US Treasury Seeks To Establish FBAR Requirement For Cryptocurrency Accounts

The Internal Revenue Service sent warnings to investors after the Coinbase subpoena. Then it began auditing and investigating US taxpayers they believe were underreporting and underpaying their crypto federal income tax liability. Another risk faced by crypto investors that are holding virtual currencies in their foreign accounts.

US citizens and residents must disclose their qualifying foreign financial accounts to the Financial Crimes Enforcement Network (FinCEN). FinCEN is a bureau of the US Treasury responsible for safeguarding the US financial system. In the past, FinCEN guided taxpayers about their enforcement of the Bank Secrecy Act’s reporting requirements for virtual currency held offshore. It also implied that they would announce additional reporting requirements in the future.

In FinCEN Notice 2020-2, they explained:

  • Current FBAR regulations DO NOT define a foreign account holding virtual currency as a reportable account.
  • Hence, for now, a foreign account holding virtual currency is not reportable under FBAR unless it holds reportable assets besides virtual currency.

According to the Bank Secrecy Act, United States Persons have to disclose financial accounts with an aggregate maximum value of $10,000 or greater at any time during a reporting year. Hence, for anyone holding two accounts of $5,000 each, both accounts are subject to reporting. The same goes for any US persons with $10,000 and $1,000 each – both must be reported using FinCEN’s online FBAR filing system. In terms of FinCEN Notice 2020-2, cryptocurrency assets are not considered when calculating the aggregate maximum value.

TAKE NOTE: When the non-crypto assets held in an offshore account exceed the reporting threshold, and the account also contains cryptocurrency assets, then the account is still subject to disclosure.

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The Future

Soon, everything will change. FinCEN will propose an amendment to the regulations regarding FBAR reports to include virtual currency as a reportable account under 31CFR 1010.350. If this happens, every United States person will have to consider their cryptocurrency assets to determine whether they have to file FBARs for accounts containing both cryptocurrency and non-crypto assets. They will also have to consider their cryptocurrency accounts separately to decide whether or not it triggers FBAR filing requirements.

Crypto Investors And Foreign Account Tax Compliance (FATCA)

FACTA establishes reporting requirements that are not specific to foreign financial accounts. It applies to all foreign financial assets over the statutory reporting thresholds. Taxpayers in the US are subject to FACTA if they had owned more than $50,000 in foreign assets at any time during the tax year. For taxpayers living abroad, the threshold increases to $200,000 while the threshold doubles for married spouses who file jointly.

Therefore, virtual currencies held offshore might qualify as foreign financial assets in terms of FACTA. Put differently: while FBAR filing requirements exclude cryptocurrency, FACTA includes cryptocurrencies. FACTA imposes substantial penalties, civil and criminal, for wilful and intentional violations.

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Options For Those Who Failed To Meet Their Reporting Obligations

Eligibility for streamlined filing compliance procedures.

IRS STREAMLINED FILING COMPLIANCE PROCEDURES are available for US taxpayers that inadvertently failed to meet their obligations under:

  • FBAR
  • Internal Revenue Code

Taxpayers must:

  • Have a valid Social Security Number (SSN) or Tax Identification Number (TIN).
  • Certify that their violations of FBAR, FACTA, and the Internal Revenue Code were non-willful.
  • Must not be the subject of a current IRS audit or investigation.
  • Be current on any previously assessed IRS penalties.

The procedure will not provide relief from penalties, but it will help taxpayers avoid further IRS audits or investigations. This is the best option available for non-willful violators.

IRS criminal investigation voluntary disclosure practice

  • Taxpayers that cannot certify non-willfulness can take advantage of the IRS Criminal Investigation (IRS CI) Voluntary Disclosure Practise for their violations of FACTA and the Internal Revenue Code. Once FinCEN’s FBAR proposals result in changes in the Bank Secrecy Act Regulations, it will also be an option for taxpayers who failed to file their FBARs.

Such a voluntary disclosure can help taxpayers to avoid criminal prosecution for willful crypto-related reporting violations. Immunity from prosecution is not automatically guaranteed, however.

Eligibility for IRS criminal investigation voluntary disclosure

  • The IRS CI must not have access to the disclosed information due to its efforts or third-party sources.

More Options

  • Settlement is always an option. The IRS will typically consider settling in appropriate cases.
  • Quiet disclosure involves correcting mistakes through current or amended filings instead of through the IRS’ designated means. This is ill-advised. When revenue agents discover a quiet disclosure, it can lead to additional consequences beyond those imposed for the original statutory violations.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.

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