In our High Net Worth Family Tax Report of August 13, 2008, we reminded you of the filing requirement of Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”), for U.S. persons with a financial interest in, or signature authority over, foreign bank and financial accounts that have aggregate balances over $10,000 at any time during a calendar year. Much has transpired over the past year with respect to the FBAR and we want to summarize for you the noteworthy events.

In October 2008, the IRS published a revised FBAR form and instructions. Some of the more significant changes or clarifications included in the revised form are: (1) broadening the definition of a U.S. Person required to file (which had been limited to U.S. citizens, residents, or domestic entities) to include anyone (U.S. or non-U.S.) "in and doing business in the United States"; (2) providing that a U.S. settlor of a trust (U.S. or non-U.S.) for which a trust protector has been appointed is considered to have a financial interest in each foreign financial account for which the trust is the record or legal title holder (with trust protector defined as "a person who is responsible for monitoring the activities of a trustee, with the authority to influence the decisions of the trustee or to replace, or recommend the replacement of, the trustee”); and (3) requiring that a U.S. person with signatory authority over a foreign account in which a non-U.S. person has a financial interest identify the person with the financial interest.

In March 2009, the IRS created a new penalty framework for those eligible persons who voluntarily disclose previously unreported foreign financial accounts and entities. This framework, referred to here also as the Voluntary Compliance Initiative, can significantly reduce the civil penalties that may be imposed for failing to disclose foreign accounts or foreign activities for eligible persons who voluntarily come forward by September 23, 2009. The IRS has stated that those who voluntarily file under the Voluntary Compliance Initiative generally eliminate the risk of criminal prosecution. To take advantage of the penalty framework, taxpayers who meet the eligibility requirements must: (i) pay all taxes and interest on their offshore accounts going back six years; (ii) file or amend all relevant information returns (including the foreign bank account report); (iii) pay either an accuracy-related penalty or a delinquency penalty on all six years; and (iv) in lieu of all other applicable penalties, pay a 20 percent penalty (reduced to 5% in certain cases) on the amount in the foreign bank account in the year with the highest aggregate account or asset value. The IRS recently released on its Web site an optional offshore voluntary disclosure form designed to streamline the process for applying under the Voluntary Compliance Initiative.

On May 6, 2009, the IRS released a list of frequently asked questions (“FAQ”) about its Voluntary Compliance Initiative, and has updated it several times. The FAQ can be found at,,id=210027,00.html. The Voluntary Compliance Initiative applies to taxpayers who failed to report taxable income from the foreign accounts and entities. In the FAQ, the IRS has made it clear that taxpayers who properly reported all taxable income but merely failed to file FBARs should not use the Voluntary Compliance Initiative process, but the IRS will not assess penalties for the failure to file the FBARs if the delinquent FBARS, presumably back to the 2002 calendar year, are filed by September 23, 2009. In the FAQ, the IRS “strongly encourages” those taxpayers who have previously filed amended returns for previously unreported offshore income without otherwise notifying the IRS directly (a socalled “quiet disclosure”) to come forward under the Voluntary Compliance Initiative, suggesting that those who do not may be subject to examination and possibly criminal prosecution.

On June 5, 2009, the IRS temporarily suspended the FBAR filing requirement for those persons who are not U.S. citizens, residents, or domestic entities. Also in June, the IRS officially came forward with their position that investments in foreign hedge funds and private equity funds are “commingled funds” that are reportable for FBAR purposes. This came as a surprise to most tax practitioners and was considered to be a departure from previous IRS practice and not supported by the FBAR instructions, which is essentially the extent of the written guidance available. Unofficial comments made by IRS personnel also suggest that the IRS believes interests in foreign partnerships and foreign corporations used by investors to commingle funds for investments are reportable financial interests regardless of the ownership percentage. The tax bar as a whole made a concerted effort to seek guidance from the IRS on this topic before the filing due date for 2008 FBARs.

On June 24, 2009, the IRS announced that it would extend the due date for 2008 FBARS from June 30, 2009, to September 23, 2009, for filers who (1) have "only recently learned" of their FBAR filing obligation, (2) have "insufficient time to gather the necessary information to complete the FBAR," and (3) have reported and paid the tax on all their 2008 taxable income (or will report and pay the tax if the return is not due before the extended filing date). While it is unclear who would qualify as having "only recently learned" of the FBAR filing obligation, arguably, persons with interests in foreign hedge funds or foreign private equity funds should qualify, given the previously held position of, and advice given by, many within the tax community that such interests are not reportable accounts. Persons eligible for this extended due date should not be assessed FBAR penalties if the FBARs are properly completed and filed by September 23, 2009.

Most recently, on August 7, 2009, the IRS issued Notice 2009-62 (the “Notice”), which provided a further extension to June 30, 2010, for FBARs relating to 2008 and earlier calendar years for (i) persons with signature authority over, but no financial interest in, a financial account; and (ii) persons with a financial interest in, or signatory authority over, a foreign financial account in which the assets are held in a commingled fund. These “foreign commingled funds” likely include an offshore hedge fund or a U.S. feeder fund investing in an offshore hedge fund. Treasury intends to publish regulations clarifying the FBAR filing requirements pertaining to persons covered by the Notice and has requested comments from practitioners. Persons eligible for this extended due date should not be assessed FBAR penalties if the FBARs are properly completed and filed by June 30, 2010.

The federal civil penalties for the willful failure to file the FBAR are severe – they can be as high as the greater of $100,000 or 50% of the amount in the account at the time of the violation, and for each year the FBAR is not filed. Some states may have similar penalties. There are also criminal penalties for willful violations. The civil penalties for the non-willful failure to file an FBAR, not due to reasonable cause, may be as high as $10,000 for each non-willful violation. The FBAR penalties are in addition to the tax penalties that could apply if taxable income from such unreported (or any reported) accounts were not properly included on the taxpayer’s U.S. tax returns.

The Voluntary Compliance Initiative may provide significant relief as to both FBAR and tax penalties for taxpayers that are entitled to its provisions and, as discussed above, the IRS has provided for FBAR penalty relief in certain other cases. The deadline for filing under the Voluntary Compliance Initiative and for some taxpayers filing delinquent FBARS is approaching quickly – September 23, 2009. Those taxpayers who want to participate in the Voluntary Compliance Initiative but cannot get all of the information together to file the required amended returns by the due date can still participate by notifying the IRS before September 23, 2009. The IRS will give those persons reasonable time to submit their information and file returns.

If you have questions about the application of the Voluntary Compliance Initiative, the announcements or the Notice discussed above, or you think you may have unreported taxable income from foreign accounts and/or entities or just unreported foreign financial accounts for 2008 or prior tax years, we suggest that you contact your accountant to review your potential filing obligation and the filing options available to you.

As a reminder, most states require taxpayers who file an amended federal tax return to also file an amended state return. The IRS and the states have an information sharing arrangement under which the IRS shares information with the states and vice versa. Accordingly, any taxpayer who files amended returns under the Voluntary Compliance Initiative to correctly report income related to offshore bank accounts or other offshore activity should also be filing amended state tax returns at the same time.