Tax Blog/Blawg

Following the release of Ann and Mitt Romney’s tax returns, the news media and political commentators of all stripes have – to paraphrase Arlo Guthrie – detected, neglected, selected, rejected, and inspected those returns for a variety of commercial and political purposes.  As expected, the return shows substantial income, largely from passive investments.

One of the most interesting aspects of the Romneys’ returns – from a tax practitioner’s perspective – is the geographic location of a significant portion of their investments.  As MSNBC reported:

His 2010 return shows a number of foreign investments, including funds in Ireland, Switzerland, Germany and Luxembourg. Most of Romney's vast fortune is held in a blind trust that he doesn't control. A portion is held in a retirement account.

Romney's advisers acknowledged Tuesday that Romney and his wife, Ann, had a bank account in Switzerland as part of her trust. The account was worth $3 million and was held in the United Bank of Switzerland, said R. Bradford Malt, a Boston lawyer who makes investments for the Romneys and oversees their blind trust, which was set up to avoid any conflicts of interest in investments during his run for the presidency.

For tax practitioners, this excerpt poses the natural question: have the Romneys filed foreign bank account reports (“FBARs”), which have been the subject of much media attention in recent weeks?  The answer might not be as straightforward as it would initially seem.

As the article noted, some of the Romneys’ assets are held in a “blind trust,” which is a trust set up so that its beneficiaries (in this case, Mitt and Ann Romney) have no knowledge of or control over its investments.  Politicians often use such blind trusts to avoid accusations that they are using a public office to affect the value of their private investments – the sort of conflict of interest referenced in the article.

Nevertheless, the Romneys have some general knowledge about their investments.  Schedule B of the 2010 return itself discloses that the Romneys have a bank account in Switzerland for which FBARs presumably have been filed.

However, they also own interests in “passive foreign investment companies” (“PFICs”) in Germany, Switzerland, Ireland, Luxembourg, and the Cayman Islands for which FBAR filings may have been required, but which are not listed on Schedule B.  In Notice 2009-62, Treasury invited comments about whether a PFIC interest should be subject to FBAR reporting; yet, in subsequent guidance and regulations, Treasury declined to address the issue.  Nevertheless, in the Frequently Asked Questions and Answers regarding the Offshore Voluntary Disclosure Initiative, the IRS has clearly contemplated that taxpayers with previously undisclosed PFIC interests should come forward under the Initiative, suggesting that it believes FBARs should have been filed for such interests.

(Although an investment’s tax status as a PFIC does not itself trigger an FBAR filing requirement, a PFIC may be an “account[] in which the assets are held in a commingled fund” and for which an FBAR must be filed.  See Notice 2009-62.)

It is not certain that the Romneys were required to report their foreign investments on FBARs.  Nevertheless, if the IRS concludes that FBAR filings were required, yet the Romneys failed to do so, the penalties that could be asserted against them would be significant.  If the failure were considered “willful,” the penalty could be the greater of $100,000 or 50 percent of the account value at the time of each failure.  In that case, the amount of money the Romneys pay to the government could increase dramatically.

Update: Thanks to Jack Townsend at Federal Tax Crimes for the pointer.