2010 Form 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR)
The purpose of this Alert is to remind you of the requirement to file the 2010 United States (U.S.) Treasury Department Form 90-22.1 for non-U.S. bank and financial accounts if the aggregate value of the financial account(s) exceeds $10,000 at any time during the year.
This updated release covers the final rules released by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) on February 23, 2011.
Form 90-22.1 is filed separately from your tax return and must be received by the Treasury Department no later than June 30, 2011. The form cannot currently be filed electronically and the sender cannot rely on a postmark date, rather than actual receipt.
The Treasury Department will impose a civil penalty of up to $10,000 on any person who does not comply with the filing requirements, even if the lack of filing is non-willful. For a willful violation, the penalty can be as high as the greater of $100,000 or 50% of the highest amount in the foreign account during the reportable calendar year.
Who Must File?
In general, the form is required to be filed by any U.S. person which has a financial interest in or signatory authority over any foreign financial account.
Reminder: For 2009 and previous calendar years, persons with signature authority over, but no financial interest in, a foreign financial account were granted an extension to June 30, 2011 to file FBARs for those years under Notice 2010-23. Those filing such prior year FBARs can also rely on the guidance in the final rules issued by FinCEN discussed in this letter.
U.S. person: For legal entities, this includes a corporation, partnership, limited liability company, or trust created, organized or formed under the laws of the United States, any U.S. State, the District of Columbia, a U.S. territory or possession, or an Indian Tribe.
• For a trust formed under one of the U.S. laws listed above, a filing by the trustee is required even though non-U.S. persons control all of the substantial decisions of the trust, making it a foreign trust for U.S. federal tax purposes under the IRC.
• A foreign corporation that elects to be treated as a U.S. corporation for income tax purposes does not have an FBAR filing obligation, because it was not organized or formed under the laws of the United States.
For individuals, this includes U.S. citizens, lawful permanent residents (green card holders) – even if he or she elects to be treated as a nonresident under an income tax treaty – or persons meeting the substantial presence test for income tax residency under the Internal Revenue Code (IRC).
• Nonresident aliens, even those “in and doing business in the United States” during the tax year, do not have a reporting obligation under the final rules.
• A determination of whether a person is a U.S. resident is made without regard to an election by a nonresident alien to file a joint tax return with a U.S. spouse.
• An individual who elects to be treated as a resident for federal income tax purposes is also required to file an FBAR, but only with respect to those foreign financial accounts held during the period covered by the election.
Foreign: An account is not a foreign account under the FBAR rules if it is maintained with a financial institution located in the U.S. For example, if you purchase a foreign security through a U.S. account maintained with a securities broker, you will not have an FBAR filing requirement.
Financial account: This broadly includes any bank, securities, derivatives, foreign mutual fund or other financial instruments account (including any savings and demand deposits, checking accounts, certificates of deposit, or other account maintained with an institution engaged in the business of banking). Financial accounts also include an account with a person that is in the business of accepting deposits as a financial agency (defined as “a person acting for a person as a financial institution, bailee, depository trustee, or agent, or acting in a similar way related to money, credit, securities, gold, or a transaction in money, credit, securities, or gold”), or a person that acts as a broker or dealer for futures or option transactions in any commodity or is subject to the rules of a commodity exchange or association.
An account with a foreign mutual fund or similar pooled fund which issues shares available to the general public that have a regular net assets value determination and regular redemptions are also reportable.
Observation: Most, if not all, investments in foreign private funds – such as hedge funds and private equity funds – held by U.S. persons do not involve reportable foreign financial accounts, unless a U.S. investor owns greater than a 50% interest in such a fund which itself holds a foreign bank or other financial account. However, the Treasury Department has reserved the right to issue regulations in future on such funds.
U.S. persons do not have an FBAR filing requirement with respect to assets held in an omnibus account (i.e., an account created by a U.S. custodian where cash and securities are pooled in a non-U.S. account to hold assets of multiple investors) which is maintained through a U.S. global custodian bank, unless the custody arrangement permits the U.S. person to directly access its foreign holdings maintained in the account.
Foreign life insurance and annuity policies with a cash value are also covered under the recently revised rules and reportable by the policy holder.
Financial interest in an account: This includes being the owner of record or having legal title, even if acting as an agent, nominee, or in some other capacity on behalf of a U.S. person. A U.S. person also has a financial interest in an account held by a corporation in which that person owns, directly or indirectly, more than 50% of the total voting power or value of shares; a partnership in which the U.S. person owns an interest of more than 50% in the capital or profits; or a trust if the U.S. person is the trust grantor and the trust grantor has an ownership interest in the account for federal income tax purposes (i.e., the trust is a grantor trust); a trust in which a U.S. person either has a present beneficial interest in more than 50% of the assets or from which such person receives more than 50% of the current income. Anti-abuse rules apply when a U.S. person causes an entity to be created for a purpose of evading the FBAR requirements.
Observation: Apparently the beneficiary of a discretionary trust does not have an FBAR filing obligation simply by reason of being a discretionary beneficiary. Further, a remainder interest does not fall within the scope of the term “present beneficial interest” under the final rules, so remainder beneficiaries do not have a filing obligation.
A beneficiary of a trust will not have a filing requirement if the trust, the trustee of the trust, or agents of the trust are U.S. persons who have filed FBARs with respect to the trust’s accounts. The final rules do not address whether a filing requirement exists if a U.S. grantor files the FBAR.
The final rules eliminated the filing requirement with respect to a trust established by a U.S. person for which the U.S. person has appointed a trust protector which is subject to the settlor’s direct or indirect instruction.
Signature or Other Authority: Signature or other authority has been re-defined for individuals only to include the authority of an individual (alone or in conjunction with another) to control the disposition of money or funds or other assets held in the account by direct communication (whether in writing or otherwise) to the institution with which the financial account is maintained.
Officers and employees employed at the organizations listed below do not have to report signature or other authority over a foreign financial account, as long as the officers and employees do not have a personal financial interest in the financial accounts:
• Banks examined by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, FDIC, Office of Thrift Supervision, or National Credit Union Administration, and federal banking agencies
• Financial institutions registered with and examined by the SEC or Commodity Futures Trading Commission
• An Authorized Service Provider that maintains foreign financial accounts by an investment company that is registered under the Investment Company Act of 1940
• Companies that are listed on a US national securities exchange, whether the company is domestic or foreign.
Observation: Officers and employees of a U.S. subsidiary of a listed company are also covered by this exception, if the U.S. subsidiary is named in a consolidated FBAR report of the parent. However, this exception is not extended to a U.S. subsidiary of a foreign parent listed on a foreign exchange, so voluntary filings by such a foreign parent will not relieve the FBAR filing obligation of the officer or employee of the U.S. subsidiary.
What Must be Reported?
The Treasury Department requires reporting of the highest balance for any account(s) during the year and the address of the foreign bank or other financial institution. Periodic statements may be relied upon where they are prepared in the ordinary course of business. They may be relied upon if the statements fairly reflect the maximum account value during the year.
There is more limited reporting for those owning a direct interest or having signature or other authority over 25 or more foreign bank or financial accounts. Where persons have signature authority over 25 or more accounts, filers are required to provide information identifying the U.S. person(s) having a financial interest in such accounts. Information that is not required to be reported in these limited circumstances should be maintained for five years, since the Treasury Department or the Internal Revenue Service may request the information within this period.
Officers or employees of a legal entity who file an FBAR because of signature or other authority are not expected to personally maintain the records of the foreign financial accounts of their employer.
Are there any Broad Exceptions to Reporting?
Exceptions apply to accounts of a department or agency of the United States, an Indian Tribe, or any State or political subdivision of a State; an international financial institution of which the U.S. government is a member; U.S. military banking facilities; and correspondent accounts maintained for bank-to-bank settlements.
Participants and beneficiaries in retirement plans under IRC Sections 401(a), 403(a) & (b), including owners and beneficiaries of Individual Retirement Accounts (or Roth IRAs), are not required to file an FBAR with respect to foreign financial accounts held by or on behalf of the retirement plans.
Observation: Trustees and administrators of qualified retirement plans are not exempt from FBAR reporting. FinCEN does not believe that it is appropriate to exempt entities from the FBAR filing requirement based upon their tax exempt status.
Under consolidated reporting, any entity that is a U.S. person and owns directly or indirectly more than 50% of an entity required to file an FBAR can file a consolidated report on behalf of itself and such other entity(ies).
Observation: FinCEN has not decided whether consolidated filing relief should be available to investment funds organized by the same fund manager – i.e., for all foreign financial account information for all funds in the same family – and indicated that such funds may seek specific guidance from the Treasury Department.
Coordination with new OVDI: The final FBAR rules are independent of a second Offshore Voluntary Disclosure Initiative announced by the Treasury Department on February 8, 2011, and described in our Alert dated February 14, 2011. Apparently late FBAR filings under this program for 2009 and earlier years by those having a financial interest in (rather than just signatory authority over) a foreign financial account – which generally must be made by August 31, 2011 – will not be governed by changes under these new final rules.
This publication is intended to provide general information to our friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.