Report of Foreign Bank and Financial Accounts (FBAR)
Reporting rules deciphered.
March 15, 2010
A flurry of government activity occurred on the last two business days of February regarding the Report of Foreign Bank and Financial Accounts — Form TD F 90-22.1 (the FBAR). Two government agencies released guidance on the FBAR. This article is intended to be only an overview of the recently released guidance. It is not intended to be a comprehensive analysis.
Before analyzing the new guidance, it is helpful to review the government agencies involved. The statutes on reporting foreign accounts are not in the Internal Revenue Code (the “Code”), but in the Bank Secrecy Act. The only reference to foreign financial accounts on Form 1040 is in Part III, Schedule B, on which the taxpayer is asked whether they have an interest in or signature authority over a foreign financial account and if so, in which foreign country.
The Bank Secrecy Act authorized the Secretary of Treasury to issue regulations requiring persons maintaining foreign financial accounts to keep records and file reports. The Secretary of Treasury delegated its authority to the Financial Crimes Enforcement Agency (FinCEN). FinCEN re-delegated its authority to enforce the reporting requirements to the Internal Revenue Service (“IRS”).
Regulations issued by FinCEN require the FBAR to be filed on or before June 30 of each calendar year for accounts maintained during the previous calendar year. Under the regulations, a person meeting the following requirements must file the FBAR:
IRS Guidelines on FBAR
Because the definitions of these terms have caused much confusion, FinCEN released a proposed regulation on February 25, 2010 to replace the current regulation together with a draft of proposed FBAR instructions. The preamble of the proposed regulation states that its purpose is to clarify which persons will be required to file FBARs and which accounts will be reportable. On February 26, 2010, the Internal Revenue Service (IRS) released guidance on FBAR reporting for 2009 and prior calendar years.
One of the IRS documents released on February 26 is Announcement 2010-16. In 2008, the IRS changed the definition of U.S. person in the FBAR instructions to include “a person in and doing business in the United States.” Under the July 2000 instructions, a “United States person” means:
In Announcement 2010-16, the IRS stated that the old definition of U.S. person applies with respect to FBARs for the 2009 calendar year and to earlier calendar years.
Private Equity and Hedge Funds
There was uncertainty regarding whether a private equity fund or a hedge fund had to be reported as a “financial account” on the FBAR. The current FBAR instructions state that a commingled fund — including a mutual fund — is a reportable financial account. IRS personnel informally commented that a foreign private equity fund or hedge fund may also be considered a “commingled fund” subject to FBAR reporting. In Notice 2010-23 issued by the IRS on February 26, 2010, the IRS announced that only mutual funds will be considered “commingled funds” with respect to FBARs for calendar year 2009 and prior years. The Notice states that a “foreign hedge fund or private equity fund” will not be considered a commingled fund subject to FBAR reporting. Also, the Notice states if the taxpayer has no other reportable foreign financial accounts then the taxpayer should check the “no” box in response to FBAR questions on the Form 1040 for 2009 and prior years.
The proposed regulation states that reportable “financial accounts” include mutual funds or similar pooled funds. It reserves taking a position on whether hedge funds and private equity funds are reportable “financial accounts.” The draft instructions list specific financial accounts which are reportable, such as an insurance policy with a cash value and an annuity policy and it lists those which are excluded from reporting.
U.S. Person Without Financial Interest
A U.S. person has to file an FBAR even though he has no “financial interest” in the reportable account if he has “signature authority” over it. Notice 2010-23 provides that persons with signature authority over, but no financial interest in, a reportable account for which an FBAR would otherwise have been due on June 30, 2010 will now have until June 30, 2011 to file the FBAR.
The proposed regulation defines signature authority to mean the “authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by delivery of instructions (whether communicated in writing or otherwise) directly to the person with whom the financial account is maintained.” The draft instructions list individuals with signature authority and no financial interest in reportable accounts, who are excepted from filing FBARs. In general, these exceptions apply to officers and employees of financial institutions that have a federal-functional regulator and certain entities that are publicly traded on a U.S. national securities exchange or that are otherwise required to register their equity securities with the U.S. Securities and Exchange Commission (SEC).
U.S. Person With Financial Interest
The proposed regulation modifies when a U.S. person has a “financial interest” in a foreign account. It maintains the rule that a U.S. person has a financial interest in an account when the person is the owner of record or holder of legal title regardless of whether the account is maintained for his own benefit or the benefit of others. It maintains and expands the rules when a U.S. person is deemed to own a financial interest in an account even though the owner of record or holder of legal title is in another person’s name. As under current law, a U.S. shareholder is deemed to own the reportable accounts held in the corporation’s name if the shareholder owns directly or indirectly more than 50 percent of the voting power or total value of the shares. Similar rules apply to partnerships. The rules have been expanded to include “any other entity” whether or not the entity exists for tax purposes. The proposed regulation expands deemed ownership to accounts held by a trust if a U.S. person is:
As under current law, a U.S. person, who either has a beneficial interest in more than 50 percent of the assets or from which such person receives more than 50 percent of the income, has a deemed financial interest in the foreign accounts held by the trust. An exception to reporting by the deemed owner in such case has been added if the trust, trustee of the trust or agent of the trust is a U.S. person that files the FBAR disclosing the trust’s foreign accounts.
There is a new, proposed exception for participants and beneficiaries in qualified retirement plans, IRAs and Roth IRAs holding foreign financial accounts. The exception does not affect the filing requirements for the qualified pension plans or IRAs. The proposed regulation has added an “anti-avoidance rule” aimed at preventing a U.S. person from evading the reporting requirements by creating entities to hold financial accounts.
Janice Eiseman, JD, LLM, is a principal at Cummings & Lockwood in Stamford, Conn. office where she focuses on the taxation of closely held businesses and tax planning for owners and investors. Eiseman has broad-based experience counseling clients on the formation, ownership and structuring of various business entities, as well as drafting and negotiating tax-based and transactional documentation for both individual and business clients. She has also done controversy work before the Internal Revenue Service and the New York State Department of Taxation and Finance. Prior to joining Cummings & Lockwood, she served as senior tax and benefits counsel at the New York City-based law firm Morrison & Cohen LLP.