As Certified Public Accountants specializing in tax and Enrolled Agents (EA), our role extends beyond mere preparation of returns; it encompasses a rigorous adherence to professional standards set forth by the Internal Revenue Service (IRS). A critical area demanding our expertise and diligence is the Report of Foreign Bank and Financial Accounts (FBAR), FinCEN Report 114. While not a tax return itself, the FBAR is inextricably linked to U.S. tax compliance and is a significant focus of the IRS Office of Professional Responsibility (OPR). This article delves into the FBAR reporting requirements and the specific obligations imposed on practitioners by Circular 230, which governs practice before the IRS as outlined in “Tax Practice Obligations and the Report of Foreign Bank and Financial Accounts,” Alerts from Office of Professional Responsibility, Issue Number: 2025-10.

Understanding FBAR Reporting Requirements

The FBAR, formalized under the Bank Secrecy Act, is an information report designed to help the U.S. government identify individuals who might be using foreign financial accounts to circumvent U.S. law, engage in illicit activities, or conceal unreported income maintained or generated abroad.

Who Must File: A United States person must file an FBAR if they have a financial interest in, or signature or other authority over, a financial account in a foreign country, and the aggregate value of such accounts exceeds $10,000 at any time during the calendar year. A "United States Person" is broadly defined to include U.S. citizens, U.S. residents, and entities such as corporations, partnerships, trusts, or limited liability companies formed under federal or state law. This also extends to children, employee benefit plans, and estates formed under U.S. law.

What Constitutes a Reportable Account: A "foreign financial account" is one located outside the U.S., which includes the fifty states, the District of Columbia, U.S. territories and possessions, and certain Indian lands. Reportable accounts encompass a wide range of financial instruments, including:

Bank accounts (checking, savings, demand deposit).
Securities accounts.
Annuities or insurance policies with a cash value.
Mutual funds.

Defining "Financial Interest" and "Signature or Other Authority": A financial interest generally refers to being the owner of record or the holder of legal title to the account. Signature or other authority typically means an individual has the power, alone or with others, to control the disposition of funds or assets in a financial account through direct communication with the financial institution.

Filing and Recordkeeping: The FBAR, FinCEN Report 114, must be filed electronically. The due date for filing an FBAR is April 15 of the year following the reporting year. Individuals and entities are also required to maintain specific records for five years, including the account name, account number, name and address of the foreign bank, type of account, and the maximum value of the account during the reporting period, and make these available for inspection.

Consequences of Non-Compliance: Failure to file an FBAR can result in significant penalties, both civil and criminal.

Civil penalties for non-willful failure to file can be up to $10,000 (adjusted for inflation), unless reasonable cause is shown and proper reporting on a late-filed FBAR occurred. It is crucial to note that the Supreme Court has clarified this $10,000 penalty applies per unfiled report, not per unreported account within that report.
A willful failure to file is subject to a penalty not exceeding the greater of $100,000 (inflation-adjusted) or 50 percent of the balance in the account at the time of the violation.
Criminal penalties for filing a knowingly and willfully false FBAR can include a fine up to $10,000 or 5 years imprisonment or both. For a criminal violation of failure to file an FBAR or retain required records, penalties can be up to $250,000 or 5 years imprisonment, or both.
Notably, a person can be subject to both civil and criminal penalties for the same violation.

Circular 230: Professional Obligations for CPAs in Tax Practice

Practitioners, including CPAs, attorneys, enrolled agents, enrolled retirement plan agents, and enrolled actuaries, are subject to the standards of conduct and disciplinary rules outlined in Circular 230, Regulations Governing Practice before the Internal Revenue Service. "Practice before the Internal Revenue Service" is broadly defined to encompass all matters connected with a presentation to the IRS related to a taxpayer’s rights, privileges, or liabilities under IRS-administered laws or regulations, including preparing and filing documents, corresponding, rendering written advice, and representing clients at meetings. Participants in the IRS’s voluntary Annual Filing Season Program (AFSP) are also subject to certain Circular 230 provisions, including those related to diligence, competence, and knowledge.

Competence (Circular 230 Section 10.35): A fundamental requirement is that a practitioner must "possess the necessary competence to engage in practice before the Internal Revenue Service". In the context of FBAR, this means a CPA should have a baseline knowledge of FBAR reporting requirements and be prepared to supplement this knowledge as needed to competently assist a taxpayer who may have reportable foreign financial accounts. Competent practice demands "the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged".

Diligence (Circular 230 Section 10.22(a)): Closely intertwined with competence is the duty of diligence. CPAs and EAs preparing income tax or other information returns for clients have an explicit duty of diligence to inquire of their clients with sufficient detail to ascertain the information necessary for correct responses to foreign-account questions on clients’ returns. This diligence also requires ensuring that all written or oral statements made to clients and to the IRS are accurate.

Knowledge and Reliance on Client Information (Circular 230 Sections 10.34(d) and 10.21): While practitioners may generally rely in good faith and without verification on information provided by a client, this reliance is not absolute. A practitioner cannot disregard the implications of information they already know or have received from the client. If client information appears to be "incorrect, incomplete, or inconsistent with other facts the practitioner knows," the CPA or EA must make further inquiry of the client for an explanation. This includes making "all appropriate inquiries" of a client whose information suggests potential overseas holdings subject to FBAR reporting.

Furthermore, if a CPA or EA discovers that a current client did not comply with past foreign account reporting requirements, they must promptly inform the client of the "noncompliance, error, or omission" and any potential penalties that may apply, as mandated by Circular 230 section 10.21.

Standards for Tax Returns and Other Documents (Circular 230 Section 10.34(c)): When advising or assisting a client with reporting income or positions on a tax return, the standards of section 10.34 apply. A CPA or EA is required to advise a client of any potential penalties likely to apply to a position taken on a tax return they prepare or advise on, and must also inform the client of any opportunity to avoid penalties through adequate disclosure.

Specifically regarding FBAR, if a CPA or EA determines that foreign accounts must be reported on the client’s tax return, they should prepare the return or advise the client accordingly. It is important to note that a CPA or EA is not obligated to prepare the FBAR form itself for the client, unless they are competent, willing, and the client agrees to this additional service. However, even if not preparing the FBAR, the CPA or EA does have an affirmative obligation to advise the client of the need to file an FBAR and the consequences of failing to file one.

Conclusion

The responsibilities of CPAs and EAs in tax practice concerning FBAR compliance are significant and clearly articulated within Circular 230. From possessing the necessary competence and exercising due diligence in client inquiries to providing crucial advice on reporting obligations and potential penalties, our professional duties extend beyond the mere mechanics of tax return preparation. Adhering to these standards is paramount not only for fulfilling our obligations to clients but also for upholding the integrity of tax administration.

Prepared with assistance from NotebookLM.