this, the precise contours of what constitutessignatory authority are unclear. Consider the fairlycommon example of an asset manager who has thepower to buy and sell assets held in a financial accountin order to manage a client’s portfolio. One possibleinterpretation of the signatory authority regulationwould mean that the asset manager would have to re-port all accounts that he controls. The word ‘‘disposi-tion’’ is generally meant to mean the sale of the prop-erty.9 The property that is being bought and sold is‘‘held in a financial account.’’ On this reading, sincethe asset manager would be able to sell the property inthe account, he would have to report that account. TheIRS once held the opposite view. A 2012 IRS FAQsuggests that those who have the power to direct invest-ment do not have to file an FBAR form.10 However,this FAQ is no longer online and the most recent ver-sion of it has removed this reference. Further, neitherthe instructions to the FBAR form nor the preamble tothe regulations mention this distinction. An outdated

FAQ that is no longer present on the IRS website isnot the most robust authority on which to base a legalposition.

Another possible interpretation is that the phrase‘‘control the disposition’’ means only the power to re-move money from the account. This reading may ex-clude most asset managers. The final words of the defi-nition (‘‘by direct communication (whether in writingor otherwise) to the person with whom the financialaccount is maintained’’) support this view. If the per-son with purported signing authority must be able tocommunicate with the person who maintains the ac-count, this suggests that they are not meant to be thesame person. However, this could easily be applied to adifferent person at the same financial institution. Thismore restrictive reading of the definition would limitthe scope of what accounts need to be reported on theFBAR form. While this may be the intended defini-tion, a broader reading is possible.

Consider the following common additional situa-tions that might create difficulties for U.S. persons out-side the United States. A U.S. person lawyer holdingmoney in trust for his clients may have to report thosetrust accounts on his annual FBAR form. A U.S. per-son chief financial officer may have to report all of hisorganization’s bank accounts on his FBAR form. Aprofessional trustee may have to report all of her cli-ents on the FBAR form. Finally, a U.S. person civilservant who holds money in trust for minors or thosewith mental disabilities may have to report all of hisclients to the IRS. Domestic privacy or other legislationmay not allow this disclosure in all cases. Even if do-mestic law allows the U.S. person to report the infor-mation, the beneficial owners of the accounts in ques-tion may be unhappy that their information is beingreported to the IRS.

Exceptions

The FBAR regulations contain five exceptions to thesignatory authority regulations if the person with sig-natory authority has no financial interest in the ac-count.11 These are likely largely inapplicable to thoseresiding outside the United States.

First, employees or officers of a bank that is super-vised by the U.S. Board of Governors of the FederalReserve System or another similar regulator do nothave to file FBARs for accounts owned or maintainedby that institution.12 However, the term ‘‘bank’’ is de-fined to mean only those branches or offices that are‘‘within the United States,’’ so this will likely be oflimited use.13

631 CFR section 1010.350(f).7Department of the Treasury, Amendment to the Bank Se-

crecy Act Regulations — Reports of Foreign Financial Accounts,76 Fed. Reg. 37, at 10236.

8See http://www.irs.gov/pub/irs-utl/IRS_FBAR_Reference_Guide.pdf.

9See, e.g., IRC section 424(c)(1).10‘‘Q: Does the term ‘other authority over a financial ac-

count’ mean that a person, who has the power to direct how anaccount is invested but who cannot make disbursements to theaccounts, has to file an FBAR?

A: No, an FBAR is not required because the person has nopower of disposition of money or other property in the ac-count.’’

1131 CFR section 1010.350(f)(2).1231 CFR section 1010.350(f)(2)(i).1331 CFR section 1010.100(d).

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Second, employees or officers of a financial institu-tion that is examined by the SEC or the CommodityFutures Trading Commission do not have to fileFBARs if they have signatory authority over accountsmaintained by that financial institution.14 The term‘‘financial institution’’ means only those offices orbranches within the United States.15

Third, employees or officers of an authorized serv-ice provider do not need to file FBARs to report ac-counts over a foreign financial account owned or main-tained by an investment company that is registeredwith the SEC. Authorized service provider is defined tomean ‘‘an entity that is registered with and examinedby the SEC and that provides services to an investmentcompany registered under the Investment CompanyAct of 1940.’’16 The text makes clear that the ‘‘entity’’itself that employs the officers and employees must beregistered with the SEC. This exception is narrow andso it may not be so helpful to U.S. persons operatingoutside of the United States.17

Fourth, an employee of an ‘‘entity’’ with a class ofequity securities listed on a U.S. national securitiesexchange does not need to file an FBAR to reportaccounts that he has signatory authority over but nofinancial interest in.18 The text makes clear that the‘‘entity’’ itself must be listed on a U.S. securitiesexchange. This may limit the number of foreign com-panies to which this exception applies.

And fifth, an employee of an ‘‘entity’’ that has‘‘equity securities’’ registered under section 12(g) of theSecurities Exchange Act does not need to file anFBAR.19 Again, in order to take advantage of theexception, the employee must be employed directly bythe entity whose securities are registered under theSecurities Exchange Act.

Put generally, these exceptions seemed designed toexempt U.S. employees of U.S. companies with foreignoperations from having to file an FBAR to reportfinancial accounts over which they have signatoryauthority. As such, they may be of limited use to U.S.persons residing outside the United States who areemployed by purely foreign organizations.

Penalties for Failing to FileThe penalties for failing for file the FBAR form can

be steep. An individual might be subject to a fine of$10,000 for each bank account that he failed to report

on an FBAR form.20 If the violation is found to bewillful, the penalty is increased to the greater of$100,000 or half the value of the account.21 The FBARpenalty can be avoided if reasonable cause is shownand the balance of the account is reported.22

Some countries, such as Canada, have declared thatthey will not help the IRS collect the FBAR penal-ties.23 Regardless, the potential penalty exposure islarge. Employees who incur such exposure in thecourse of their duties may have a cause of actionagainst their employer for putting them in this situa-tion. As such, employers should take proactive steps todetermine whether any of their employees have anFBAR reporting duty as a result of their employment.

Solutions to This Problem

Employers, particularly financial institutions, shouldconduct an analysis to help their U.S. person employ-ees determine if any of the accounts they are respon-sible for fall under the definition of ‘‘signing author-ity.’’ The next step should be to determine if domesticprivacy, or other legislation, prevents the employeefrom filing the FBAR form. If there is no barrier, theIRS offers a catch-up program for overdue FBARs.24

This program is available as long as the individual tax-payer is not under IRS civil or criminal investigationand has not already been notified by the IRS about thedelinquent FBARs. The taxpayer should include a writ-ten statement with the delinquent FBARs to explainwhy the submission was delayed.

If domestic legislation or other concerns prevent theemployee from filing the FBAR, the employee is in atrickier spot. If the employee does not file the FBARsas required and is later audited by the IRS, the penaltyexposure could be enormous. On the other hand, theemployee may not be able to actually comply for fearof breaching domestic law, which may have penaltiesattached to it. One solution may be to file an FBARwith information only about the person who has signa-tory authority and attach a statement explaining thedomestic legal concerns about why the FBAR couldnot be filed. This statement would later form the basisof a reasonable cause argument if the IRS ever investi-gated the failure to file. Arguably, a U.S. court wouldbe sympathetic to the argument that one should not berequired to break a domestic law in order to complywith U.S. law that is applied extraterritorially. After all,domestic legal considerations were one of the primary

1431 CFR section 1010.350(f)(2)(ii).1531 CFR section 1010.100(t).1631 CFR section 1010.350(f)(2)(iii).17Id.1831 CFR section 1010.350(f)(2)(iv).1931 CFR section 1010.350(f)(2)(v).

2031 U.S.C. section 5321(a)(3).2131 U.S.C. section 5321(a)(5)(C).2231 U.S.C. section 5321(a)(5)(B)(ii).23See http://isaacbrocksociety.files.wordpress.com/2012/03/

ba481782.pdf.24See http://www.irs.gov/Individuals/International-

Taxpayers/Delinquent-FBAR-Submission-Procedures.


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rationales why the United States adopted the FATCAIGAs. The same logic should hold true for individualtaxpayers trying to comply with the FBAR regulations.

In sum, the FBAR signatory authority regulationsput U.S. persons who reside abroad (especially thosewho work in the finance industry or as CFOs) in atough spot. Unless they can avail themselves of one ofthe exceptions, they may be obliged to report accountsto the U.S. government over which they have signatoryauthority. The definition of what is a ‘‘financial ac-count’’ is broad and the signatory authority regulations

are vague as to what precise level of authority is re-quired. As such, many accounts managed by U.S. per-sons abroad may have to be reported. The U.S. personabroad may thus have to choose between complyingwith domestic law and complying with the FBAR regu-lations. Explaining this choice to the IRS may be oneway of mitigating the penalty risk of failing to file. TheFBAR signatory authority regulations may not havereceived as much attention as FATCA, but they causemany of the same problems. ◆


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