The IRS has recently adopted an expansive view of what may constitute a financial account subject to FBAR reporting duties. As explained below, U.S. persons (apparently including U.S. benefit plans, as discussed below) should be aware that those duties extend not only to plans with beneficial interests in such accounts but also those who have signature authority over the accounts (e.g., individual officers with signature authority over any foreign financial accounts).
Under current law, a Report of Foreign Bank and Financial Accounts (“FBAR’) on certain foreign accounts owned or controlled by a U.S. person during calendar year 2008 must be filed by June 30, 2009. On June 25, the IRS updated its administrative guidelines for taxpayers who fail to file FBAR reports for 2008 by the June 30, 2009 deadline. While these updated guidelines lack the desired clarity as to several of the conditions to this administrative grace period, logic dictates that taxpayers who attest that they only recently learned of their FBAR filing obligation and have insufficient time to complete the FBAR by the June 30, 2009 deadline will not be subject to the penalty for failure to file the FBAR if they file a delinquent FBAR report by September 23, 2009, together with a copy of their timely filed 2008 tax return (e.g., a plan’s Form 5500) and a statement explaining why the report is filed late (e.g., that they belatedly became aware of this reporting obligation).
The form for the FBAR, TD F 90-22.1, is used to report foreign financial accounts held by U.S. persons to the Internal Revenue Service (IRS). Generally, U.S. persons with combined financial interests exceeding $10,000 in foreign accounts must file FBAR by June 30 each year. However, changes made to the FBAR in 2008 may now also require that U.S. investors, fund managers and pension plans with financial interests in offshore funds file an FBAR for the 2008 calendar year and, if applicable, the previous five calendar years.
In October 2008, the IRS had changed FBAR by, among other things, expanding the definition of “financial account.” Previously, a financial account was defined in the FBAR instructions to include “any bank, securities, securities derivatives or other financial instruments accounts”. Under the October changes, the definition was expanded to also include “any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund (including mutual funds).”
In a June 12, 2009 panel discussion addressing open questions regarding FBAR for calendar year 2008, IRS representatives publicly stated that under the new definition, an offshore hedge fund is a “foreign financial account” for FBAR purposes. Accordingly, they indicated that every U.S. investor in such a fund must file an FBAR, whether or not the fund itself has any offshore bank or securities accounts. These statements, which have been widely reported but have not yet been published by the IRS, came as a surprise to the industry, since (i) the IRS had not previously indicated that the new term “commingled fund” was intended to include hedge funds or other privately-offered vehicles, and (ii) the panel’s comments seem inconsistent with previous comments by IRS representatives published subsequent to an IRS 2007 National Phone Forum.
We are reaching out to our IRS contacts for further clarification of these issues. However, until further guidance is provided, it is not clear whether the panelists’ interpretation is correct, or whether it applies only to hedge funds or also to private equity and other funds. If broadly applied, the following “U.S. persons” are among those who may need to file an FBAR:
- A U.S. investor in an offshore investment fund (or in an offshore feeder fund in a master/feeder fund structure), including U.S. tax-exempt investors (there are indications that this includes a pension fund or a welfare benefit fund);
- A U.S. investor that owns more than 50% of a U.S. or foreign entity which is a direct investor in an offshore investment fund;
- A U.S. investor in a foreign blocker or other foreign corporation which itself may be considered a commingled fund;
- A U.S. fund of funds, or U.S. feeder fund, that invests in an offshore investment fund;
- A U.S. investment manager with a financial interest (for example, a carried interest) in an offshore investment fund; and
- A U.S. individual or other U.S. person with signature or other authority to invest in, or to bind an offshore investment fund, or to bind the general partner or managing member of such a fund (in addition to the general partner or managing member itself if it is a U.S. entity). (The FBAR form permits a limited exception for certain officers and employees of certain domestic corporations under some limited circumstances.) This also could include a trustee or investment fiduciary of a pension fund or custodian of an IRA account.
Additionally, the IRS representatives indicated that taxpayers who failed to file the FBAR for prior years and paid tax on all taxable income should submit an FBAR for each of the prior six years by September 23, 2009, with an explanation of why the FBARs were not timely filed.
At this point, the IRS has not provided written confirmation of the June 12 panel comments. However, it appears that until such guidance is available, the only way to be certain of avoiding potentially severe penalties ($10,000 or, in willful cases, up to 1/2 of the value of the account) is to file for all such entities. Please be advised that, unlike most IRS forms, the FBAR for calendar year 2008 must be received by the IRS, not merely postmarked, by June 30.