On February 26, 2010, the Treasury Department published long-awaited, revised proposed regulations clarifying which taxpayers will be required to file the Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1 (“FBAR”), and which accounts will be reportable.[1] In addition, the Internal Revenue Service (the “IRS”) issued Notice 2010-23 (the “Notice”) and Announcement 2010-16 (the “Announcement”), which are related to FBAR filings.[2]

Proposed Regulations

The proposed regulations, drafted by Treasury’s Financial Crimes Enforcement Network (“FinCEN”), address some of the issues raised by the IRS in Notice 2009-62. Notice 2009-62, which was issued by the IRS on August 10, 2009, extended the FBAR filing deadline for the 2008 and earlier calendar years to June 30, 2010 for certain filers, and requested comments from the public regarding certain issues, including when an interest in a foreign entity should trigger an FBAR filing requirement. For our prior client alert regarding Notice 2009-62, click here.

Specifically, the proposed regulations add definitions of the accounts subject to reporting. 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 these rules, “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.

The proposed regulations specifically reserve with respect to 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. 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.

IRS Guidance

The Notice provides three important changes and clarifications to the current rules:

1) Foreign “Commingled Funds” Do Not Include Offshore Private Equity and Hedge Funds. For purposes of FBAR filings, the IRS will not interpret the term “commingled fund” to apply to funds other than mutual funds for calendar year 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, U.S. 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. U.S. persons holding interests in offshore mutual funds will still be required to file an FBAR, unless another exception applies.

2) 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 pursuant to Notice 2009-62 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.

3) 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 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.

Compliance Reminders

  • > The deadline for registered investment advisers to comply with the new SEC rules on custody is March 12, 2010. We encourage advisers to review their operations to ensure full compliance with the new rules.
  • > Registered investment advisers are required to amend their Form ADV each year by filing an annual updating amendment within 90 days after the end of their fiscal year.
  • > Updates of Form D, where there is an ongoing offering, are required on an annual basis on or before the anniversary of the original filing (unless an amendment is otherwise required prior to such date).
  • > New Massachusetts data security regulations have gone into effect. There rules apply to advisers having Massachusetts investors. Click here to access our Client Alert, New Massachusetts Data Security Regulations Go Into Effect on March 1, 2010.