Recent statements by Internal Revenue Service (“IRS”) personnel have signaled that the IRS may take the position that U.S. persons are required to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly known as the “FBAR,” with respect to hedge funds and perhaps other private investment funds organized outside the United States as a foreign partnership or foreign corporation. In general, for FBAR purposes, financial accounts include bank accounts, securities accounts, commingled funds (including mutual funds) and any other account maintained at a foreign financial institution. A financial account is considered “foreign” if the entity or institution where the account is maintained is located in a jurisdiction other than the United States.
To date there has been no published guidance by the IRS that expressly states that offshore hedge funds or other private investment funds are “foreign financial accounts” subject to the FBAR reporting requirements. In fact, considerable arguments can be made that the Bank Secrecy Act, under which the FBAR reporting requirements were promulgated, simply does not apply to interests in many private investment funds. Nevertheless, given the substantial penalties for noncompliance and the failure of the IRS to clear up the confusion, U.S. fund managers and investors in offshore funds should consider their potential FBAR reporting obligations.
The FBAR reporting requirement applies to any U.S. person who holds either a financial interest in or signatory authority over a foreign financial account if the value of the account (or the aggregate value of multiple accounts) at any time during the year exceeds $10,000. Interests held indirectly are also covered if a U.S. person owns more than a 50% interest in a corporation (by value or vote) or a partnership (either in the profits or capital), or the beneficial interests in a trust that holds a foreign financial account. No attribution (e.g., family) rules apply in making these determinations.
The FBAR report for financial accounts held in 2008 must be filed by June 30, 2009. It is important to note that for this purpose the “timely mailing-timely filing rule” for federal income tax forms does not apply and the 2008 FBAR must be received by the Treasury Department by June 30, 2009 (i.e., sent by overnight mail by June 29, 2009). Furthermore, except for the initiative described below, there is no extension of time available for filing FBARs. FBARs filed by June 30, 2009 should be mailed to: Department of the Treasury, P.O. Box 32621, Detroit, MI 48232-0621.
For U.S. taxpayers who have properly reported and paid tax on all of their taxable income for years prior to 2008, but have only recently learned that they were required to have filed FBARs, the IRS has provided a qualified extension of the filing deadline for their delinquent FBAR reports to September 23, 2009. Any taxpayer filing FBAR reports under the extended deadline must mail the delinquent reports, along with a statement explaining why the reports are filed late and a copy of the taxpayer’s income tax return for each prior year for which an FBAR is filed, to: Internal Revenue Service, 11501 Roosevelt Blvd., South Bldg., Room 2002, Philadelphia, PA 19154, Attn: Charlie Judge, Offshore Unit, DP S-611. The limitations period for prior year FBARs is six years. Taxpayers who have only recently learned of their filing obligation and have had insufficient time to gather the information necessary to complete the 2008 FBAR by the June 30, 2009 due date also can take advantage of the extension until September 23, 2009 for filing FBARs and avoid penalties if they have reported and paid tax on all of their 2008 taxable income. However, they also must attach a statement explaining why the FBAR is filed late and a copy of their 2008 federal income tax return unless the due date of the return is after September 23, 2009.
The IRS has aggressively stepped up enforcement of the FBAR reporting requirements in recent months as part of its enforcement efforts targeted at taxpayers who have failed to report their income from foreign accounts. The penalties for taxpayers who have failed to report income from foreign accounts and to file FBARs with respect to those accounts are onerous even for those who participate in the IRS’ voluntary compliance program. The penalties include payment of back taxes, with interest and other penalties. Criminal penalties also can be imposed on taxpayers who fail to comply and fail to participate in the IRS’ voluntary disclosure program.
Given the IRS’ stance in this area, notwithstanding that they are tax-compliant and that there is still considerable uncertainty as to whether the FBAR reporting requirements apply, fund managers and investors in offshore hedge funds and other private investment funds should consult with their advisors with respect to their obligations to file FBARs for their interests in such funds. Fund managers also may have additional reporting requirements with respect to any foreign financial accounts held by the funds over which they have signatory authority.