Executive Summary

On February 24, 2011, the Financial Crimes Enforcement Network of the Department of the Treasury (FinCEN) issued widely anticipated final regulations regarding the reporting of foreign financial accounts on Form TD-F 90-22.1, Report of Foreign Bank and Financial Accounts (commonly referred to as "FBAR").1 The final regulations generally adopt proposed regulations previously issued by the Treasury Department in February 2010 with few changes, and the accompanying preamble clarifies questions raised by commentators with respect to the proposed regulations. The IRS may shortly issue additional guidance, including a revised FBAR form with accompanying instructions. We have been advised that the revised form should be issued by March 28, 2011, the effective date of the final regulations, and may resolve questions that remain open. In order to provide greater clarity on the remaining open issues, FinCEN and the IRS should have coordinated their efforts in releasing the Final Regulations and the new FBAR form and instructions and additional guidance, as was done in 2010.

Final regulations

The final regulations clarify the following open questions:

  • Whether an account is foreign and therefore reportable, including the treatment of custodial accounts;
  • Whether persons having signature authority over, but no financial interest in, foreign financial accounts must file FBARs and whether recordkeeping obligations apply to those persons; and
  • Which officers and employees with signature authority are excluded from the FBAR filing and recordkeeping requirements.

The final regulations apply to FBARs with respect to foreign accounts maintained in 2010 and for all subsequent calendar years. The final regulations do not further extend the deferred filing deadlines for certain filers with signature authority over foreign financial accounts previously provided by the IRS guidance accompanying the proposed regulations. For FBARs that were deferred under prior temporary IRS relief with respect to accounts maintained through 2009, the final regulations apply only at the filer's election. For persons who took advantage of the deferral program that do not elect to apply the final regulations, it is unclear what filing obligations apply for accounts maintained through 2009 over which such persons had only signature authority. Such persons are advised to consult their tax advisor regarding their filing obligations.

Background

Under the Bank Secrecy Act and applicable Treasury Regulations, U.S. persons generally must file an FBAR by June 30 of the year following any year during which such person had signature or other authority over, or had a financial interest in, foreign financial accounts whose aggregate value exceeded $10,000 at any time during such calendar year. Failure to file an FBAR can lead to severe penalties, including civil penalties (as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation), criminal penalties (including both incarceration and criminal penalties of up to $500,000) or both.

In October 2008, the IRS revised the FBAR instructions and, among other things, significantly broadened the definition of "U.S. persons" required to file the FBAR. These changes resulted in many questions and comments from filers and tax advisors. In response, the IRS issued guidance in 2009 that (i) suspended the applicability of the broader definition of U.S. persons set forth in the October 2008 revised FBAR instructions, and (ii) extended the filing deadlines with respect to other types of U.S. persons. On February 26, 2010, the Treasury Department issued proposed regulations, which included proposed revised FBAR instructions, and the IRS released guidance providing additional administrative relief that included further extension of deadlines with respect to certain types of U.S. persons (Notice 2010-23 and Announcement 2010-16). The final regulations generally adopt the proposed regulations with few changes, and provide additional clarifying guidance in response to comments from the public.

Definition of "U.S. persons"

The final regulations define "United States person" to include a U.S. citizen, U.S. resident for tax purposes, or any entity, including but not limited to a corporation, partnership, trust or limited liability company, created, organized, or formed under U.S. laws. The preamble to the final regulations also clarifies that U.S. permanent legal residents are subject to FBAR filing requirements regardless of whether they have elected treatment as a non-resident under a tax treaty. Further, the determination of whether an individual is a U.S. resident for FBAR purposes is made without regard to whether such individual has elected treatment as a resident for U.S. federal income tax purposes.

Like the proposed regulations, the final regulations do not impose an FBAR filing requirement for (i) non-U.S. persons "doing business" in the U.S. or (ii) U.S. branches of foreign entities that conduct business in the U.S. but are not separately incorporated or formed under U.S. laws.

U.S. persons having signature authority but no financial interest

The final regulations maintain the FBAR filing requirement for persons with signature or other authority over, but no financial interest in, a foreign financial account. The final regulations provide that "signature or other authority" means the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained. This definition responded to public concerns that the definition in the proposed regulations would have applied to an individual who merely participates in the decision to allocate assets or has the ability to instruct or supervise others with signature authority over a reportable account. The phrase "in conjunction with another" is intended to address situations in which a foreign financial institution requires a direct communication from more than one individual regarding the disposition of assets in the account. Thus, a U.S. person is required to file an FBAR even with respect to accounts where communications are required from multiple persons to effect a disposition. The preamble to the final regulations provides that the test for determining whether an individual has signature or other authority is whether the foreign financial institution will act upon a direct communication from that individual regarding the disposition of assets in the account. The preamble clarifies that this definition applies only to individuals.

The final regulations do not further extend the June 30, 2011 deadline for persons with only signature or other authority over accounts maintained in 2009 and earlier open years, which extension was previously provided by the IRS in Notice 2010-23. Thus, absent new IRS guidance further extending relief, persons with only signature authority over, and without any financial interest in, a foreign financial account in 2010 must now file an FBAR by June 30, 2011. However, the final regulations may apply – at the filer's option – to FBARs that were deferred under Notice 2010-23. For persons who took advantage of the deferral program who do not elect to apply the final regulations, it is unclear what filing obligations apply for accounts maintained in 2009 and prior open years over which such persons had only signature authority.2 Such persons are advised to consult their tax advisor regarding their filing obligations.

Persons filing FBARs for accounts maintained in 2010 should check the "yes" box in response to the FBAR-related question on federal tax forms. Further guidance from the IRS is needed to clarify whether FBAR filers for accounts maintained in 2009 and prior open years must file amended federal tax forms that check the "yes" box in response to the FBAR-related question since Notice 2010-23 previously instructed those persons to check the "no" box.

Foreign private equity funds and foreign hedge funds

As in the proposed regulations, the final regulations reserve the prospective treatment of foreign commingled funds, other than mutual funds, in defining foreign financial accounts that must be reported on the FBAR. For accounts maintained in 2009 and earlier years, the IRS had previously exempted from FBAR filing requirements those persons with a signature authority or a financial interest with respect to foreign commingled funds that are not mutual funds (such as foreign private equity funds, foreign hedge funds, and foreign venture capital funds). In reserving the prospective treatment of these private funds, the proposed regulations noted that the lack of functional regulation over them makes them difficult to define and distinguish. Citing pending legislative proposals regarding the regulation of some of these funds, the proposed regulations noted that the Treasury Department remained concerned about the use of hedge funds to evade taxes, and that FinCEN will continue to study the issue. Until the IRS issues further guidance addressing the treatment of such funds for accounts maintained in 2010 and subsequent years, it is not necessary for persons to file FBARs with respect to such private funds.

Foreign mutual funds

The final regulations require FBAR filing by persons with signature authority over, or a financial interest in, foreign commingled funds that are mutual funds or similar pooled funds, unless another exception applies. The final regulations define "mutual fund or similar pooled fund" to include a requirement that the shares be available to the general public in addition to having a regular net asset value determination and regular redemption feature. The proposed regulations distinguished mutual funds from private equity funds, venture capital and hedge funds, by noting the ability of the mutual fund account holder to redeem shares on a daily or otherwise regular basis, which presents a greater risk for money laundering than with other types of commingled funds.

Trusts

The final regulations provide a look-through rule in the case of trusts, so that a U.S. person will be considered to have a financial interest in a foreign account where title to the account is held by a trust, and the U.S. person is the trust grantor and has an ownership interest in the trust for U.S. federal tax purposes. In addition, a U.S. person is considered to have a financial interest in a foreign account where title to the account is held by a trust in which the U.S. person has either a present beneficial interest in more than 50% of the assets or from which such person receives more than 50% of the current income. However, beneficiaries described in the foregoing sentence are not required to file an FBAR if the trust, trustee, or agent is a U.S. person that separately files an FBAR with respect to the trust assets. The preamble to the final regulations clarifies that the FBAR requirements do not apply to discretionary beneficiaries of trusts or persons with remainder interests (except to the extent such persons have a present beneficial interest in more than 50% of the trust assets, or receive more than 50% of the current income of the trust). The final regulations declined to adopt language from the proposed regulations that defined "financial interest" to include a trust established by a U.S. person for which the U.S. person has appointed a trust protector that is subject to such person's instruction.

Other clarifications with respect to scope of foreign financial accounts

The final regulations clarify that, as a general matter, an account is not a foreign account if it is maintained with a financial institution located in the United States. The mere fact that an account contains holdings or assets of foreign entities does not render it "foreign" for FBAR purposes. Further, the final regulations clarify that an FBAR is not required with respect to "omnibus" accounts – that is, custodial arrangements wherein a U.S. bank acts as a global custodian and holds the U.S. person's assets outside the United States in pooled cash and securities accounts with other investors. However, if the custodial arrangement permits the U.S. person to directly access their foreign holdings maintained at the foreign institution, then an FBAR is required with respect to the foreign account.

The proposed regulations required FBARs with respect to insurance policies with cash value or an annuity. The final regulations adopt the insurance policy reporting requirement, but clarify that the requirement only applies to annuities with a cash value. Further, the preamble clarifies that the reporting requirement rests with the policy holder.

Exceptions for accounts of government departments and agencies

The final regulations adopt a new exception from the proposed regulations that exempts from FBAR filing requirements those persons with signature or other authority over, or a financial interest in, an account of a United States department or agency, any state or any political subdivision of a state, or any wholly owned entity, agency, or instrumentality of any of the foregoing. This new exception applies for accounts maintained in 2010 and subsequent years. For accounts maintained in 2009 or earlier, this new exception applies to persons who had only signature authority and no financial interest with respect to a foreign financial account held by a government entity and who would otherwise have been required to file FBARs by June 30, 2011 upon expiration of the temporary relief previously extended by the IRS.

Exceptions for officers and employees

The final regulations generally retain the provisions in the proposed regulations that elaborate on the exceptions to FBAR filing requirements for officers and employees of certain financial institutions, and possess signature or other authority over, but no financial interest in, foreign financial accounts. This exception applies to officers and employees of the following: (i) certain regulated organizations, including the FDIC, the Federal Reserve System, and the Office of Thrift Supervision; (ii) financial institutions that are registered with and examined by the SEC or Commodity Futures Trading Commission; (iii) entities registered with and examined by the SEC that provide services to investment companies registered under the Investment Company Act of 1940, where such officer or employee has signature authority over an account owned or maintained by any such investment company; (iv) entities with a class of equity securities listed on a U.S. national securities exchange; and (v) entities with a class of equity securities registered under section 12(g) of the Securities Exchange Act of 1934. The preamble provides that the officers and employees covered by the foregoing exception are exempted without any requirement that they receive notice that the employer filed an FBAR with respect to those accounts. A U.S. subsidiary's officers and employees are also exempt from the filing requirements so long as the U.S. parent is listed on a U.S. national securities exchange, and includes the subsidiary in its consolidated report. For officers and employees who do not fall under the foregoing exceptions, the preamble to the final regulations clarifies that officers and employees required to file FBARs with respect to foreign financial accounts of their employers are not required to personally maintain records regarding such accounts.

Tax treatment of other entities

The preamble to the final regulations clarifies that, absent express language to the contrary, all U.S. persons are subject to the application of the FBAR rules without regard to any special income tax treatment (such as organizations exempt from federal income tax, pension plans or welfare benefit plans). The preamble notes that, while these entities may be entitled to some measure of special treatment under the federal tax rules, the purpose of the FBAR is broader than tax administration. Thus, for example, nonprofit organizations exempt from federal income tax, pension plans and welfare benefit plans are not exempt from the FBAR requirements. However, the final regulations maintain the existing rule that owners, participants and beneficiaries in certain retirement plans, individual retirement accounts and Roth IRAs are not required to file an FBAR with respect to a foreign financial account held by or on behalf of the retirement plan or IRA.

Other changes and clarifications

The proposed FBAR instructions from February 2010 clarified that the FBAR must be received by the Treasury Department on or before June 30 of the year following the calendar year being reported. The final regulations do not address the issue of whether an FBAR that is postmarked on or before June 30, but is not received by the Treasury Department until after June 30, would be considered timely filed. Absent further guidance from the IRS on this point, filers should assume that FBARs must be received by the IRS on or before June 30. The IRS has taken this position on its website in the past.

The final regulations retain the proposed regulations' reporting procedures for persons with signature authority or financial interest with respect to 25 or more foreign financial accounts. The preamble to the final regulations clarifies that the Treasury Department will require persons with signature authority over foreign accounts to not only provide identifying information about themselves, but also provide identifying information about the owners of the foreign financial accounts. Accordingly, the preamble notes that the reporting requirements for persons with signature authority over 25 or more accounts is more burdensome than for persons with a financial interest in 25 or more accounts.

Anti-avoidance rule

The final regulations provide that a U.S. person that causes an entity, including a corporation, partnership or trust, to be created for a purpose of evading the FBAR rules shall be deemed to have a financial interest in any account for which the entity is the owner of record or holder of legal title.

Please utilize the links below to view the final regulations:

 http://edocket.access.gpo.gov/2011/pdf/2011-4048.pdf.