On February 23, 2011, the Treasury Department (“Treasury”) issued final regulations (the “Final Regulations”) regarding reporting obligations for foreign financial accounts (commonly referred to as “FBAR”).
As under prior FBAR rules, a U.S. person generally is required to file Form TD F 90-22.1 (the “Form”) with the Internal Revenue Service to report the existence of a financial interest in, or signature authority over, foreign financial accounts that had an aggregate value of more than $10,000 at any time during a calendar year (each a “Foreign Account”).1
The Final Regulations provide clarity on a number of issues of interest to managers of offshore private investment funds (“Funds”), such as:
An investor in a Fund will not be required to file the Form solely because he or she is an investor in a Fund.
U.S. personnel of a manager are required to file the Form if they have signature or other authority over a Foreign Account established by a Fund (e.g., a Fund’s bank account or prime brokerage account). However, if such persons can only control the disposition of assets in the Foreign Account by first sending directions to a third-party (e.g., a Fund administrator), and then the third-party in turn sending the directions directly to the institution where the Foreign Account is held, such persons will not have to file the Form.
Below is a summary of the main elements of the FBAR rules that may be of interest to managers of Funds:
Who Has to File the Form?
Any U.S. citizen, resident, or entity formed in the United States having a “financial interest” in, or “signature or other authority” over, a bank, securities or “other financial account” in a foreign country.
A person has a “financial interest” in a Foreign Account if: (1) such person is the record owner or has legal title to the account, irrespective of whether the account is held for such person’s own benefit or for the benefit of others; or (2) the record owner or title holder is (a) a person acting as an agent, nominee, attorney or in some other capacity on behalf of the U.S. person with respect to the account, (b) a corporation in which the person owns (directly or indirectly) more than 50% of the voting power or value, (c) a partnership in which the U.S. person owns (directly or indirectly) more than 50% of the capital or profits interest, (d) a grantor trust of the U.S. person, (e) a trust in which the U.S. person either has a present beneficial interest2 in more than 50% of the assets or from which such U.S. person receives more than 50% of the current income, or (f) any entity (other than a corporation, partnership or trust) in which the U.S. person owns (directly or indirectly) more than 50% of the voting power, value of the equity interest or assets, or profits interest.
A person has “signature or other authority” over a Foreign Account if the person is able to control the disposition of assets in the account by direct communication (in writing or otherwise) to the institution holding the account. Treasury clarified that only an individual can have signature or other authority over a Foreign Account. Therefore, while the principals and employees of an investment adviser may be required to report that they have signature or other authority over a foreign financial account of an investment fund, the investment adviser itself would not have such obligation.
Other financial account includes a mutual fund or similar pooled fund that issues shares available to the general public and having a regular net asset value determination and regular redemptions. Treasury noted in the preamble to the Final Regulations that the definition of a mutual fund for FBAR purposes includes a requirement that shares be available to the general public, which should alleviate the concern that hedge funds and private equity funds will be treated as mutual funds for FBAR purposes (although the Final Regulations continue to reserve on the question of whether an investment fund other than a mutual fund should be treated as an “other financial account”). Therefore, until further guidance is issued, hedge funds and private equity funds themselves will not be treated as Foreign Accounts.
Are There any Exceptions to Filing?
The Final Regulations contain some limited exemptions to the reporting obligation. For example, an officer or employee of certain entities need not file the Form to report signature or other authority over a Foreign Account so long as the officer or employee has no financial interest in the Foreign Account. Such entities include: (1) certain banks; (2) financial institutions (excluding investment advisers) registered with and subject to examination by the SEC or the CFTC; (3) investment advisers registered with and subject to examination by the SEC and providing services to an investment company registered under the Investment Company Act of 1940, but only with respect to the Foreign Accounts of the registered investment company; and (4) entities with a class of equity securities listed on any U.S. national securities exchange.
Is There a Simplified Reporting Regime for Entities with Multiple Financial Accounts?
The Final Regulations provide for simplified reporting in the case of a United States person having a financial interest in 25 or more foreign financial accounts or signature or other authority over 25 or more such accounts. This reporting need only include the number of foreign financial accounts and certain other basic information. Detailed reporting is required if requested by Treasury.
When Does the Filing Have to be Made?
The Form must be filed by June 30, 2011 for Foreign Accounts that had an aggregate value of more than $10,000 at any time during 2010. It should be noted that the IRS had previously extended the deadline for filing the Form until June 30, 2011 for U.S. persons who had signature authority over, but no financial interest in, a Foreign Account through 2009.
What are the Consequences for Failing to File the Form?
There are civil and criminal penalties for failing to file. On February 8, 2011, the IRS announced its most recent FBAR voluntary disclosure initiative, pursuant to which noncompliant U.S. persons are able to voluntarily disclose their unreported Foreign Accounts and significantly lessen the penalties to which they would otherwise be subject. The deadline for taking advantage of the voluntary disclosure initiative is August 31, 2011.
Are there any Other Filing Requirements with Respect to a Foreign Account?
In addition to the FBAR filing obligation, taxpayers are required to answer certain questions related to foreign financial accounts on U.S. federal income tax and information returns (e.g., Schedule B of Form 1040; the “Other Information” section of Form 1041; Schedule B of Form 1065; Schedule N of Form 1120). On March 30, 2011, the Service issued Notice 2011-31 to provide guidance to taxpayers regarding how to answer these questions on their 2010 returns. For returns filed on or after March 28, 2011, the Final Regulations, along with the revised instructions to the Form, should be referenced when answering foreign financial account related questions on 2010 returns. For returns filed before March 28, 2011, taxpayers could have referenced either (1) the FBAR regulations in place before the Final Regulations, along with other then-existing FBAR guidance or (2) the Final Regulations, along with the revised instructions to the Form.
* * * * *
If you have any questions regarding this memorandum, please contact one of the attorneys listed below.
______________________________________________________
1 Our previous memoranda on FBAR are available here [March 2, 2010 memo]; [August 12, 2009 memo]; [June 26, 2009 memo]; [June 11, 2009 memo]; [June 3, 2009 memo]; [June 3, 2008 memo].
2 Treasury clarified that a beneficiary of a discretionary trust or the owner of a remainder trust interest will not be treated as having a “present beneficial interest.”
