US investors holding interests in offshore private equity, venture capital and other investment funds may now be required to disclose such interests on the Report of Foreign Bank and Financial Accounts. During a recent teleconference, IRS officials unofficially stated that the term "other financial accounts" for purposes of the FBAR includes interests in offshore hedge funds. If interests in offshore hedge funds must be disclosed on an FBAR, it is very likely that interests in foreign private equity, venture capital and other investment funds must be disclosed as well. Unfortunately, given the timing of the IRS comments, many US investors may not have been aware of their filing obligation in time to disclose such interests on a 2008 FBAR form by the June 30 deadline. Moreover, such investors also may not have filed an FBAR for earlier years.
Fortunately, last week the IRS granted an extended filing deadline for those caught off guard by the FBAR filing requirement. FBARs may now be filed without penalty by September 23, 2009, provided that all US taxes on income derived from the offshore fund have been reported and paid as required by US tax law, the filer encloses a statement explaining the reason for the delinquency and the filer encloses tax returns for the years relating to each delinquent FBAR. During this extended filing period, FBARs for the years 2003 through 2008 should be filed disclosing interests in and signature authority over offshore funds held during these years.
A reportable interest includes an indirect interest, defined as an interest held by an entity in which the US person has a greater than 50% interest, as well as a direct interest in any foreign financial account. Since FBAR filings are required by each US person holding either a direct or indirect interest in a foreign financial account, this rule can result in multiple filings with respect to the same financial account. For example, consider a simple investment structure in which a US private equity fund owns a greater than 50% interest in a US partnership, and the US partnership in turn owns a direct interest in an offshore investment fund with a value greater than $10,000. In this case, both the private equity fund and the US partnership (and potentially others) would have a filing obligation with respect to the single interest in the offshore fund. Note that the direct percentage ownership interest in the offshore fund held by the US partnership in this example need not be over a particular threshold in order to be reportable.
For general information regarding the FBAR requirement, please see our earlier client alert: Foreign Bank Account Disclosure Requirement Applies to Corporate Officers.