U.S. taxpayers, including not-for-profit/exempt organizations, with a financial interest in or signatory authority over a foreign financial account are generally required to file the Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1 (FBAR) with the Department of the Treasury each June 30 if the aggregate value of all of the U.S. person’s foreign financial accounts exceeds $10,000 at any time during the year. Taxpayers must also report whether they have such interests on their tax returns (for example, Forms 1040, 1041, 1065, 1120, and 990).
Under new IRS guidance, persons who have only signatory authority over a foreign financial account for calendar year 2009 and previous years has been extended again to June 30, 2011. In addition, owners of foreign hedge funds and private equity funds do not have to file FBARs for calendar year 2009 and previous years. And, persons who are relieved of filing FBARs this year also do not have to report the interest on their own returns. Holders of foreign mutual funds, however, will need to file FBARs by June 30, 2010 for calendar year 2009 and previous years.
The Treasury Department also published proposed regulations clarifying which taxpayers will be required to file FBARs and which accounts will be reportable. The Notice and the proposed regulations add some clarity to FBAR requirements and delay some filing deadlines.
The proposed regulations, drafted by Treasury’s Financial Crimes Enforcement Network (FinCEN), add definitions of the accounts subject to reporting – bank, securities, and other financial accounts. The preamble to the proposed regulations notes that FinCEN has chosen to define the accounts subject to reporting with reference to the kinds of financial services for which a person maintains an account.
Many exempt organizations may be subject to FBAR filing because of having a financial interest in an "other financial account." Under the regulations, “other financial account” is defined as:
- an account with a person that is in the business of accepting deposits as a financial agency;
- an account that is an insurance policy with a cash value or an annuity policy;
- an account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or
- an account with a mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions.
Thus, holders of foreign mutual funds are required to file FBARs by June 30, 2010 under the proposed regulations. A previous Notice, Notice 2009-62, extended the filing deadline for mutual fund holders for calendar year 2008 and preceding years to June 30, 2010. The proposed regulations and Notice 2010-23 do not change that filing deadline.
The proposed regulations specifically reserve the section dealing with the treatment of investment funds other than mutual funds and similar pooled funds. Accordingly, until further guidance is issued, there is no requirement to file an FBAR with respect to an interest in an offshore private equity fund or hedge fund. Further, the Notice provides that U.S. taxpayers holding these interests do not need to file at all for 2009 and preceding years, regardless of future guidance.
For exempt organizations that have an interest in a foreign blocker corporation, only organizations with an interest that is more than 50 percent of the voting power of the blocker corporation are deemed to own the financial accounts owned by the blocker corporation. And, if the blocker corporation owned only hedge funds or private equity funds, the ultimate exempt organization owner would not have to file an FBAR under the relief given in Notice 2010-23.
However, the preamble to the proposed regulations notes that Treasury remains concerned about the use of, for example, hedge funds to evade taxes and FinCEN will continue to study this issue.
Finally, Notice 2010-23 indicates how foreign financial interests are to be reported, or not reported, on the holder’s tax return. If a taxpayer has no other reportable foreign financial accounts for the year in question, a taxpayer who qualifies for the filing relief for signatories as provided in Notice 2010-23 should check the “no” box in response to FBAR-related questions found on U.S. federal tax forms for 2009 and earlier years that ask about the existence of a financial interest in, or signature authority over, a foreign financial account.