FBAR UPDATE: The Sixth Circuit Rules Willfulness Includes Recklessness - March 2024

Background

Under the Bank Secrecy Act, individuals with foreign bank accounts containing an aggregate of $10,000 or more must annually file a Report of Foreign Bank and Financial Accounts (“FBAR”) with the U.S. Department of the Treasury. An individual who fails to file an FBAR by the deadline risks civil penalties.

If the failure to file an FBAR is not willful, the penalty shall not exceed $10,000.  However, for any person willfully violating the FBAR requirement, the maximum penalty increases to the greater of $100,000 or 50% of the balance in the account at the time of the violation. A person willfully violating the FBAR requirements could also subject himself to criminal penalties.

Unfortunately, there is no “clear-cut” test to determine whether an act is “willful” and several federal courts tasked with assigning it a legal interpretation have expanded its meaning. While it inherently involves the obvious meaning that a person is willful if they are aware of the FBAR reporting requirement and intentionally choose not to file, these courts have broadened the definition to encompass objectively reckless conduct related to the FBAR reporting obligation. According to this expanded definition, a taxpayer is deemed to engage in objectively reckless conduct if they clearly should have been aware of an FBAR reporting requirement, and discovering this obligation would have been relatively straightforward for them.

In the recent Sixth Circuit Court of Appeals case, United States v. Kelly (2024), the court further expanded the definition of willfulness to include “objectively reckless conduct.”

Summary of United States v. Kelly

In United States v. Kelly (2024), Kelly (the “taxpayer”), a U.S. citizen, opened an interest-bearing account at a bank in Switzerland in 2008, keeping it "numbered" to hide his identity and avoiding disclosure to the IRS. Despite warnings from Swiss bank about U.S. tax compliance, the taxpayer did not seek professional advice and maintained around $1.5 million in the account. In 2012, the Swiss bank closed his account due to non-compliance, later reopening it as "Mandatory High Risk." The bank urged the taxpayer to comply with U.S. tax laws or face disclosure to U.S. authorities.

In 2013, the Swiss bank requested proof of compliance with U.S. tax laws, and the taxpayer, fearing disclosure, applied for the IRS Offshore Voluntary Disclosure Program (“OVDP”) in 2014. His voluntary disclosure was preliminarily accepted, contingent on truthful cooperation. Meanwhile, he closed the Swiss bank account, transferring funds to another bank in Liechtenstein.

In 2016, over two years later, the taxpayer filed delinquent FBARs for 2008-2013, omitting 2014 and 2015. In 2018, the IRS removed him from the OVDP for failing to provide foreign asset information. The IRS then investigated, finding the taxpayer willfully failed to file FBARs for 2013-2015 and proposed penalties totaling approximately $770,000. The taxpayer's non-payment led to a government action, resulting in cross-motions for summary judgment. The district court favored the government, prompting the taxpayer's appeal. The Sixth Circuit affirmed the district court’s decision because it found that the taxpayer's failure to file was a willful violation of the Bank Secrecy Act.

Citing various U.S. Supreme Court cases, the Sixth Circuit explained that term "willfulness" in the context of violating FBAR requirements carries different meanings depending on whether it pertains to criminal or civil penalties. In criminal cases, it refers to a "voluntary, intentional violation of a known legal duty," and such violation can be inferred from conduct meant to conceal or mislead financial information. For civil penalties, including those under FBAR, the Sixth Circuit held that “willfulness” encompasses both knowing and reckless violations. This interpretation aligns with the Supreme Court's ruling in Safeco Insurance Company of America v. Burr, which clarified that civil liability under the Fair Credit Reporting Act for willful violations includes reckless disregard of statutory duty. The court's decision is consistent with every other circuit court, which include the Eleventh Circuit, Fourth Circuit, Third Circuit, and Federal Circuit, that has addressed this issue.

In Kelly, the taxpayer did not dispute his failure to file FBARs for the relevant tax years but argued he did not act knowingly or recklessly. The record, however, revealed evidence of willful and reckless non-compliance. The Sixth Circuit found that the taxpayer intentionally evaded legal obligations by concealing his assets, shielding his Swiss bank account from U.S. authorities, and opting out of U.S. securities to avoid disclosure. Despite participating in the OVDP, he failed to meet the 2013 FBAR deadline and provided false and incomplete information to the IRS about his foreign assets.

The Sixth Circuit also found that the taxpayer's conduct was objectively reckless, as he failed to seek professional advice about reporting obligations notwithstanding having previously done so.  Further, the taxpayer did not confirm the Swiss bank’s reporting practices and neglected to inquire about FBAR preparation. Even after becoming aware of his reporting requirements, the taxpayer did not file the 2014 and 2015 FBARs. The taxpayer's reliance on his OVDP participation and engagement of a Swiss account manager was dismissed as insufficient to excuse noncompliance. The undisputed facts demonstrated the taxpayer's intentional efforts to keep his foreign account secret, failure to consult professionals, and neglect in ensuring FBAR submissions. Consequently, the taxpayer's failure to meet FBAR requirements for 2013-2015 was deemed a willful violation of the Bank Secrecy Act.

Observations

In recent circuit courts decisions coming from the Sixth, Eleventh, Fourth, Third, and Federal Circuits, there is a discernible trend that broadens the scope of actions considered as willful violations by taxpayers.  Taxpayers who believe their failure to file FBARs (and potentially other international forms) is non-willful should assess their set of facts in light of these decisions.  What a taxpayer may think is non-willful intent may actually constitute a willful act.

This news alert does not constitute legal advice and only contains informative content.

For assistance with complying with U.S. tax laws, please contact:

Christine Alexis Concepción, Esq., Partner

Corporate Transparency Act Update: Unenforceable Against Only Certain Businesses

Background

In 2021, Congress enacted the Corporate Transparency Act (“CTA”) as part of an anti-money-laundering initiative. The CTA mandates that all entities formed or registered to do business in the US (“Reporting Companies”) and all foreign entities registered to do business in any state, unless exempt, must disclose their beneficial ownership to the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”).

A legal challenge to the CTA and FinCEN's implementing rules arose in the case of National Small Business United v. Yellen in the US District Court of the Northern District of Alabama. On March 1, 2024, the court ruled in favor of the plaintiffs, deeming the CTA unconstitutional, stating it exceeded the constitutional limits on the legislative branch.

National Small Business United v. Yellen

In National Small Business United v. Yellen, the National Small Business Association (“NSBA”) and one of its members filed suit challenging the constitutionality of the CTA and FinCEN’s authority to implement the CTA. On March 1, 2024, the District Court ruled in favor of the plaintiffs, deeming the CTA unconstitutional, stating it exceeded the constitutional limits on the legislative branch.

The District Court dismissed the US government's arguments that Congress had the power to enact the CTA under its (1) powers to conduct foreign affairs, (2) Commerce Clause authority, or (3) taxing power, or the authority to pass laws "necessary and proper" for enumerated powers.  The key issue, as highlighted by the District Court, focused on determining whether the Commerce Clause empowers Congress “to regulate non-commercial, intrastate activity when certain entities, which have availed themselves of states’ incorporation laws, use channels of commerce, and their anonymous operations substantially affect interstate and foreign commerce.”  The court ruled that Congress did not have such power under the Commerce Clause.

Effect on Businesses

Although the District Court declared the CTA unconstitutional, the injunction against enforcement applies solely to the plaintiffs, including the National Small Business Association (NSBA).

In response, FinCEN released a statement indicating it would comply with the ruling for the specific plaintiffs and a commitment not to enforce the CTA against them. The affected entities are those that were NSBA members when the court ruled on March 1, 2024. Other reporting companies remain subject to CTA requirements unless exempt.

Entities formed on or after January 1, 2024, must plan for CTA compliance, filing initial Beneficial Ownership Information (BOI) reports within 90 days if not exempt. Existing entities formed before January 1, 2024, should continue preparing for compliance by the January 1, 2025 deadline, keeping an eye on legal updates.

While the District Court's decision impacts the federal CTA, it does not affect reporting requirements under state statutes. States, including New York with the LLC Transparency Act, have introduced disclosure laws similar to the CTA, reflecting a broader landscape of regulatory developments.

Expected Future Developments

On March 11, 2024, the US Department of Justice filed a notice of appeal with the United States Court of Appeals for the Eleventh Circuit. It is expected that the DOJ will ask for a stay of the ruling during the appeals process. The outcome of similar litigation in other courts remains uncertain.

This news alert does not constitute legal advice and only contains informative content.

For assistance with complying with U.S. tax laws, please contact:

Christine Alexis Concepción, Esq., Partner

AmCham Peru Renews Its Members For The Period 2024-2025

Carlos F. Concepción has been renewed as a member of The Arbitration Court of the International Arbitration Center of the American Chamber of Commerce of Peru (AmCham Perú) for 2024-2025.

The Corporate Transparency Act is Finally Effective: What You Should Know

I. Executive Summary:

The Corporate Transparency Act (“CTA”) is finally effective January 1, 2024. Enacted in 2021, the CTA requires certain U.S. and foreign entities to disclose beneficial information for purposes of combatting illicit activity, including money laundering, tax fraud, and terrorism financing.

Under the CTA, certain domestic and foreign companies are required to disclose information about their beneficial owners (“BOs”) and individuals who file paperwork on the company’s behalf (a “Company Applicant”) to the US Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”).

This alert will discuss what entities are subject to reporting and which ones are exempt, who must file, and what information must be reported. Further, it will address who has access to the report, when it is due, and penalties associated with civil and criminal non-compliance. Finally, it will include a brief analysis of New York’s recently enacted New York LLC Transparency Act.

II. What is a Reporting Company

An estimated 32 million entities are now mandated to report to FinCEN beneficial ownership information (“BOI”) concerning a broad range of U.S. and foreign entities. An entity that is required to report is a reporting company (“Reporting Company”). A Reporting Company includes the following:

Domestic Entities

• a U.S. corporation,

• a U.S. limited liability company, or

• any other entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.

Foreign Entities

• a corporation, limited liability company, or other entity formed under the law of a foreign country, and

• registered to do business in any U.S. state or in any Tribal jurisdiction, by the filing of a document with a secretary of state or any similar office under the law of a U.S. state or Indian tribe.

It is important to stress that the mere formation of an entity in the U.S. will bring the entity under the scope of the CTA reporting requirements, subject to limited exemptions.

III. Who Must Report to FinCEN

Beneficial Owners

Individuals who either (1) directly or indirectly own or control 25% or more of a Reporting Company or (2) exercise substantial control over the Reporting Company are required to complete the BOI form.  

An individual has control if such individual serves as a senior officer, has authority over the appointment or removal of any senior officer or a majority of the board of directors or similar body, has substantial influence over important business, financial or corporate decisions or has similar indirect or direct substantial control, including through board representation or control over intermediary entities that exercise substantial control.  

An individual who owns or controls an ownership interest in an entity through a contract, arrangement, understanding, relationship or otherwise, including through ownership or control of intermediary entities that separately own or control the entity’s ownership interests is considered as controlling the Reporting Company.

Company Applicants

Company applicants are individuals who file the document to create or register the Reporting Company and the individual who is primarily responsible for directing and controlling the filing. 

IV. What Entities are Exempt from Reporting

The CTA carved exemptions to report BOI to FinCEN for narrow categories of entities. The applicant will still need to file a written certification with FinCEN clearly identifying the exemption to disclosure. A few of the 23 non-reporting entities are as follows:

• financial entities that report to governing authorities i.e. banking institutions, credit unions, investment advisors, venture capital funds, public accounting firms, and insurance companies;

• any pooled investment vehicle that is operated or advised by an exempt financial entity described above;

• Regulated Private Trust Companies (Regulated PTC);

• 501(c) organizations, which can include private foundations;

• sole proprietorships and general partnerships;

• large businesses with at least 20 full-time employees, over 5 million USD in gross receipts, and a substantial U.S. presence;

• inactive companies created prior to January 1, 2020, excluding foreign owned entities, companies with annual receipts above $1,000 USD and those that had any recent changes in ownership; and

• subsidiaries of the exempted entities (except for the pooled investment company).

The text of the CTA includes specific criteria for the exemptions, which should be analyzed on a case-by-case basis before concluding that an entity qualifies for an exemption. Many of these exempt entities are excluded from the CTA because they are already regulated by federal and/or state government reporting requirements (i.e. under SEC).  

V. What BOI Must Be Reported

Beneficial Owner

A BO must report his/her name, current residential or business address, birth date, and an identification number of driver’s license number or non-expired U.S.  or foreign passport number (with a photograph for those not holding a U.S.  ID, driver’s license or passport). Alternatively, the BO can provide his FinCEN Identifier (see below).

The Reporting Company

The Reporting Company must report its name, its “doing business as” (if applicable), address, tax identification number (TIN) or foreign TIN, jurisdiction of formation/registration, and whether the filing is an initial filing, a correction, or an update.  Alternatively, the Reporting Company can provide his FinCEN Identifier (see below).

Company Applicants

An individual who files the document that creates or forms the Reporting Company under local law is a Company Applicant.  For a foreign Reporting Company, the Company Applicant is the individual who files the document that first registers such foreign entity to do business in the U.S. Anyone who directs or controls the filing of an entity creation or registration document by another is also Company Applicant.

VI. FinCEN Identifiers For Simplified Reporting

Individuals and Reporting Companies may want to consider requesting a FinCEN identifier to keep track of their reported information. For individuals, the number is called an “individual FinCEN identifier” and for Reporting Companies, the number is called an “entity FinCEN identifier” (collectively, “FinCEN Identifier”). A FinCEN Identifier would simplify reporting, because, in some circumstances, the FinCEN Identifier can be provided instead of BOI.   

If an individual has obtained an individual FinCEN Identifier and provided such individual FinCEN Identifier to a Reporting Company, the Reporting Company may include the FinCEN Identifier in its report in lieu of the BOI. Additionally, an individual FinCEN Identifier would allow those individuals to submit personal information directly to FinCEN rather than providing it to every Reporting Company that must report on such individual. 

As to the entity FinCEN Identifier, a Reporting Company may report another entity's FinCEN Identifier and full legal name instead of the information required with respect to the BOs of the Reporting Company if: (1) such entity has obtained a FinCEN Identifier and provided that FinCEN Identifier to the Reporting Company; (2) an individual is or may be a BO of the Reporting Company by virtue of an interest in the Reporting Company that the individual holds through the entity; and (3) the BO of the entity and of the Reporting Company is the same individuals. 

VII. Who Has Access to BOI

BOI can be disclosed to five (5) types of recipients: 

• U.S. Federal, state, local, and Tribal government agencies requesting BOI for specified purposes; 

• foreign law enforcement agencies, judges, prosecutors, central authorities, and competent authorities; 

• financial institutions (“FIs”) using BOI to facilitate compliance with customer due diligence (“CDD”) requirements under applicable law; 

• Federal functional regulators and other appropriate regulatory agencies acting in a supervisory capacity assessing FIs for compliance with CDD requirements; and 

• the U.S. Department of the Treasury, which of course includes the Internal Revenue Service (“IRS”) and Office of Foreign Assets Control (“OFAC”).

The BOI will be stored in a federal, searchable database, with limited access for use by law enforcement or for national security or intelligence purposes. This system is called the Beneficial Ownership Secure System (“BOSS”).

VIII. Penalties for Failure to File 

Civil Penalties

Entities that fail to report the required information about their BOs, or report incorrect or incomplete information, face fines up to $500 per day until the violation is corrected.

Criminal Penalties

In cases where non-compliance is found to be willful or accompanied by fraudulent intent, criminal penalties may be imposed. This includes cases in which false or misleading information is knowingly submitted. Violators can face fines of up to $10,000 USD and imprisonment for up to two years. 

The severity of these penalties is a clear indication of the seriousness with which the government views compliance with the CTA.

IX. When Is a BOI Report Due 

For entities created before January 1, 2024:

A Reporting Company created or registered to do business before January 1, 2024, will have until the deadline of January 1, 2025 to file its initial beneficial ownership information report.

For entities created  January 1, 2024 – December 31, 2024:

New companies created or registered on or after January 1, 2024, have 90 days to file initial BOI reports from the time the company receives notice that its creation or registration is effective, or after a secretary of state or similar office provides public notice of its creation or registration, whichever is earlier.

For entities created on or after January 1, 2025:

Only Within 30 days of notice of creation or registration.

Ongoing Reporting:

The reporting obligation entails the submission to FinCEN of an annual filing containing a list of:

• the current beneficial owners of the corporation or limited liability company and the information for each beneficial owner; and

• any changes in the beneficial owners of the corporation or limited liability company during the previous year (but not changes to the applicants); and

• update the list of the beneficial owners of the corporation or limited liability company within 30 days

Reporting companies have 30 days to report changes to the information in their previously filed reports. Inaccurate information in previously filed reports must be corrected within 30 days of when the Reporting Company becomes aware or has reason to know of the inaccuracy of information in earlier reports.

In conclusion, the CTA will require annual and continuing reporting, and a prior analysis to identify the ultimate beneficial owners under the stringent “substantial control” or “benefits” criteria based on the evolving guidance of FinCEN.  Lack of compliance in not reporting or incomplete/incorrect reporting can expose individuals to civil and criminal penalties, with a short 30-day timeframe for correction, making the CTA a top priority for both small and larger entities that will have to examine their exemption status and file a certification with FinCEN to avoid non-compliance. 

X. New York’s Version of the CTA: The NY LLC Transparency Act

New York enacted its own version of the CTA, called the New York LLC Transparency Act (the “NY Act”), which was signed into law on December 23, 2023. The NY Act applies to limited liability companies that are organized under the laws of New York and foreign entities that are registered to do business in New York.  The NY Act is significantly narrower than CTA because CTA covers more entities, including corporations, LLCs, limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships.

The NY Act states that reporting companies must provide BOI to the New York State Department of State (“DOS”) each beneficial owner's full legal name, date of birth, and current business street address.  Reporting companies can satisfy New York's requirements by submitting a copy of the BOI form filed with FinCEN.

NY’s reporting companies must file the required BOI with the DOS and exempt companies must file an exemption statement with the DOS:

• By January 1, 2025, if formed or qualified to do business in New York on or before the Act's effective date.

• With the articles of organization, if a domestic LLC formed after the Act's effective date.

• With the application for authority to do business in New York, if a foreign LLC qualified in New York after the Act's effective date.

Any changes to a New York LLC’s BOI must be reported to the DOS within 90 days.  Foreign entities registered to do business in NY must amend their application to do business in the state whenever there is a change in BOI.

One alarming difference between CTA and the NY Act is database of BOI that the NY Act creates.  While CTA’s database of BOI is maintained in a nonpublic database accessible only in certain circumstances by authorized entities, some of the BOI under the NY Act will be made public. The beneficial owners' full legal names and current business street addresses will be included in a public database maintained by the DOS. However, BOs of reporting companies can cite significant privacy interests and apply for a waiver to withhold their name, business address, or both, from the database under procedures to be established by the DOS.

This news alert does not constitute legal advice and only contains informative content.

For assistance to determine your reporting requirements with federal or state regulation and additional requirements under the CTA please contact:

Christine Alexis Concepción, Esq., Partner  

Munia El Harti Alonso, Esq., Counsel 

IRS’s New Tax Amnesty Program: Voluntary Disclosure Program for questionable Employee Retention Credits

On December 21, 2023, the Internal Revenue Service announced a new Voluntary Disclosure Program (the “ERC VPD”) to assist taxpayers who want to pay back the IRS after having erroneously filed for Employee Retention Credits (the “ERC”).

The IRS is also urging employers to withdraw pending ERC claims in a separate program that allows them to remove a pending claim with no interest or penalty. Over $100 million in withdraws have been made by taxpayers as the IRS continues aggressively pursuing audits and criminal investigations.

Taxpayers must apply for the ERC VDP by March 22, 2024 and those who are accepted must pay back only 80% of the ERC the taxpayer received. Taxpayers who cannot repay the amount owed may be enter into an installment agreement. The IRS agreed to accept only 80% because many ERC promoters charged a percentage of the ERC paid to the taxpayers and so the taxpayer never actually received the total amount of the ERC.

To qualify for the ERC VDP, applicants must report the name, address, and telephone numbers of the advisors or tax preparers who advised or assisted in the preparation of the claims.

Any employer who received an ERC but was not entitled to one can apply to the ERC VPD if all of the following are true:

• The employer is not under criminal investigation and has not been notified that they are under criminal investigation.

• The employer is not under an ERC examination for the tax period for which they are applying for the ERC VDP.

• The employer has not received an IRS notice and demand for repayment.

• The IRS has not received information from a third party that the employer is not in compliance or has not acquired information directly related to the noncompliance from an enforcement action.

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If you are interested in applying for the ERC VDP, please contact Christine Concepción at caconcepcion@concepcionlaw.com