IRS Notice on FBAR Suspends Treatment of Hedge Funds as Foreign Financial Accounts,
Extends Due Date for Many Filings to June 30, 2011

A “U.S. person” is required to file Form TD F 90-22.1 to report the existence of a foreign “financial account” where such person either (1) has “signature authority” over such account, or (2) has a “financial interest” in such account at any time during the calendar year.

For the 2008 calendar year filing due on June 30, 2009, the Internal Revenue Service (the “IRS”) took the position that a hedge fund or private equity fund formed outside the United States was a “foreign financial account” for this purpose. As a result of an uproar among tax and industry professionals, the IRS initially extended the due date for this filing to September 23, 2009 and then extended it again to June 30, 2010 for those U.S. persons which had “signature authority” or a “financial interest” in an offshore hedge fund or private equity fund.

On February 26, 2010, the IRS released Notice 2010-23, which provides that hedge funds and private equity funds will not be treated as “foreign financial accounts” for purposes of the foreign bank account reporting (“FBAR”) rules for 2009 and any prior years. Therefore, (i) U.S. persons who have a “financial interest” in an offshore hedge fund or private equity fund and (ii) U.S. persons who have “signature authority or other authority” over such a fund will not be required to file Form TD F 90-22.1 for such years.

It should be noted that U.S. persons who have signature authority over an offshore bank or securities account maintained by a hedge fund or private equity fund are still required to file Form TD F 90-22.1 In addition, U.S. persons who own more than 50% of a hedge fund or private equity fund which itself has a foreign financial account are still required to file Form TD F 90-22.1 to report such account.

Notice 2010-23 also further extends the due date for filing Form TD F 90-22.1 to June 30, 2011 for those persons with signature authority over, but no financial interest in, any foreign financial account. Previously, the deadline was June 30, 2010. This extension applies to Form TD F 90-22.1 filings of such persons for calendar years through 2009.

The Department of Treasury’s Financial Crimes Enforcement Network issued proposed regulations on February 26 interpreting the FBAR requirements. These proposed regulations 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 this purpose.

Please see our previous memoranda on this subject, linked below.

If you have any questions regarding this memorandum, please call Jim Cofer at (212) 574-1688.