Long Awaited Guidance Concerning FBAR Filing Requirements Released

This past week, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) released proposed changes to the regulations implementing the Bank Secrecy Act pertaining to the reporting of foreign financial accounts (i.e., the Form TD F 90-22.1, a/k/a the “FBAR”). In addition, the Internal Revenue Service issued two notices giving administrative relief with respect to certain aspects of the FBAR filing requirements. These developments:

• Clarify the persons required to file an FBAR, and which accounts are reportable;
• Exempt certain persons with signature or other authority over foreign financial accounts from filing the FBARs;
• Include anti-abuse measures intended to prevent avoiding the FBAR reporting requirement;
• Address pre-2010 filing requirements for those having an interest in a private equity, hedge, or other commingled fund; and
• Change the filing deadline for those who have not previously disclosed accounts for which they hold signature authority.

EisnerAmper Observation: The FBAR must actually be received by Treasury by June 30, 2010 – no timely mailing rules or extensions of time to file are available.  

Definitions Treasury’s proposed rulemaking contains clarifications of the following definitions:

“United States Person”: 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). A domestic entity for this purpose would be an entity organized in, or under the laws of, the United States. 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).

EisnerAmper Observation: The proposed regulations eliminate the need for those persons “in and doing business in” the United States to file an FBAR. Similarly, one of the IRS notices suspends the FBAR reporting requirement for years prior to 2010 for persons who are not United States citizens, United States residents, or domestic entities. 

“Reportable Account”: 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.

Examples of reportable accounts include:

• Bank, securities, brokerage, commodity futures or options and other financial accounts in a foreign country, including certificates of deposit and checking accounts
• An annuity policy, or an insurance policy with a cash value
• A mutual fund or similar “pooled fund” that issues shares available to the general public with regular net asset valuations and regular redemption periods

FinCEN reserves the right to require FBAR reporting with respect to private equity funds, venture capital funds and hedge funds, but does not impose such a requirement under the proposed regulations. The explanation notes that Treasury continues to be concerned about the use of hedge funds to evade taxes. It is likely that Treasury will await the outcome of pending offshore reporting legislative proposals before it releases further guidance.

EisnerAmper Observation:Similarly, one of the new IRS notices eliminates FBAR filing for individuals holding commingled funds (other than foreign mutual funds) prior to 2010.  

“Financial Interest”: The proposed regulations provide that a United States person has a “financial interest” in each bank, securities, or other financial account in a foreign country for which the person is the owner of record or holder of legal title, whether or not the account is maintained for the record holder’s own benefit or for the benefit of others.

A United States person also has a financial interest in a foreign financial account for which the owner of record is a person acting on behalf of that United States person (e.g., as an attorney, agent or nominee). Thus, both the holder of record and the beneficial owner are required to file an FBAR.

If an account is maintained in the name of more than one person, each United States person in whose name the account is maintained is deemed to have a financial interest in that account.

A United States person is deemed to have a financial interest in a foreign account owned by another entity in the following situations:

• The United States person owns, directly or indirectly, more than 50 percent of the total voting power or the total value of shares in a corporation;
• The United States person owns, directly or indirectly, more than 50 percent of the capital or profits interests of a partnership; or
• The United States person owns, directly or indirectly, more than 50 percent of the voting power, total value of the equity interests or assets, or interests in profits of any other type of entity (other than trusts).

A United States person is deemed to have a financial interest in an account held by a trust if any of the following apply:

• A United States person is the trust settlor (i.e., grantor) and is deemed to be the owner of the account for income tax purposes under the grantor trust provisions of the Internal Revenue Code;
• A United States person has either a beneficial interest in more than 50 percent of the assets of the trust or receives more than 50 percent of the current income of the trust (no clarification is provided for the determination of how the beneficial interest is measured in terms of ownership of assets; the income test alternative presumably is based on fiduciary accounting income); or
• A United States person established the trust and appointed a United States person as a trust protector who is subject to such person’s direct or indirect instruction.

EisnerAmper Observation: Treasury is concerned that in many cases trust protectors serve as alter egos, even though the trust arrangement appears to maintain the appearance of trustee independence.  

The proposed regulations contain an anti-avoidance rule to require reporting in instances where persons seek to evade the requirement to file an FBAR through the use of special purpose companies used solely to disguise the transfer of funds between commonly controlled entities.

“Signature or Other Authority”: One of the IRS notices also extends the filing deadline to June 30, 2011, to report those foreign financial accounts over which United States persons have “signature or other authority,” but in which they have no financial interest, including accounts held during or prior to 2010.

In general, a United States person that has signature or other authority over a foreign financial account may also be required to file the FBAR. Signature or other authority generally means authority, either alone or in conjunction with another, to control the disposition of money, funds, or other assets held in a financial account by delivery of instructions (communicated in writing or
otherwise) to the person with whom the financial account is maintained.

Officers or employees that have signature or other authority over a foreign financial account may be required to file the FBAR. There are exceptions, but they will only apply if the officer or employee does not have a financial interest in the account. These exceptions apply to officers and employees of the following:

• A bank examined by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the FDIC, the Office of Thrift Supervision, or the National Credit Union Administration. Notification by the institution that it has filed an FBAR is not required.
• A financial institution, securities broker dealer, or futures commission merchant registered with and examined by the SEC or Commodity Futures Trading Commission. Again, notification of officers and employees by the institution that it has filed an FBAR is not required.
• An Authorized Service Provider (e.g., a person providing services to an investment company registered under the Investment Company Act of 1940) registered with the SEC.
• Domestic and foreign publicly traded entities listed on a United States national exchange. Officers and directors of a United States subsidiary of such a publicly traded entity also are exempt from filing an FBAR, if the United States subsidiary is included in a consolidated FBAR report of the parent entity.
• A United States corporation with equity interests registered under section 12(g) of the Securities Exchange Act. These are corporations which have more than $10 million in assets and more than 500 shareholders of record.
• Foreign financial account owned jointly by spouses: Only one FBAR is required, signed by both spouses. However, if one spouse is required to file an FBAR for an account which is not jointly owned, the other spouse is required to file a separate FBAR for all his or her accounts, including those owned jointly.

Reporting Simplification The proposed regulations also provide some simplified reporting procedures:

• A United States person having a financial interest in 25 or more foreign financial accounts or having signature authority over 25 or more foreign financial accounts is required only to provide the number of financial accounts and certain basic information on the FBAR, but must maintain information on the accounts should the IRS request an inspection.
• Participants and beneficiaries in qualified retirement plans under the Internal Revenue Code, including owners and beneficiaries of traditional IRAs, Roth IRAs, and 401(k) plans, are not required to file FBARs.

EisnerAmper Observation: Trustees and administrators of qualified retirement plans are not exempt from FBAR reporting. 

• A United States beneficiary of a trust having a more than 50 percent beneficial interest in the trust’s corpus or income is not required to report the trust’s foreign financial accounts if the trustee of the trust or agent of the trust is a United States person that files an FBAR disclosing the trust’s foreign financial accounts.  
• Consolidated reporting is allowed for all United States persons who own, directly or indirectly, more than 50% in an entity required to file the FBAR.

EisnerAmper Observation: Consolidated reporting applies to all types of entities, including partnerships and limited liability companies (not only corporations), which will eliminate duplicative reporting particularly in complex investment vehicle structures. 

For more information, please contact your EisnerAmper tax professional.

This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice, nor is it intended to convey a thorough treatment of the subject matter.