U.S. taxpayers with a financial interest in or signatory authority over a foreign financial account are generally required to file the Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1 (FBAR) with the Department of the Treasury each June 30 if the aggregate value of all of the U.S. person’s foreign financial accounts exceeds $10,000 at any time during the year. Taxpayers must also report whether they have such interests on their tax returns (for example, Forms 1040, 1041, 1065, 1120, and 990).

Under new Internal Revenue Service guidance, the already delayed deadline for filing FBARs by persons who have only signatory authority over a foreign financial account for calendar year 2009 and previous years has been extended again to June 30, 2011. In addition, owners of foreign hedge funds and private equity funds need not file FBARs for calendar year 2009 and previous years. Persons who are relieved of filing FBARs this year also need not report the interest on their own return. Holders of foreign mutual funds, however, will need to file FBARs by June 30, 2010 for calendar year 2009 and previous years.

On February 26, 2010, the IRS issued Notice 2010-23 (the Notice) providing administrative relief for some potential FBAR filers.[1] The Treasury Department also published proposed regulations clarifying which taxpayers will be required to file FBARs and which accounts will be reportable.[2] The Notice and the proposed regulations add some clarity to FBAR requirements and delay some filing deadlines. As we reported last year (June 2009-Private Investment Funds Update Newsletter and August 2009 Client Alert), widespread confusion arose about the breadth of reporting requirements for holders of interests in foreign “commingled funds” and signatories on foreign financial accounts. The IRS responded in Notice 2009-62 by extending the deadline for these reports for calendar year 2008 and previous years from June 30, 2009 to June 30, 2010, thereby putting off the issue for another year.

The proposed regulations, drafted by Treasury’s Financial Crimes Enforcement Network (FinCEN), add definitions of the accounts subject to reporting – bank, securities, and other financial accounts. The preamble to the proposed regulations notes that FinCEN has chosen to define the accounts subject to reporting (i.e., bank, securities, and other financial accounts) with reference to the kinds of financial services for which a person maintains an account. Under the regulations, “other financial account” is defined as:

  • an account with a person that is in the business of accepting deposits as a financial agency;
  • an account that is an insurance policy with a cash value or an annuity policy;
  • an account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or
  • 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.

Thus, holders of foreign mutual funds are required to file FBARs by June 30, 2010 under the proposed regulations. Notice 2009-62 extended the filing deadline for mutual fund holders for calendar year 2008 and preceding years to June 30, 2010. The proposed regulations and the Notice do not change that filing deadline.

The proposed regulations clarify that participants and beneficiaries in tax-qualified retirement plans, as well as owners and beneficiaries of IRAs and Roth IRAs, do not have to file FBARs for foreign financial accounts held by the retirement plan or IRA. However, the qualified plan or trust is required to file.

The proposed regulations specifically reserve the section dealing with the treatment of investment funds other than mutual funds and similar pooled funds. Accordingly, until further guidance is issued, there is no requirement to file an FBAR with respect to an interest in an offshore private equity fund or hedge fund. Further, the Notice provides that U.S. taxpayers holding these interests do not need to file at all for 2009 and preceding years, regardless of future guidance. However, the preamble to the proposed regulations notes that Treasury remains concerned about the use of, for example, hedge funds to evade taxes and FinCEN will continue to study this issue.

The proposed regulations also exempt certain persons with signature or other authority over foreign financial accounts from filing FBARs. The exceptions apply only if such persons have no financial interest in the reportable account. However, the exceptions are not as broad as commentators had requested and generally apply only to officers and employees of financial institutions that have a federal functional regulator, and certain entities that are publicly traded on a U.S. national securities exchange, or that are otherwise required to register their equity securities with the Securities and Exchange Commission.

Nonetheless, the Notice provides signatories with some filing relief. 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 (the previous extended deadline) now have until June 30, 2011 to file FBARs with respect to those foreign financial accounts. The filings then due would be those for 2010 and prior calendar years.

Finally, the Notice indicates how foreign financial interests are to be reported, or not reported, on the holder’s tax return. If a taxpayer has no other reportable foreign financial accounts for the year in question, a taxpayer who qualifies for the filing relief for signatories as provided in the Notice above should check the “no” box in response to FBAR-related questions found on U.S. 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.

IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.