On February 26, 2010, the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department (“Treasury”) issued a Notice of Proposed Rulemaking proposing to amend the Bank Secrecy Act (BSA) implementing regulations regarding the Report of Foreign Bank and Financial Accounts (FBAR). On the same date, the Treasury and the Internal Revenue Service (IRS) issued long-awaited additional guidance to FBAR filers. Notice 2010-23, 2010-11 IRB was issued extending the filing deadline for certain FBAR filers until June 30, 2011. The Notice also provides some clarity with respect to the FBAR filing obligations pertaining to commingled funds. In addition, Announcement 2010-16, 2010-11 IRB was issued continuing the suspension of FBAR filing requirements for persons who are not United States citizens, residents or domestic entities.
The FBAR filing requirements, authorized under one of the original provisions of the BSA, have been in place since the early 1970s. FinCEN delegated to the IRS the authority to enforce the FBAR rules and amend the form to be filed with the IRS. However, FinCEN retained the authority to revise the applicable regulations. The FBAR form, TDF 90-221.1, is used to report a financial interest in, or signature or other authority over, one or more financial accounts in foreign countries. No report is required if the aggregate value of the accounts does not exceed $10,000. When filed, FBARs become part of the BSA database.
Proposed FBAR Regulations
The Treasury’s proposed regulations provide clarity and some relief to filers attempting to determine their obligations under the FBAR rules. Some of the key provisions clarify which persons are required (and are not required) to file an FBAR and which accounts are reportable.
- United States Person: A U.S. person is defined as a citizen or resident of the United States or a domestic entity (including a corporation, partnership, trust or limited liability company, regardless of whether the entity has made an election to be disregarded for federal income tax purposes) that is 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. A “resident” is essentially the same as under the Internal Revenue Code (e.g., a lawful permanent resident, or an individual who meets the 183-day substantial presence test, with certain exceptions). The proposed regulations seem to eliminate the need for foreign persons “in and doing business in” the United States to file an FBAR.
- Reportable Account: An account is one in which a U.S. person has a formal relationship with a foreign financial institution to provide regular services, dealings or other transactions, even if the relationship is for a short period of time. An account is not established by simply using a foreign financial institution to wire money or purchase a money order. The proposed regulations would treat an annuity or any other insurance policy with a cash surrender value, including a variable annuity or whole life policy issued outside of the U.S., as a foreign financial account. Foreign mutual funds and similar pooled funds offered to the general public that have a regular net asset value determination and regular redemptions would also be treated as foreign financial accounts (on the theory that they are highly liquid). The proposed regulations reserve on whether interests in offshore private investment vehicles such as hedge funds and private equity funds constitute reportable financial accounts, thus suggesting that those interests will not be treated as reportable financial accounts, at least in the near future.
- Pension Plans Must File: The proposed regulations make clear that an FBAR must be filed with respect to plan-related foreign financial accounts, subject to certain exceptions. Proposed revisions to the FBAR instructions, which accompany the proposed regulations, expressly state that the foreign financial account of any employee retirement or welfare plan of a government entity is not required to be reported on FBAR by any person. Participants and beneficiaries in qualified retirement plans and Individual Retirement Account (IRA) owners and beneficiaries would not be required to file FBAR with respect to foreign financial accounts held by or on behalf of the plan or IRA.
- Signature Authority: The proposed regulations would clarify the definition of signature authority or other authority, and generally would expand the filing exceptions for U.S. persons with signature or other authority over, but no financial interest in, certain reportable accounts to cover certain officers and employees of various entities. The proposal defines signature or other authority to mean 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 delivery instructions (whether communicated in writing or otherwise) directly to the person with whom the financial account is maintained.
Extension of Deadline to File FBAR for Certain Persons
In August 2009, the IRS extended the deadline to file FBARs for 2008 (and any prior year) to June 30, 2010, for persons with no financial interest in, but only signature authority over, a foreign financial account, as well as for persons with a financial interest in, or signature authority over, a foreign financial account in which assets are held in a commingled fund. (Notice 2009-62, 2009-35 IRB 260). The Treasury released Notice 2010-23, 2010- 11 IRB in response to comments received by the IRS. The Notice provides the following relief to FBAR filers:
- The IRS extends the filing deadline to June 30, 2011, for persons with only signature authority over, but no financial interest in, a foreign financial account with respect to FBARs for 2009 and earlier years that would otherwise have been due by June 30, 2010.
- The IRS clarifies that persons who have an interest, in or signature authority over, a commingled fund that is a mutual fund (or similar fund) must file an FBAR. For this purpose, however, the term “commingled fund” will not be interpreted to mean hedge funds or private equity funds.
- With respect to the 2009 tax period, persons who only have signature authority over a foreign financial account, or who have a financial interest in or signature authority over a foreign commingled fund that is not a mutual fund (or similar fund), would not be required to disclose the existence of such accounts and may check the “no” box in response to FBAR-related questions found on federal tax forms for 2009 and earlier years.
Suspension of Expanded Definition of U.S. Person
In October 2008, the IRS expanded the definition of a U.S. person. The term was broadened to include persons “in and doing business in the U.S.” The IRS temporarily suspended this definition over public confusion about the scope of the language and directed people to refer to the old definition of “U.S. person” contained in the July 2000 version of the FBAR instructions, which required only United States citizens, residents or domestic entities to file an FBAR (Announcement 2009-51, 2009-25 I.R.B. 1105). The IRS has again suspended the requirement to file FBARs for 2009 (and any prior year) for persons who are not U.S. citizens, U.S. residents or domestic entities (Announcement 2010-16, 2010-11 IRB).