On Aug. 7, 2009, the Internal Revenue Service, for the third time this year, extended the deadline for reporting interests in foreign bank and other foreign financial accounts by filing a Report of Foreign Bank and Financial Accounts (FBAR) for certain categories of taxpayers.
Back in March 2009, the IRS announced an initiative under which some taxpayers who were obligated to file FBARs in the past but had failed to do so could avoid failure-to-file penalties by filing up to six years of prior FBAR returns by Sept. 23, 2009. This exemption applied only to the years before 2008, and only for taxpayers who could provide a “reasonable cause” for the past failure to file.
Then, in June, the Service extended the deadline for reporting interests in foreign bank and other financial accounts for the 2008 calendar year to Sept. 23, 2009. To be eligible for this extension, the taxpayer must have:
• timely reported all 2008 income with respect to foreign financial accounts or have reported and paid tax on all 2008 income;
• have only recently learned of the FBAR filing obligation; and
• had insufficient time to gather information necessary to file the FBAR on time. (It’d normally be June 30, 2009.)
The IRS instructed taxpayers who meet these requirements and who file their FBARs for 2008 after June 30, 2009 to include with their FBARs:
• a statement explaining why the FBAR is being filed late; and
• a copy of the taxpayer’s 2008 tax return, unless the return is not due until after Sept. 23, 2009. (We believe that a 2008 tax return that was put on extension should fall in this category if it is not due until after Sept. 23, 2009.)
Unfortunately, a new FBAR form that was issued in October 2008, as well as comments from IRS officials made to practitioners during American Bar Association briefings, have raised numerous questions about the filing of FBAR reports. For example, could an interest in an offshore private equity fund or an offshore hedge fund be viewed as a “financial account” that would trigger an FBAR filing requirement?
Based on these briefings, the IRS’ answer to this question seems to be “yes”—an answer that came as a great surprise to many advisors.
Other questions also arose: How do the FBAR filing requirements apply to foreign accounts held by entities such as trusts in which U.S. persons have an interest? Does it matter if the interest is only a discretionary interest? Does an individual who has a power of appointment over trust property have signature authority over a foreign financial account held by the trust?
The IRS responded to the significant confusion surrounding the FBAR reporting rules on Aug. 7, 2009, by offering a further filing extension to June 30, 2010. This extension applies to only two groups:
• persons with signature authority over, but no financial interests in, a foreign financial account; and
• persons with a financial interest in, or signature authority over, foreign commingled funds, such as foreign investment companies.
We remain hopeful that the IRS will issue further guidance to make clear that offshore private equity and certain hedge funds should not be viewed as “financial accounts” for purposes of the FBAR filing requirements. We will update you on any developments.
THE FBAR
The Bank Secrecy Act, enacted in 1970, requires U.S. persons who had a financial interest in, or signature authority over, any foreign financial account in a particular year to report these accounts if the aggregate value of all such accounts exceeded $10,000 on any day in that year. Such account or accounts must be reported on a Form TD F 90-22.1, the FBAR.
Failure to file a required FBAR may be a crime and is subject to substantial civil penalties—currently as high as the greater of $100,000 or 50 percent of the value of an unreported account for each year of failure.
These disclosure requirements apply both to foreign financial accounts held by U.S. persons directly, as well as accounts held by entities such as trusts in which U.S. persons have an interest.
The IRS’ recent efforts to enforce the FBAR filing requirements include highly publicized investigations of a number of major foreign financial institutions as well as the March 2009 announcement of amnesty for pre-2008 FBAR violations if taxpayers voluntarily disclose.
YOU MAY NEED TO REPORT
The IRS’ new version of Treasury Form 90-22.1 that the IRS issued in October 2008 had a set of instructions that expanded the amount of information required to be reported and the types of connections with foreign accounts to be treated as financial interests or signature authority.
The following definitions reflect the recent changes and should help you decide whether you might have an FBAR reporting obligation:
“Financial Account”—The term “financial account” includes bank accounts, security accounts, security derivatives or other financial instruments accounts (including foreign mutual funds, debit cards or prepaid credit card accounts).
“U.S. Person”—The term “U.S. person” means:
(1) a citizen or resident of the United States;
(2) a domestic partnership;
(3) a domestic corporation; or
(4) a domestic estate or trust.
The IRS has indicated that the definition of “U.S. Person” may be modified for FBARs due after June 30, 2009.
“Financial Interest”—A U.S. person has a “financial interest” in a foreign account if:
• the U.S. person is the owner of record or has legal title to the account.
• the owner of record or the holder of legal title is a person acting as an agent, nominee, attorney or in some other capacity on behalf of the U.S. person.
•the owner of record or the holder of legal title is a corporation, partnership or a trust in which:
(1) in the case of a corporation, the U.S. person owns (directly or indirectly) more than 50 percent of the value or voting power of all shares of stock of the corporation;
(2) in the case of a partnership, the U.S. person owns (directly or indirectly) more than 50 percent of the profits or capital interests of the partnership; or
(3) in the case of a trust, the U.S. person has a present beneficial interest (directly or indirectly) in more than 50 percent of the trust’s assets or receives more than 50 percent of the current income; or the owner of record or holder of legal title is a trust that was established by the U.S. person and for which a trust protector (that is to say, a person responsible for monitoring the activities of a trustee with the authority to influence the trustee or remove and replace the trustee) has been appointed.
It is unclear how multiple beneficiaries of discretionary trusts should be treated for purposes of the 50 percent test. In a recent teleconference, an IRS representative opined that all such beneficiaries should be treated as having a greater than 50 percent interest.
“Signature Authority”—A person has “signature authority” over a financial account if that person can control the disposition of money or other property in the account through the delivery of a document containing a signature to the institution with which the account is maintained or can exercise comparable authority by communication with the institution through another person. This may include a power of appointment over trust property even if the power holder has no direct control over the account itself.