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Real Compliance: Getting your way by giving in.

Op-ed - Real Compliance: Getting your way by giving in.

Compliance, and Raising the FBAR.
How to get your way, by giving in.

Compliance regimes, by their nature are the auditing to a standard and the enforcement of rules of governance in a regulated environment. Compliance regimes will be found wherever there has been a third party harmed by activity outside of their control. Sometimes they are also found where businesses have attempted to erect barriers to entry into a market and have successfully lobbied for controls which they satisfy but may cause difficulty to smaller competition. There are compliance regimes for vast numbers of regulated industries. If your industry is considered important, it is likely regulated.

On an individual level, there are also extensive compliance regimes. One that has been hotly debated in the news lately is the US Internal Revenue Service. This service serves each income earner in the US and many abroad. They provide very prompt and attentive service on an individual basis. It is this service that of all the US Federal services, has the most intimate relationship with the citizenry and it is projected that this intimacy will get much much deeper in the near future as it takes charge of not just your personal wealth, but also your health as it is the government institution charged with implementing the new federal health insurance payment requirements.

In the mean time, by the time you read this journal, you may have lost half your wealth to this service without even knowing it. How? We have a little known but highly important tax filing date on June 30 2013. The FBAR (Foreign Bank and Financial Account Report) form is available from the IRS. This form is required for all that have foreign accounts with an aggregate value of US$10,000 or more. The reason this may come as a surprise is that foreign banks and exchanges do not need to report this, only the account holder does.

Normally this may be a quiet non-event for most, because the well heeled folks with Suisse Bank holdings and gold vault troves, or Cayman Island accounts have staff that will perform such things on their behalf to maintain their compliance. Why this year is different is that there is a growing phenomenon which I have written about recently called crypto-currency, such as Bitcoin.

Bitcoin is a virtual currency, it is not legal tender in any country, and it has no inherent value. In this way it might be similar to a currency in an online game, where you can trade virtual gold with a digital Elf for a virtual item that lets you play better in some online game. It has no value outside the small world of folks that want to play that game. But where Bitcoin is very different from these other virtual currencies is that it has an exchange value. Folks have been exchanging this virtual currency for dollars and yen and euros and all sorts of other government currencies. There are currency exchanges that are permanently operating that give a real-time value for these virtual currencies. (Yes currencies… there are many, not just Bitcoin, though that is currently the most valuable and noteworthy of them all).

So what is the connection? Compliance – FBAR – Bitcoin? Quite simply, since the regulatory environment in the USA is fairly ornate, many of the Bitcoin businesses are hosted overseas. The largest Bitcoin exchange is in Japan, Since all of these are online businesses, it is not always obvious where they are located, but if you have accounts on several of the exchanges, and the aggregate value of all those accounts is over US$10K, you are required to report it to the IRS. This is true even if you have never exchanged any of this virtual currency for “real” money of any kind, because the exchanges list a “value” of the currency in US Dollars.

At this time quite a high percentage of the Bitcoin folks are unaccustomed to having large amounts of money. Most are technology folks, programmers, or working people. This is because it still takes some technical know-how to work with this currency. It exists in software, it uses cryptography, it is experimental and not much like any currency that has ever existed before. These folks are not the highly tax-savvy 1ers that file these forms routinely. A few years ago, the currency was worth ten cents, then a dollar, then ten dollars, now it is about 100 dollars apiece, and briefly this year it went up to 265 dollars, and it hit a high of almost 32 dollars in 2011.

So this could be a big problem for US Bitcoin holders. The FBAR non-filing penalties from the IRS are draconian. Willful non-filing for violations occurring after October 22, 2004, the ceiling is the greater of $100,000 or 50 of the balance in the account at the time of the violation. This means that someone that had over 300 of these virtual coins as far back as 2011 could have their whole virtual fortune sacrificed to the IRS simply for not filling out the form. The penalty would then be 50 + 50 = 100 of the entire amount of your account, regardless of whether it was profitable or not, simply for holding the account outside the US and not reporting it. The IRS confirms this:

Q. Can cumulative FBAR penalties exceed the amount in a taxpayer’s foreign accounts?
A. Yes, under the penalty provisions found in 31 U.S.C. 5314(a)(5), it is possible to assert civil penalties for FBAR violations in amounts that exceed the balance in the foreign financial account.

To add to this problem, there is no notice that you will receive that you need to file this form until it is way past too late. The IRS will not notify you, the foreign institution has no requirement to notify you. The only way you are going to find out is by reading important journals such as this, or Forbes or some other financial journal that serves the international community. You will also not receive any notice that the form was received, you have to call the IRS (866-270-0733) to confirm that it was received and have to wait 90 days to do so. Even if you file, and it was lost in the mail, you may lose your entire foreign fortune, so it is important to make that call.

So how can you be sure whether you need to file? The safest way is to ask your tax attorney and read carefully the IRS documentation.
1. In order to determine whether or not the FBAR is required, all of the following must apply:
A. The filer is a U.S. person; (or person equivalent, partnership, corp, etc)
B. The U.S. person has a financial account(s);
C. The financial account is in a foreign country;
D. The U.S. person has a financial interest in the account or signature or other authority over the foreign financial account; and, (you have the password)
E. The aggregate amount(s) in the account(s) valued in dollars exceed $10,000 at any time during the calendar year.
The US government has shown that it is taking Bitcoin very seriously so we should be wise and understand the implications of that. Either avoid it altogether, risk your entire fortune and freedom by pretending that you can be anonymous, or understand it well enough so that you don’t fall in one of the many pitfalls that may accompany this wonderful new world of virtual money.