Statement of the American Institute of Certified Public Accountants

Statement of the American Institute of Certified Public Accountants

The American Institute of Certified Public Accountants thanks the House Ways
and Means Committee for the opportunity to submit this statement for the hearing
on November 5, 2009, on foreign bank account (Form TD F 90–22.1, Report of Foreign
Bank and Financial Accounts (FBAR)) reporting and related tax compliance
issues.

The AICPA is the national professional organization of certified public accountants
comprised of approximately 360,000 members. Our members advise clients of
federal, state and international tax matters, and prepare income and other tax returns
for millions of Americans. Our members provide services to individuals, notfor-profit
organizations, small and medium-sized business, as well as America’s largest
businesses.

General Comments

We thank the Internal Revenue Service (IRS) and the Department of Treasury
(Treasury) for the various announcements(1) this year, providing FBAR form filing
relief and extending the 2008 (and prior years) FBAR form due date for certain persons.
We also appreciate the continuing dialogue we have had over the past several
years with various government officials responsible for the FBAR form and the Voluntary
Disclosure Initiative.

However, many of our members remain concerned about the potential breadth of
the newly revised form, effective for the 2008 calendar year (i.e., filed starting on
January 1, 2009), and are confused as to the specific application of the filing requirements
to their clients’ circumstances. Because of the substantial penalties potentially
applicable to taxpayers who do not comply with the FBAR form filing requirements
and the lack of regulations and written guidance (other than the form
instructions), we request written guidance addressing the issues discussed below.

Specific Comments

Based on member feedback on the FBAR form over the past few years, the AICPA
suggests the following (elaborations on each are contained later in the letter):

1. Taxpayers should be assured that until definitive FBAR regulations and rulings
are issued, they can rely upon information on the IRS website, including
FAQs and similar information, and Internal Revenue Code (IRC) definitions in
complying with the FBAR form requirements.

2. The FBAR form should be considered timely filed when timely mailed (or efiled),
rather than when timely ‘‘received,’’ similar to the ‘‘mailbox’’ rule for filing
all tax and information returns.

3. The FBAR form due date should be changed from June 30 to October 15, or
an automatic extension should be available for October 15 filing.

4. The FBAR form should continue to apply only to U.S. persons, but if it is decided
that non-U.S. persons must file FBAR forms, such requirement should
be adopted prospectively and with clear definitions.

5. An FBAR form filing requirement with respect to foreign accounts held by a
trust should be imposed only on U.S. settlors/transferors and U.S. trustees of
the trust. Also, any U.S. person who is considered to have control of the trust
as a grantor under IRC Section 679 should be required to file an FBAR form
if the trust has a foreign account. If it is nonetheless decided that additional
reporting is required by foreign trust beneficiaries, only trust beneficiaries who
receive a distribution from a foreign trust should be required to file an FBAR
form, reporting the receipt of the distribution.

6. When Treasury and IRS clarify the rules regarding a comingled account for
FBAR form filing purposes, we recommend the FBAR form filing requirement,
if any, be limited to the current year and applied prospectively, rather than
retroactively, and that no FBAR form reporting be required for foreign financial
accounts owned by any comingled account that is itself an entity and a reportable
financial account.

7. When Treasury and IRS clarify the rules regarding which taxpayers are considered
to have signature authority over a foreign bank or financial account for
FBAR form filing purposes, we recommend that the FBAR form filing requirement,
if any, be limited to the current year and applied prospectively, rather
than retroactively.
all their taxes on the foreign accounts, but did not file FBAR forms, as well
as for those with unreported income and taxes due who also did not file FBAR
forms.

9. The IRS Office of Professional Responsibility (OPR) should work with the tax
practitioner community in formulating more comprehensive guidance for FBAR
form purposes before the practitioner due diligence guidance under Circular
230 goes into effect.

Each of the above comments is explained in further detail below.

1. Taxpayers should be assured that, until definitive FBAR regulations and rulings
are issued, they can rely upon information on the IRS website, including
FAQs and similar information, and IRC definitions in complying with the
FBAR form requirements.

If information on the IRS website is deleted or superseded prior to the issuance
of more formal guidance, taxpayers should not be penalized for relying on information
on the IRS website at the time they, or their advisors, access it.
IRS and Treasury should establish a clear procedure for requesting FBAR form
rulings (authorized by 31 C.F.R. Section 103.56(g)) that is similar to the existing
ruling process/procedures for requesting tax private letter rulings (PLRs) from the
IRS, and the IRS should release sanitized FBAR form rulings similar to what is
done with tax PLRs.

Also, IRS and Treasury should use terms and definitions from the IRC with which
taxpayers and practitioners already are familiar rather than developing a new set
of definitions for FBAR form purposes.

2. The FBAR form should be considered timely filed when timely mailed (or efiled),
rather than when timely ‘‘received,’’ similar to the ‘‘mailbox’’ rule for filing
all tax and information returns.

If the ‘‘mailbox’’ rule is not adopted for FBAR form purposes, all IRS websites
(and websites of U.S. embassies and consulates), publications, instructions, responses,
and references to the filing of an FBAR form should be clarified to say ‘‘received
by’’ rather than ‘‘filed by’’ or ‘‘mailed by.’’ The ‘‘received by’’ rule, as it currently
stands, is a trap for the unwary since it differs from the filing requirements
that apply to all tax and information return filing rules.

IRS and Treasury should allow and encourage taxpayers to efile the FBAR form.
A grace period of at least 10 days should continue to apply for FBAR form filings
because there is no tax due.

We recommend proof of timely filing include: (1) hand-delivery of the FBAR form
with receipt of a date stamp at an IRS district office, and (2) use of USPS certified
receipts or other proof of mailing alternatives available for tax forms.

We also suggest that a street address and phone number (rather than just the
current P.O. Box) be added to the instructions to enable a taxpayer (including a
non-resident of the U.S.) to use an overnight delivery service to deliver the FBAR
form to the IRS.

3. The FBAR form due date should be changed from June 30 to October 15, or
an automatic extension should be available for October 15 filing.

Taxpayers with the financial resources to purchase offshore investments or business
interests are very likely to request an extension of time to file their income
tax returns. Complete filing information from foreign sources is rarely available
until mid-summer or later. As a result, the amount and details of offshore accounts
are often not known until after June 30.

Taxpayers often do not have all the information (such as Schedules K–1 and footnotes
thereto) that may be needed to complete the FBAR form by June 30. Many
investors do not receive their Schedules K–1 until well after June 30 (many are received
in September). Furthermore, if a taxpayer’s investment advisor purchases a
foreign investment, such as a hedge fund, on behalf of the taxpayer, the investor
may not be aware of this except to the extent that a short entry is included on a
monthly statement. People who utilize investment advisors typically have multiple
accounts, and each account has a monthly statement that can run tens of pages.
The investor may, therefore, have no idea of the new investment in the foreign
hedge fund and the taxpayer’s tax preparer may not be made aware of this until
receipt of the Schedule K–1 for the initial year of investment, which will in many
cases be well after June 30.

Few taxpayers understand the full scope of the phrase ‘‘foreign financial account’’
or the concept of indirect (constructive) ownership. Thus, they are unlikely to inform
their tax preparer of their need to file the FBAR form or to provide all information
necessary to file by June 30. Because the definition of a foreign financial account
is a complex determination, especially if indirect ownership is involved, preparers
are more likely to discover that there is indirect ownership of a foreign financial account
when they are preparing the income tax return for the individual later in the
year. For example, an individual may own a controlled foreign corporation (CFC)
that might have a foreign bank account; however, the individual generally files the
Form 1040 after June 30 because of Schedules K–1 that are not yet received or the
inability to obtain the CFC information for the individual’s Form 5471 by June 30.
The tax practitioner might not even be aware of the CFC or be in a position to inform
the client of the need to file an FBAR form until well after June 30.

No other tax form is due on June 30, so many taxpayers are not aware of, or accustomed
to, the need to provide their tax preparers with information by this June
30 due date. In addition, taxpayers are not accustomed to having a filing requirement
for which there is no extension. It also takes a lot of time for many taxpayers
to gather the information required to prepare the FBAR form. For the above reasons,
and in light of the potentially significant penalties involved, the FBAR form
due date should be on or after October 15 to conform to the extended due date for
the vast majority of individuals. This would also ensure that the FBAR form due
date is after the extended filing deadline for calendar year-end entities, so most taxpayers
will have reviewed their prior calendar year filing requirements and disclosures
to ensure that complete and accurate FBAR forms are filed rather than having to
file late or amended FBAR forms due to Schedules K–1 received after June
30.

4. The FBAR form should continue to apply only to U.S. persons, but if it is decided
that non-U.S. persons must file FBAR forms, such requirement should be
adopted prospectively and with clear definitions.

The policy provided in Announcement 2009–51, adopting for 2008 and prior-year
FBAR form filings the definition of ‘‘in and doing business in the U.S.’’ that was
provided in the pre-October 2008 instructions for the FBAR form, should be adopted
for 2009 FBAR form filings and all future years. The FBAR form should not apply
to those meeting the IRC section 7701(b) definition of a non-U.S. person. Special
elections to be treated as a U.S. person for non-FBAR form purposes and treatybased
return filings should not require an FBAR form filing.

Despite our urging to restrict FBAR forms to U.S. persons, if Treasury and IRS
decide to require non-U.S. persons to file FBAR forms, we encourage careful thought
and clear definitions, and that such treatment be adopted only prospectively.

5. An FBAR form filing requirement with respect to foreign accounts held by a
trust should be imposed only on U.S. settlors/transferors and U.S. trustees of
the trust. Also, any U.S. person who is considered to have control of the trust
as a grantor under IRC Section 679 should be required to file an FBAR form
if the trust has a foreign account. If it is nonetheless decided that additional
reporting is required by foreign trust beneficiaries, only trust beneficiaries who
receive a distribution from a foreign trust should be required to file an FBAR
form, reporting the receipt of the distribution.

Beneficiaries of a foreign or domestic trust should not be required to file an FBAR
form. Beneficiaries will in most cases not have access to a trust’s foreign account
information. Beneficiaries often are not aware of, or able to calculate, their percent
interest in trust current income and assets (and the trustees may not share that
information) so it is often difficult or impossible for many beneficiaries to complete
an accurate, timely, and complete FBAR form. In some instances, a U.S. person may
not even be aware he or she is a beneficiary of a trust until a distribution is made.
Form 3520 is required to be filed by U.S. persons receiving distributions from foreign
trusts. Likewise, beneficiaries who receive a distribution from a domestic trust
will receive a Form 1041, Schedule K–1 and are required to include any income arising
from the distribution on their individual income tax return. Therefore, beneficiaries
already are required to report any distributions, and income included in
such distributions, from trusts. A U.S. settlor or transferor or a U.S. trustee to a
trust which owns a foreign bank account is much more likely to have access to and
knowledge of the trust’s assets than the beneficiary.

If it is nonetheless decided that additional reporting is required by foreign trust
beneficiaries, despite our recommendation and concerns mentioned above, only beneficiaries
who receive a distribution from a foreign trust should be required to file
an FBAR form, reporting the receipt of the distribution. This provides reporting
when there is income involved and is easier and simpler to administer and with
which to comply. If there is no distribution from the trust, an FBAR form should
not be required unless the person is considered to have control of the trust as a
grantor under IRC Section 679.

In all cases, U.S. settlers/transferors, and trustees of trusts with a foreign account
should be required to file an FBAR form.

6. When Treasury and IRS clarify the rules regarding a co-mingled account for
FBAR form filing purposes, we recommend the FBAR form filing requirement,
if any, be limited to the current year and applied prospectively, rather than
retroactively, and that no FBAR form reporting be required for foreign financial
accounts owned by any co-mingled account that is itself an entity and a reportable
financial account.

We appreciate the IRS Notice 2009–62 delay until June 30, 2010, for the FBAR
form filing for the 2008 and prior-year calendar year FBAR form filings for persons
with signature authority over, but no financial interest in, a foreign financial account,
and for persons with a financial interest in, or signature authority over, a
foreign comingled fund. We note that both issues continue to concern our members.

It would be extremely difficult and an administrative burden for taxpayers to go
back multiple years and research whether an account would have required an FBAR
form filing and gather the information required. The new definitions and clarifications
should apply only prospectively.

We also suggest that when taxpayers own an interest in a foreign pooled investment
account that is an entity, such as a mutual fund or hedge fund that is itself
a reportable financial account for FBAR form purposes, guidance clarify that FBAR
form reporting is not required with respect to any financial accounts owned by the
foreign pooled investment account.

7. When Treasury and IRS clarify the rules regarding which taxpayers are considered
to have signature authority over a foreign bank or financial account for
FBAR form filing purposes, we recommend that the FBAR form filing requirement,
if any, be limited to the current year and applied prospectively, rather
than retroactively.

The signature authority requirement has created significant uncertainty and concern
for entities who have assigned various rights over customers’ accounts to employees
within their organizations. Guidance on this should be limited to the current
year and applied prospectively, rather than retroactively.

8. Regarding delinquent FBAR forms, Treasury and IRS should provide guidance
and relief regarding their filing, including reasonable cause for waiver of penalties.
Guidance and relief are needed (consistent with FAQ# 9, posted on the
IRS website on May 6, 2009) for those who reported all their income and paid
all their taxes on the foreign accounts, but did not file FBAR forms, as well as
for those with unreported income and taxes due who also did not file FBAR forms.

The Voluntary Disclosure Initiative served its purpose in bringing more taxpayers
into the system. We encourage IRS and Treasury to continue that program and
work with taxpayers to increase compliance in this area without unnecessarily
harsh civil or criminal penalties for coming forward. We also request an extension
of the relief provided by the IRS in FAQ #9 regarding delinquent FBAR forms when
all income was reported and taxes paid. Finally, we urge the IRS and Treasury to
provide an adjustment of the penalty when the amount of unpaid tax on the previously
unreported income from the foreign bank account is less than the penalty.

9. The IRS Office of Professional Responsibility (OPR) should work with the tax
practitioner community in formulating more comprehensive guidance for FBAR
form purposes before the practitioner due diligence guidance under Circular 230
goes into effect.

Although we appreciate the importance of due diligence in preparing tax and information
returns, in view of the significant open questions and lack of clear definitions
in the FBAR form context, in combination with the potentially onerous penalties
involved, we recommend that OPR work with the tax practitioner community
in formulating more comprehensive guidance before the due diligence guidance goes
into effect.
* * * * *
We welcome the opportunity to discuss our comments further with you or others
at the House Ways and Means Committee Select Revenue Subcommittee.

(1) Announcement 2009–51 and IR–2009–58, released June 5, 2009; Notice 2009–62,
released August 7, 2009; IR–2009–84, released September 21, 2009; ‘‘Frequently Asked Questions’’
(FAQs) on the Voluntary Disclosure Initiative, posted on the IRS website May 6, 2009, and
modified July 31, 2009; additional FAQs added June 24, 2009, and August 25, 2009, FAQs on
the FBAR form, posted on the IRS website March 13, 2009, and modified July 1, 2009; and the
Voluntary Disclosure Initiative, announced March 26, 2009.
8. Regarding delinquent FBAR forms, Treasury and IRS should provide guidance
and relief regarding their filing, including reasonable cause for waiver of penalties.
Guidance and relief are needed (consistent with FAQ# 9, posted on the
IRS website on May 6, 2009) for those who reported all their income and paid