On February 26, 2010, the Treasury Department and IRS issued limited relief and released widely anticipated guidance regarding required reporting of certain foreign accounts on Form TD F 90- 22.1, Report of Foreign Bank and Financial Accounts (commonly referred to as an "FBAR"). This guidance was issued in the form of Notice 2010-23 and Announcement 2010-16 from the IRS, both immediately effective, and Proposed Regulations from the Treasury Department that would revise the current regulations implementing FBARs. The Proposed Regulations are not effective until adopted in final form, and the Treasury Department is accepting written comments to the Proposed Regulations until April 27, 2010. The new guidance clarifies the following:
- Whether nonresident aliens or branches of foreign entities doing business in the U.S. are required to file FBARs;
- Whether persons having signature authority over, but no financial interest in, foreign financial accounts must file FBARs;
- Which foreign “commingled funds” are reportable; and
- Which officers and employees with signature authority are excluded from the FBAR filing requirements.
Under the Bank Secrecy Act and applicable Treasury Regulations, U.S. persons generally must file an FBAR by June 30 of the year following any year during which they possessed signature or other authority over, or had a financial interest in, foreign financial accounts whose aggregate value exceeded $10,000 at any time during such calendar year. In October 2008, the IRS revised the FBAR instructions and, among other things, significantly broadened the definition of "U.S. persons" required to file the FBAR. These changes resulted in many questions and comments from taxpayers and tax advisors. In response, the IRS issued guidance in 2009 that (1) suspended the applicability of the broader definition of U.S. persons set forth in the October 2008 revised FBAR instructions, and (2) extended the filing deadlines with respect to other types of U.S. persons. The most recent guidance from the IRS provides additional administrative relief as summarized below.
Definition of "U.S. persons"
In Announcement 2010-16, the IRS extends through 2009, and continues for 2008 and prior years, the suspension of FBAR filing requirements for persons who are not U.S. citizens, U.S. residents, or domestic entities. For 2009 and earlier years, this new guidance effectively suspends the FBAR filing requirements for:
- Nonresident aliens “doing business” in the U.S. and
- U.S. branches of foreign entities that conduct business in the U.S. but are not separately incorporated or formed under U.S. laws.
In the Proposed Regulations, Treasury clarifies which persons will be required to file an FBAR by defining a “United States person” as a U.S. citizen, U.S. resident, or any entity, including but not limited to a corporation, partnership, trust or limited liability company, created, organized, or formed under U.S. laws. Entities that have elected to be disregarded for federal income tax purposes may also constitute U.S. persons.
U.S. persons having signature authority but no financial interest
In Notice 2010-23, the IRS extends the FBAR filing deadline to June 30, 2011, for persons with signature authority over, but no financial interest in, a foreign financial account during 2009 or any earlier years. The new guidance instructs a taxpayer who qualifies for the extended deadline and has no other reportable foreign financial accounts for the year in question to check the “no” box in response to FBAR-related questions on federal tax forms for 2009 and earlier years.
Foreign private equity funds and foreign hedge funds
In Notice 2010-23, the IRS also provides administrative relief to persons with signature authority over, or a financial interest in, foreign commingled funds that are not mutual funds, such as foreign private equity funds, foreign hedge funds, and foreign venture capital funds. The IRS declares that it will not apply its enforcement authority adversely in the case of foreign commingled funds that are not mutual funds for 2009 and prior years. Consequently, the IRS effectively provides that persons with a signature authority or a financial interest with respect to foreign commingled funds that are not mutual funds during 2009 and earlier years are not required to file an FBAR for those years.
Notice 2010-23 instructs a taxpayer who qualifies for relief with respect to foreign commingled funds and has no other reportable foreign financial accounts for the year in question to check the “no” box in response to FBAR-related questions on federal tax forms for 2009 and earlier years.
The Proposed Regulations, if adopted in final form, would similarly reserve the prospective treatment of foreign commingled funds, other than mutual funds, in defining “other financial accounts” that must be reported on the FBAR. However, Treasury also stated that it will continue to study the issue and may later decide to apply FBAR requirements to such foreign commingled funds in subsequent years. Treasury focused on the risk for money laundering inherent in mutual and similar pooled funds where an account holder may redeem shares on a daily or regular basis and contrasted that with private equity and hedge funds.
Foreign mutual funds
In Notice 2010-23, the IRS clarifies that persons with signature authority over, or a financial interest in, foreign commingled funds that are mutual funds are required to file an FBAR, unless other exceptions apply. However, as discussed above, the FBAR filing deadline for 2009 and earlier calendar year FBARs has been extended to June 30, 2011, for persons with only signature authority over and no financial interest in any type of financial account, including mutual funds. Furthermore, 2008 and earlier calendar year FBARs for persons with a financial interest in foreign mutual funds remain subject to the June 30, 2010, deadline previously extended by Notice 2009-62 for persons with a financial interest in, or signature authority over, foreign commingled funds.
Exceptions for accounts of government entities and public universities
The Proposed Regulations would provide a new exception to FBAR filing requirements for accounts of government entities. If adopted in final form, the Regulations would not require reporting by persons with signature or other authority over, or a financial interest in, an account of a United States department or agency, any state or any political subdivision of a state, or any wholly owned entity, agency, or instrumentality of any of the foregoing. The proposed FBAR instructions define government entities to include public colleges and universities, as well as employee retirement or welfare benefit plans of government entities. At this time, these proposed exceptions for government entity accounts are not effective, and the Proposed Regulations do not currently apply to 2009 or earlier calendar year FBARs.
Exceptions for officers and employees
The Proposed Regulations would elaborate on the exceptions to FBAR filing requirements for officers and employees of certain federally regulated or publicly traded financial institutions, who possess signature or other authority over, but no financial interest in, foreign financial accounts. However, the Proposed Regulations do not extend similar exemptions or provide other relief to officers and employees of tax-exempt organizations such as private universities.
Among other changes, the Proposed Regulations would clarify that the FBAR must be received by the Treasury Department on or before June 30 of the year following the calendar year being reported. Consequently, if the Proposed Regulations are adopted in final form, an FBAR that is postmarked on or before June 30, but is not received by the Treasury Department on or before June 30, would not be considered timely filed.
Other clarifications regarding participants and beneficiaries in certain retirement plans are discussed in the Hogan & Hartson Executive Compensation and Employee Benefits Newsletter, January–February 2010, and available at:
Please utilize the links below to view the:
- Proposed Regulations: http://edocket.access.gpo.gov/2010/pdf/2010-4042.pdf
- Notice 2010-23: http://www.irs.gov/pub/irs-drop/n-10-23.pdf
- Announcement 2010-16: http://www.irs.gov/pub/irs-drop/a-10-16.pdf