This memorandum is intended to alert you that a U.S. person who had a financial interest in a foreign financial account during the 2009 calendar year is required to disclose the existence of such account to the U.S. Treasury Department by June 30, 2010 and that a U.S. person who had “signature or other authority” over (but no financial interest in) a foreign financial account during the 2009 calendar year is required to disclose the existence of such account to the U.S. Treasury Department by June 30, 2011. This requirement often applies to private investment funds and/or their principals or employees.
There have been numerous changes to these rules over the past year.
A “U.S. person” is required to file Form TD F 90-22.1 to report the existence of an offshore “financial account” where such person either (1) had “signature authority” over such account or (2) had a “financial interest” in such account at any time during the 2009 calendar year.
The filing requirement only applies to a U.S. person if the aggregate value of all such accounts in which a person had a “financial interest” or “signature authority” exceeded $10,000 at some time during the 2009 calendar year. The deadline for filing Form TD F 90-22.1 for 2009 for accounts in which a U.S. person had a “financial interest” is June 30, 2010; the deadline for filing Form TD F 90-22.1 for 2009 for accounts in which a U.S. person had signature authority (but no financial interest) is June 30, 2011. Extensions are not available and forms must be received by the U.S. Treasury Department (not just postmarked) by the deadline.
“U.S. Person”
A “U.S. person” means (1) a citizen or resident of the United States, (2) a U.S. domestic partnership, (3) a U.S. domestic corporation, or (4) a U.S. domestic estate or trust.
“Financial Account”
A “financial account” includes “any bank, securities, securities derivatives or other financial instruments accounts.” Such an account includes any account in which the assets of the account are held in a “commingled fund” in which the account holder holds an equity interest. A “commingled fund” specifically includes a “mutual fund,” but does not currently include a hedge fund or a private equity fund.1
“Financial Interest”
A person will be treated as having a “financial interest” in an account if either:
- He is the owner of record or has legal title to the account, regardless of whether the account is maintained for his own benefit or the benefit of others; or
- He is not the owner of record or person having legal title, but the owner of record or person having legal title is either:
- acting on his behalf (e.g., as an agent, nominee or attorney);
- a corporation in which he owns directly or indirectly more than 50 percent of the value of the stock;
- a partnership in which he owns more than 50 percent of the capital or profits; or
- a trust in which he either has a present beneficial interest in more than 50 percent of the assets or from which he receives more than 50 percent of the current income.
“Signature Authority” or “Other Authority”
An individual has “signature authority” over an account if such individual can either control the disposition of money or other property in the account (1) by delivering a document containing his signature to the bank or other person with whom the account is maintained, or (2) by delivering a document containing his signature and that of one or more other individuals to the bank or other individual with whom the account is maintained.
An individual has “other authority” over an account if such individual can exercise power comparable to “signature authority” over an account by direct communication to the bank or other person with whom the account is maintained, either orally or by some other means.
It should be noted that only an individual can have “signature authority” or “other authority.”
Examples Applicable to Private Investment Funds
A Form TD F 90-22.1 is required to be filed in the following cases. In each of the examples, it is assumed that the balance of the account at issue is in excess of $10,000:
(1) An investment fund organized as a Delaware limited partnership has an offshore bank or brokerage account. Reporting is required by the fund.
(2) A principal or employee of an investment manager has signature authority over an offshore bank or brokerage account maintained by an investment fund (whether the fund is domestic or offshore). Reporting is required by each principal or employee with such authority. This is the case even where more than one signature is required to disburse funds from the account. Since only individuals can have signature authority over a foreign financial account, an investment manager entity is not required to report that it possesses signature authority over a foreign financial account.
(3) A domestic feeder fund owns more than 50 percent of an offshore master fund and the master fund has an offshore bank or brokerage account. Reporting is required by the domestic feeder fund with respect to the offshore bank or brokerage account.
A Form TD F 90-22.1 is not required to be filed in the following circumstances:
(1) A principal or an employee of an investment manager has the authority to direct an offshore administrator to disburse funds from an account, provided that account is at an institution other than the administrator (e.g., a third party bank or brokerage).
(2) An investment fund has a domestic bank or brokerage account. The fund does not have to report. A person with signature authority over such account does not have to report.
(3) An offshore feeder fund owns more than 50 percent of a master fund and the master fund has an offshore bank or brokerage account. The offshore feeder fund does not have to report.2
(4) An offshore fund (feeder, master or stand alone) has an offshore bank or brokerage account. The fund does not have to report.3
(5) A U.S. person (including a tax-exempt entity) invests in an offshore private investment fund. Under current law, the U.S. person is not required to report the investment in the offshore fund as a “financial account.”
Civil and Criminal Penalties for Failure to File
The penalties for failing to file Form TD F 90-22.1 were substantially increased in 2004 and the IRS has recently increased its enforcement efforts regarding these filings. The penalty for an unintentional failure to file Form TD F 90-22.1 is $10,000. This penalty could apply even where a person did not know about the filing requirement.
The penalty for an intentional failure to file Form TD F 90-22.1 is the greater of $100,000 or 50 percent of the value of the account. In addition, a person who intentionally fails to file Form TD F 90-22.1 may be subject to criminal prosecution.
Form 1040 Reporting Requirement
In addition to the filing requirements discussed above, a taxpayer with an interest in, or signature or other authority over, a financial account in a foreign country may be required to disclose such accounts on Schedule B of his Form 1040.
If you have any questions regarding reporting of such foreign financial accounts or need assistance completing Form TD F 90-22.1, please call Jim Cofer at (212) 574-1688.
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1 It should be noted that the Internal Revenue Service (the “IRS”) took the position in 2009 that a “commingled fund” included a hedge fund or private equity fund. In Notice 2010-23, the IRS reversed this position and held that hedge funds and private equity funds would not be treated as “commingled funds” for filings through 2009. In addition, on February 26, 2010, the Department of Treasury issued proposed regulations which reserve on the question of whether a hedge fund or private equity fund is a “financial account.” As a result, it is possible that the IRS may ultimately take the position that a hedge fund or a private equity fund is a “financial account” for filings after 2009.
2 A U.S. person with signature authority over such account would be required to report the account.
3 A U.S. person with signature authority over such account would be required to report the account.
