The recent decision by the IRS to pull in its horns on enforcing the FBAR against NRAs is mounting evidence that Treasury is beginning to better understand the true functions of the FBAR filing requirement. In my view, in ascending order of importance they are:

1. “to assure maintenance of reports where such reports or records have a high degree of usefulness in criminal, tax or regulatory investigations or proceedings.”

2. to provide employment opportunities in the economically beknighted Detroit, Michigan for constituents of important committee chairmen.

3. to backstop the current campaign against US tax evaders with accounts in Swiss and other tax haven banks.

4. to function as a tarif on capital flows leaving the US or to non-US financial institutions that compete globally with US financial institutions for deposits and/or management fees.

The “valuable law enforcement tool” is and always was patent nonsense. One of the reasons FBAR enforcement was dormant for so long is that the data it collects is logically useless to law enforcement. The fact that no such detailed information is required if you own an interest in more than 25 accounts is indicative of this.

I suspect that a major reason the IRS is having a hard time clarifying what it wants on a FBAR is that the IRS does not really want any of the information. Neither the IRS nor the FINCEN ever had any positive use for it. Indeed, since, as I argue above, one of the major real functions of the FBAR is to exercise leverage over taxpayers, FBAR non-filing or non-compliance is actually an institutional plus.

In addition, since an evolving purpose of the FBAR requirement is to criminalize and/or otherwise burden capital flows to destinations outside the US, the more occult and intransparent the filing requirements are and the more draconian the penalties for failure, untimeliness or error, the more likely the filer will have to retain and pay for advice to fill the thing out properly. The resulting financial burden on the ownership of foreign accounts gives a competitive advantage to domestic financial institutions.

Another indication that the FBAR is now intended as a punitive threat and financial burden on the “masses” is that the $10,000 value threshold remains the same as when the first FBAR was required in 1970.

To illustrate the ravages of inflation and devaluation of the US dollar on the value of $10,000: In 1970 the average monthly US Social Security retirement check for men and women was $123.82 or $1,485.84 a year. In 2004 the average monthly benefit was $954.90 or $11,458.80 – well over the annual $10,000 threshold. By now (2009) the retirement average benefit is probably about 10 times what it was in 1970.

Every month the Social Security Administration, the Department of Defense and (to a lesser extent) the Office of Personnel Management automatically deposit payments to the foreign bank accounts of American citizen retirees and survivors living abroad. Given nearly 40 years of inflation and the static $10,000 threshold filing requirement, the odds are good that a very high proportion of those payments go to accounts that are now subject to FBAR reporting – and confiscation for non reporting.

The corollary to all this is that if you make the mistake of imposing the FBAR “tarif” on foreign capital inflows as the IRS was threatening, then you run the risk of defeating this increasingly important purpose of the FBAR and shooting your own country in the financial foot.

Hence, the recent “never mind” from the IRS.

As in the golden days of “Smoot-Hawley” look for other developed countries to reciprocate with FBAR Follies of their own stripe.

John Nolan
Frankfurt am Main