Summary. Last Thursday and Friday the Internal Revenue Service (the “IRS”) and the Financial Crimes Enforcement Network (“FinCEN”) of the Department of the Treasury issued current guidance and Proposed Regulations covering a number of important issues with respect to the requirement to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”).
Most significantly for private investment funds, the IRS guidance provides that an FBAR filing is NOT required with respect to interests in offshore private equity and hedge funds for 2009 and earlier calendar years. The Proposed Regulations, in their current form, also would not require such filings, but expressly state that this issue is under further study, and as drafted reserve on the issue of whether filings will be required in the future.
Background. As discussed in our earlier client alert from June 19, 2009, Foreign Financial Account Filing Requirements for Investors in Offshore Investment Funds,1 United States persons with financial interests in or signature or other authority over any foreign financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year must file an FBAR with respect to the account on or before June 30 of the succeeding year. Certain comments and informal guidance in the summer of 2009 suggested that offshore hedge and private equity funds were “financial accounts” for this purpose, although the deadline for FBAR filings in respect of such interests was extended to June 30, 2010.
FinCEN Proposed Regulations. FinCEN has issued Proposed Regulations that, among other things, provide a more detailed definition of the financial accounts that would be subject to FBAR reporting, certain specific rules and exceptions regarding when persons with signature or other authority over accounts must file FBARs, an expanded consolidated reporting mechanism for filing FBARs in certain cases, and a revised set of instructions for the FBAR form that would implement the changes in the regulations. Under the Proposed Regulations, accounts subject to reporting include 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.
Typical hedge and private equity funds are not included in the Proposed Regulations’ current definition of mutual fund or similar pooled fund. The Proposed Regulations reserve on the issue of other investment funds and the preamble to the Proposed Regulations makes it clear that Treasury is continuing to study these issues. Thus, the Proposed Regulations may not be the last word for private investment funds.
IRS Guidance. In addition, the IRS issued a Notice, Notice 2010-23, and an Announcement, Announcement 2010-16, related to FBAR filings. The Notice provides three important changes and clarifications:
- Foreign “Commingled Funds” Do Not Include Offshore Private Equity and Hedge Funds. For purposes of FBAR filing, the IRS will not interpret the term “commingled fund” to apply to funds other than mutual funds with respect to FBARs for calendar years 2009 and prior years. For these purposes, “a financial interest in, or signature authority over, a foreign hedge fund or private equity fund” is specifically excluded from the term “commingled fund.” Accordingly, United States persons holding interests in offshore private equity and hedge funds will not be required to file FBARs with respect to those funds for 2009 and prior years. United States persons holding interests in offshore mutual funds will still be required to file an FBAR, unless another exception applies.
- Signature Authority but No Financial Interest. Persons with signature authority over, but no financial interest in, a foreign financial account for which an FBAR would otherwise have been due on June 30, 2010 now have until June 30, 2011 to file FBARs with respect to those foreign financial accounts. This applies for the 2010 and prior calendar years.
- FBAR Reporting on Tax Returns. If a taxpayer has no other reportable foreign financial accounts for the year in question, a taxpayer who qualifies for the filing relief provided in (1) and (2) above should check the “no” box in response to FBAR-related questions found on 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.
Announcement 2010-16 suspends the requirement to file the FBAR due on June 30, 2010 for all persons who are not United States citizens, residents, or domestic entities. In addition, all potential FBAR filers are permitted to rely on the definition of “United States person” found in the July 2000 version of the FBAR instructions to determine if they have a filing obligation for the 2009 and earlier calendar years. Consistent with earlier IRS pronouncements,2 this narrows the definition of “United States person” found in the instructions to the FBAR from October 2008, which included “a person in and doing business in the United States” and would have required certain foreign entities and individuals to file FBARs.