Introduction

In October 2008, the United States Department of the Treasury (the "Treasury") updated and amended Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR"). In general, the Treasury requires a United States person to file a FBAR to report any financial interest in, or signature or other authority over, foreign financial accounts in which the aggregate value of these financial accounts exceeds US$10,000 at any time during the calendar year. A FBAR is required to be filed with the Treasury on or before June 30 of each year with respect to interests held in accounts during the prior year. The deadline for filing the FBAR for the 2008 calendar year is June 30, 2009. In addition, the Internal Revenue Service (the "Service") has recently announced a September 23, 2009 deadline for taxpayers to submit delinquent FBAR forms for all prior taxable years, including the 2008 taxable year.

Among the recent changes to the form, the definition of "financial accounts" now incorporates equity interests in mutual funds and perhaps other commingled funds. Representatives from the Service, during a June 12 teleconference addressing questions concerning the FBAR, took the position that an offshore private investment fund is a "financial account" for FBAR purposes, whether or not the fund has any offshore bank or securities accounts. We understand that this position, articulated orally by the Service, is inconsistent with how many US Sponsors of offshore private equity and hedge funds have interpreted the FBAR filing requirement in the past. If the Service maintains this position with respect to offshore private investment funds, US Sponsors with an interest in offshore private equity and hedge funds will be required to file the FBAR form.

Background

The Bank Secrecy Act, passed by Congress in 1970, directs the Secretary of the Treasury to require that United States persons disclose information regarding records and reports on foreign financial agency transactions. Under this Act and the corresponding regulations, the Treasury requires a United States person to file a FBAR if that person has a financial interest in, or signature or other authority over, foreign "financial accounts" in which the aggregate value of these financial accounts exceeds US$10,000 at any time during the calendar year. Prior to the 2008 updates to the form, the term "financial accounts" included "any bank, securities, securities derivatives or other financial instruments accounts" and generally encompassed "any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund."

Revised Definition of "Financial Accounts"

The revised FBAR instructions indicate that a "financial account" does not include a direct interest in debt or equity. The instructions provide that "[i]ndividual bonds, notes, or stock certificates held by the filer are not a financial account." However, the revised instructions also indicate that an equity interest in a mutual fund, as a type of commingled fund, is a "financial account" for FBAR purposes. Because a mutual fund owner typically owns stock in a corporation, the revised definition of "financial account" appears to treat equity investments inconsistently.

Compliance with FBAR Reporting Requirements

When addressing this seeming inconsistency during a June 12 teleconference concerning the FBAR filing requirement, representatives from the Service took the position that an offshore private investment fund is a "financial account" for FBAR purposes, whether or not the fund has any offshore bank or securities accounts. If the Service maintains this position, US Sponsors with an interest in an offshore private equity or hedge fund would be required to file a FBAR. For instance, a US Sponsor with a carried interest in a stand-alone offshore hedge fund, offshore feeder fund, or offshore master fund would be required to file a FBAR. In addition, a US feeder fund, such as a Delaware limited liability company, would be required to file the FBAR with respect to its interest in an offshore private equity or hedge fund. Likewise, US investors in such funds, including US tax exempt entities, would be required to file the FBAR with respect to their interest in the offshore funds.

We understand that the position taken by the Service is inconsistent with the position that many US Sponsors have taken in the past regarding the FBAR filing requirement. While it is unclear how the seeming inconsistency concerning the definition of "financial account" will ultimately be resolved, US Sponsors of offshore private equity and hedge funds should be aware of the Service's statements indicating that an offshore fund is a financial account for FBAR purposes.

Penalties for Failure to File the FBAR Form

Failure to file an FBAR on a timely basis can result in civil penalties, criminal sanctions, or both. The maximum civil penalty for a nonwillful failure to file is US$10,000. For willful noncompliance, the maximum penalty is the greater of US$100,000 or 50 percent of (1) the amount of the transaction (if the violation involved a transaction), or (2) the balance in the foreign accounts. Criminal penalties include a US$250,000 fine and up to five years of imprisonment. If noncompliance is in connection with other violations of US law, the maximum penalty is a US$500,000 fine and 10 years imprisonment.

Filing Delinquent FBAR Forms Without Penalty

The Service has announced a September 23, 2009 deadline for taxpayers to submit delinquent FBAR forms, provided that the taxpayers have reported and paid tax on all of their taxable income for prior years but did not file FBAR forms for prior years. In this case, taxpayers should complete the required FBAR forms for all delinquent years. Taxpayers should send the delinquent FBAR forms, together with copies of all tax returns for the relevant years and a statement explaining why the reports are filed late, to the Service. The Service has advised that it will not impose a penalty for the failure to timely file the FBAR forms.

Conclusion

The definition of "financial account" in the revised FBAR instructions appears to treat equity investments inconsistently. While the instructions generally exempt equity interests from the definition of "financial accounts," an equity interest in a mutual fund and perhaps other commingled funds may constitute a "financial account" for FBAR purposes. When asked to clarify this inconsistency, representatives of the Service took the position that an offshore private investment fund constitutes a "financial account" for FBAR purposes, regardless of whether the fund has any offshore bank or securities accounts. Absent further guidance, the current position taken by the Service is that US Sponsors with an interest in an offshore private equity or hedge fund are required to file the FBAR form.

 Recent IRS Guidance.pdf