U.S. persons required to file a Report of Foreign Bank and Financial Accounts (“FBAR”) should be aware that FBARs generally are due June 30, 2011 for both (i) 2010 and (ii) prior years for which the due date was extended under prior IRS guidance. For certain filers, this deadline was postponed until June 30, 2012 under Notice 2011-1, which was released yesterday by the Financial Crimes Enforcement Network (“FinCEN”).
Below is a brief summary of the FBAR filing requirements, as well as certain items of note under the most recent guidance, including FBAR regulations (the “Regulations”) issued by FinCEN in February 2011, Notice 2011-1 issued by FinCEN yesterday, and revised instructions to the FBAR, Form TD F 90-22.1, issued by the IRS in March 2011. The Regulations and updated instructions clarify much of the uncertainty that existed in prior years regarding who must file an FBAR. In many cases, these clarifications serve to narrow the FBAR filing obligations, but in some cases, the Regulations are expansive and the relief under Notice 2011-1 is limited to a narrow group of filers. In light of the potential for significant civil and criminal penalties, we strongly encourage you to consider your potential filing obligations under this guidance.
FILING REQUIREMENTS WITH RESPECT TO 2010
If at any time during 2010 you were:
- a United States person,
- with either
- a financial interest in, or
- signature authority over,
- any foreign financial account(s),
- valued at over $10,000 in total,
then you generally are required to file an FBAR by June 30, 2011, even if you have not filed your 2010 federal income tax return by such date.
FILING REQUIREMENTS WITH RESPECT TO PRIOR YEARS
If you satisfied the above criteria for prior years, you have (or had) an FBAR filing requirement with respect to each such prior year. Of particular note, if you had signature authority over, but no financial interest in, a foreign financial account, you received an automatic extension of the FBAR filing deadline for prior years under IRS Notices 2009-62 and 2010-23. If you would have been required to file an FBAR due in earlier years, but availed yourself of this extended filing deadline, you generally must file your FBARs for such previous years by June 30, 2011. If you had a financial interest in a foreign commingled fund other than a mutual fund (e.g., a hedge fund or private equity fund), then under IRS Notice 2010-23 you were not required to file an FBAR with respect to such fund for 2009 and earlier years. (See below for a discussion of the application of FBARs to hedge funds and private equity funds for 2010 and subsequent years under the Regulations.)
ITEMS OF NOTE UNDER RECENT GUIDANCE
Below is a brief summary of some of the more relevant items from the Regulations, updated instructions, and Notice 2011-1.
Application to Hedge Funds and Private Equity Funds
Previously, there was considerable uncertainty over whether hedge funds and/or private equity funds would themselves be considered financial accounts for purposes of the FBAR. In the Regulations, FinCen declined to extend the definition of financial account to include non-U.S. hedge funds or private equity funds, but noted that this issue was still under consideration. While non-U.S. mutual funds are generally considered financial accounts, the preamble to the Regulations specifically noted that hedge funds and private equity funds are not mutual funds since shares in hedge funds and private equity funds are generally not available to the general public; in addition, such funds often do not have regular net asset value determinations and/or a regular redemption feature. Accordingly, FBARs generally need not be filed with respect to interests in hedge funds or private equity funds for 2010 (or prior years), but it is possible FBARs may be required with respect to such interests in the future.
Note that, in some cases, it is possible that ownership by a U.S. person of interests in a U.S. or non-U.S. hedge fund or private equity fund may still, depending on the type and/or amount of such person’s ownership, give rise to an FBAR filing requirement with respect to the underlying foreign financial accounts of the hedge fund or private equity fund via the look-through rules discussed below. These look-through rules may be of particular interest to, among others, fund founders and/or fund sponsors.
Of course, U.S. hedge funds and private equity funds may themselves have FBAR filing obligations with respect to foreign financial accounts and, as further discussed below, U.S. persons with signatory authority over a fund’s foreign financial accounts (including the employees or officers of the GP or manager of a fund) may have filing obligations related to the fund.
Under the Regulations, an individual has signature authority over a foreign financial account if that individual, alone or in conjunction with others, can control the disposition of money, funds or other assets held in the account through a direct communication to the financial institution with which the account is maintained. The preamble to the Regulations makes clear that the individual must have, “the authority to directly deliver instructions to the foreign financial institution.” In the case of a traditional bank account, this would be the person whose signature is “on file” with the bank.
Record Keeping Requirements
The preamble to the Regulations makes clear that where an officer or employee has signature authority over, but no financial interest in, a foreign financial account, FinCEN does not expect such officer or employee to personally maintain the records of the foreign financial accounts of his employer(s).
Exceptions to Signature Authority with Respect to Certain Regulated Entities
There are five exceptions to the requirement that individuals with signature authority over a foreign financial account file an FBAR with respect to such account. These exceptions apply to an officer or employee of an entity that is:
- A bank that is examined by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, or the National Credit Union Administration;
- A financial institution (which includes banks, brokers or dealers in securities, and certain money service providers, but does not include financial advisors) that is registered with and examined by the Securities and Exchange Commission or the Commodity Futures Trading Commission;
- An entity (which is referred to as an “Authorized Service Provider”) that is registered with and examined by the Securities and Exchange Commission and that provides services to an investment company registered under the Investment Company Act of 1940;
- An entity with a class of equity securities listed (or American depository receipts listed) on any U.S. national securities exchange or, if the listed entity is a U.S. entity, any U.S. subsidiary of such entity that is included in the parent entity’s consolidated FBAR; or
- An entity that has a class of equity securities registered (or American depository receipts in respect of equity securities registered) under section 12(g) of the Securities Exchange Act.
In each case, the exception does not apply if the officer or employee has a financial interest in the foreign financial account. For an individual that falls into one of the first three categories, such individual need not file an FBAR reporting signature authority over accounts owned or maintained by such institution. If an individual is an officer or employee of an entity that falls into the last two categories, then the exception only applies with respect to signature authority over the financial accounts of such entity (i.e., an account owned by such entity). It appears that FinCEN meant for the reference to accounts of an entity to be construed literally and that signature authority over accounts of another entity, even in the same consolidated group, generally is not eligible for this exception. However, in Notice 2011-1, FinCEN further extended, to June 30, 2012, the filing deadline for FBARs related to signature authority by (i) employees or officers of an entity described above, with respect to accounts of controlled subsidiaries of such an entity, and (ii) employees or offices of a controlled subsidiary of a parent entity described above, with respect to accounts of the parent or of any controlled subsidiary of the parent (e.g., brother/sister entities). Under Notice 2011-1, the relief extends to signature authority over foreign financial accounts of a controlled domestic or foreign subsidiary, meaning an entity more than 50% owned by one of the entities described above.
In other respects, these exceptions are also very specific and, in some cases, quite limited. For example, the exception for officers or employees of an Authorized Service Provider is limited to the accounts owned or maintained by the registered mutual funds which they manage, but does not apply to the Authorized Service Provider’s own accounts. As another example, officers or employees of U.S. subsidiaries of non-U.S. parents are not exempted, even if the non-U.S. parent is listed on a U.S. stock exchange and the parent’s employees or officers are themselves exempted from filing with respect to the parent’s accounts. Finally, officers and employees of an investment manager or GP of a hedge fund or private equity fund who have signature authority over accounts of the fund generally will not qualify for any of the foregoing exceptions, even if the fund sponsor is itself publicly traded.
The preamble to the Regulations clarifies that if a U.S. person opens a securities account in the U.S. and the broker maintains certain securities on behalf of such person in a non-U.S. omnibus account (i.e., a pooled cash and securities account in the name of the broker), the U.S. person would not have to report such account if the U.S. person is only able to access such account’s holdings through the U.S. broker. However, if the specific custodial arrangement permits the U.S. person to directly access such person’s holdings maintained in the non-U.S. omnibus account, the U.S. person will be considered to have an interest in a foreign financial account.
Definition of U.S. Person
A U.S. person is defined for FBAR purposes as a U.S. citizen, a U.S. resident, or an entity (including but not limited to, a corporation, partnership, trust, or limited liability company) created, organized or formed under the laws of the United States, any State, the District of Columbia, the Territories and Insular Possessions of the United States or the Indian Tribes. Entities that are disregarded for tax purposes are not disregarded for FBAR purposes, and a disregarded entity may have an FBAR filing obligation if it meets the requirements outlined above. Similarly, regardless of whether or not a trust is a U.S. person for tax purposes, as noted above, trusts are U.S. persons for FBAR purposes if they are formed under U.S. law. It should be noted that, with regard to beneficiaries of trusts, the Regulations clarify that only beneficiaries with a present beneficial interest in the trust (i.e., contingent beneficiaries and remaindermen are excluded) are subject to the look-through rules described below. With regard to individuals, the Regulations make clear that U.S. person is defined under § 7701(b) of the Internal Revenue Code except substituting the definition of “United States” from 31 C.F.R. 103.11(nn); this broader definition includes the Territories and Insular Possessions of the United States. Additionally, the preamble to the Regulations specifies that a legal permanent resident (i.e., a “green card” holder) who elects under a treaty to be treated as a non-resident for tax purposes is still a U.S. person for FBAR purposes.
Look-Through and Similar Rules
A U.S. person is considered to have a financial interest in a foreign financial account, even if the U.S. person is not the holder of record on the account, if the U.S. person owns more than 50% of an entity which itself has a financial interest in such foreign financial account. The look-through rules may lead to unexpected results (particularly as such rules relate to offshore hedge funds and/or private equity funds) because the manner by which the 50% is measured varies by entity type. For corporations, ownership is measured by vote or value. Accordingly, with respect to funds organized as corporations (e.g., Cayman Ltds), it appears that a fund sponsor that holds the voting interests in such corporation would be considered the owner of any foreign financial accounts that the fund owns, even if the fund sponsor’s economic interest in the fund is only de minimis. For partnerships, ownership is measured by profits or capital, but not by vote; accordingly, it appears that GPs of funds generally will not be subject to a look-through rule. For trusts, ownership is measured by assets or income. All other entities fall into a catch-all provision where ownership is measured by any of vote, value of interests or assets, or interest in profits. This catch-all provision would appear to cover a limited liability company (an “LLC”) so, as with a corporation, it appears that a fund sponsor that holds the voting interests in an LLC would be considered the owner of any foreign financial accounts that the LLC owns under the look-through rule for other entities; although not entirely clear, this rule does not appear to extend to the managers of LLCs who are not otherwise members. Note that neither the term “corporation” nor “partnership” is defined for purposes of the FBAR look-through provision; however, as the tax treatment of an entity does not determine whether it has an FBAR filing obligation, it is reasonable to assume that the determination of whether an entity is a corporation or a partnership for this purpose is based on the legal status of the entity, rather than the tax status of the entity, so whether or not a “check-the-box” election has been made on an entity to change its default tax treatment would not appear relevant for purposes of the look-through rule.
Additionally, a U.S. person is considered to have a financial interest in an account over which such person is not the owner of record if the owner of record is an agent, nominee, attorney, or other person acting in some capacity on behalf of the U.S. person; the scope of this rule may not be clear in all cases.
IRS Circular 230 Disclosure: Any U.S. tax advice herein was not intended or written to be used, and cannot be used, by any taxpayer to avoid U.S. tax penalties. Any such tax advice that is used or referred to by others to promote, market or recommend any entity, plan or arrangement should be construed as written in connection with that promotion, marketing or recommendation, and the taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.