The U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) and the Internal Revenue Service (the “IRS”) issued guidance regarding Reports of Foreign Bank and Financial Accounts (“FBARs” and each an “FBAR”) required to be filed with the IRS on Form TD F 90-22.1.
IRS Issues Guidance
The IRS published Notice 2010-23 (the “Notice”) which postpones until June 30, 2011 the filing due date for FBARs for the calendar year 2009 and previous years by U.S. persons who have signature authority over, but no financial interest in, foreign financial accounts. The Notice further delays the filing deadline for such filers, which, along with the filing deadline for U.S. persons with a financial interest in, or signature authority over, a foreign commingled fund, had been postponed until June 30, 2010. (The previous deadline extension was provided in August, 2009 by Notice 2009-62, which was covered in an August 10, 2009 Goodwin Procter Client Alert.) In addition, the Notice provides that a “commingled fund” does not include any type of fund other than a mutual fund with respect to FBARs for calendar year 2009 and earlier years. Accordingly, hedge funds and other private investment funds are not foreign commingled funds for purposes of FBAR reporting for calendar year 2009 and earlier years.
The IRS also issued Announcement 2010-16 (the “Announcement”), which clarifies that persons who are not U.S. citizens, U.S. residents, or domestic entities (corporations, partnerships, trusts, or estates) are not subject to FBAR filings requirements for 2009 or earlier years, even if such persons have been present in, or doing business in, the United States. Because the Notice and the Announcement apply only to reporting periods through 2009, FBAR filings could nevertheless apply for calendar year 2010 and later years, unless additional guidance provides otherwise.
FinCEN Issues Proposed Rule
FinCEN published a proposed rule (the “Proposed Rule”) that would amend its regulations regarding FBARs. FinCEN’s existing regulations require that, with certain exceptions, any U.S. person who holds a “financial interest” in or has “signature or other authority” over any “bank, securities, or other financial account” in a foreign country, the aggregate value of which is more than $10,000 at any time during any calendar year, must file an FBAR with the IRS by June 30 of the following calendar year. The Proposed Rule would clarify various aspects of the requirements for filing FBARs.
FinCEN’s existing regulations provide few specifics regarding the FBAR filing requirements, and guidance to date has been provided primarily in the FBAR filing instructions (the “Filing Instructions”) and certain other guidance from the IRS. The most recent version of the Filing Instructions and a revised FBAR form, which were issued in October 2008, broadened the definition of “United States person” subject to the FBAR filing requirement and sought to clarify the scope of foreign financial accounts that trigger FBAR filing requirements. In response to numerous comments and questions regarding the revised FBAR form and Filing Instructions, the Treasury Department published Notice 2009-62, which is mentioned above. Notice 2009-62 also announced the Treasury Department’s intention to issue regulations clarifying certain aspects of the FBAR filing requirements. In drafting the Proposed Rule, FinCEN reviewed the public comments received in response to Notice 2009-62.
Much of the Proposed Rule incorporates guidance from the existing Filing Instructions, but the Proposed Rule aims to provide greater clarity regarding various aspects of the FBAR filing requirements and expands certain of the reporting exemptions now provided in the Filing Instructions. The Proposed Rule:
defines a “United States person” required to file FBARs and defines the types of reportable bank, securities, and other financial accounts;
clarifies what it means to have a “financial interest” in a foreign account;
exempts certain persons with signature or other authority over, but no financial interest in, foreign financial accounts from filing FBARs;
exempts certain low-risk accounts for which reporting will not be required, such as accounts of federal or state governmental entities;
exempts participants and beneficiaries in certain types of retirement plans and includes a similar exemption for certain trust beneficiaries;
includes provisions intended to prevent persons from avoiding FBAR reporting requirements; and
permits summary filing by persons who have a financial interest in or signature or other authority over 25 or more foreign financial accounts and permits consolidated filings by an entity on behalf of subsidiaries in which it owns more than a 50 percent interest.
Proposed Definition of “United States Persons”
A “United States person” subject to the FBAR filing requirement would be defined by the Proposed Rule as a citizen or resident of the United States, or an entity “created, organized, or formed under the laws of the United States or any state, the District of Columbia, the Territories and Insular Possessions of the United States or the Indian Tribes.” Any entity, including but not limited to a corporation, partnership, trust, or limited liability company, meeting this definition would be a U.S. person for purposes of the Proposed Rule, regardless of whether an election has been made to disregard the entity for federal income tax purposes.
With respect to individuals, the determination of whether an individual is a resident of the United States would be made under the rules of the Internal Revenue Code (the “Code”), except that the definition of “United States” under FinCEN’s regulations would be used rather than the definition from the IRS’s regulations. FinCEN has chosen this approach because it provides uniformity regardless of where in the United States an individual may be, and takes into account the fact that individuals may attempt to hide their residency to obscure the source of their income or location of their assets. With respect to FBARs for 2009 and prior years, the IRS stated in the announcement that it will allow all persons to refer to the definition of U.S. person in the July 2000 version of the FBAR filing instructions.
Proposed Definitions of “Bank,” “Securities” and “Other Financial Accounts” in a Foreign Country
In defining the types of foreign financial accounts that must be reported on FBARs, FinCEN has focused on the kinds of financial services provided rather than references to U.S. law or terminology. First, a “bank account” would mean “a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking.” A “securities account” would be “an account with a person in the business of buying, selling, holding or trading stock or other securities.”
With respect to “other financial accounts,” FinCEN believes that compliance would be improved by specifying the types of relationships that must be reported. Therefore, the term would be defined to mean any of the following:
an account with a person “in the business of accepting deposits as a financial agency;”
an insurance policy with a cash value or an annuity;
an account with certain brokers or dealers for commodity futures and options; or
an account with a “mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions.”
Notably, FinCEN excluded from this definition privately offered funds, such as private equity funds, venture capital funds, and hedge funds. Recognizing that the lack of functional regulation makes these types of funds difficult to define and distinguish, FinCEN would limit the funds subject to FBAR filing requirements to mutual funds and similar pooled funds meeting the definition described above. Although the exclusion of privately‑offered funds appears to provide relief for U.S. investors in such funds, the exception may prove to be only temporary. In the preamble to the Proposed Rule, FinCEN expressed its concern that privately offered funds may be used by U.S. persons to evade taxes and stated that it will continue to study that issue. In addition, the Notice implicitly leaves open the possibility that FBAR filings could be required for calendar year 2010 and later years if FinCEN ultimately includes private investment funds in the definition of “commingled fund”.
Definition of “Financial Interest”
Under the Proposed Rule, a U.S. person would have a “financial interest” in a bank, securities or other financial account subject to FBAR filing requirements if the U.S. person is the owner of record or holds legal title to the account, even if the account is held for the benefit of others. A U.S. person would also have a “financial interest” in a foreign financial institution if the U.S. person record owner or holder of legal title is a person acting on behalf of the U.S. person, such as an attorney, agent or nominee.
In addition, the Proposed Rule would specify that a U.S. entity would have a “financial interest” in a foreign account if the record owner or holder of legal title is any of the following.
A corporation in which the U.S. person owns directly or indirectly more than 50 percent of the voting power or the total value of the shares;
A partnership in which the United States person owns directly or indirectly more than 50 percent of the interest in profits or capital;
Any other entity (other than a trust) in which the U.S. person owns directly or indirectly more than 50 percent of the voting power, total value of the equity interest or assets, or interest in profits;
A trust, if the U.S. person is the trust settlor and has an ownership interest in the account for United States federal tax purposes (whether a settlor has an ownership interest in a trust’s financial account for a year should be determined with reference to 26 U.S.C. §§ 671– 679);
A trust in which the U.S. person either has a beneficial interest in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income; or
A trust that was established by the U.S. person and for which the U.S. person has appointed a trust protector that is subject to such person’s direct or indirect instruction.
Exemptions for Certain Persons with “Signature or Other Authority” over an Account
A U.S. person also may be subject to FBAR filing requirements if the U.S. person has “signature or other authority” over a foreign bank, securities, or other financial account. The Proposed Rule would define “signature or other authority” as “authority of an individual (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 (whether communicated in writing or otherwise) directly to the person with whom the financial account is maintained.”
The Proposed Rule would provide exceptions for officers or employees of certain U.S. entities. Reporting by officers or employees who are signatories of foreign accounts maintained by the following types of entities would not be required, provided the officer or employee does not have a financial interest in the reportable account.
An officer or employee of a bank examined by a federal banking agency;
An officer or employee of a financial institution, such as a securities broker-dealer or a futures commission merchant, which is registered with or examined by the SEC or the CFTC;
An officer or employee of an “Authorized Service Provider” (such as an investment adviser) that is registered with and examined by the SEC and provides services to an SEC-registered investment company, with respect to accounts owned or maintained by the investment company;
An officer or employee of an entity with a class of equity securities listed on a U.S. national securities exchange or a subsidiary that is named in the consolidated FBAR report of such an entity; or
An officer or employee of a U.S. corporation that a class of equity securities registered under section 12(g) of the Securities Exchange Act.
By exempting officers and employees of SEC-registered broker-dealers and investment advisers, the Proposed Rule would expand this exemption beyond the scope provided by the existing Filing Instructions.
Exemptions for Certain Low-Risk Accounts
The Proposed Rule would include exemptions under which FBAR reporting would not be required for the following types of low-risk accounts:
An account of a department or agency of the United States; an Indian Tribe; or any State or any political subdivision of a State; or a wholly-owned entity, agency, or instrumentality or an account of an entity established under the laws of the United States; of an Indian Tribe; of any State; or of any political subdivision of any State; or under an intergovernmental compact between two or more States or Indian Tribes that exercises governmental authority on behalf of the United States, an Indian Tribe, or any such State or political subdivision.
An account of an international financial institution of which the United States government is a member.
An account in an institution known as a ‘‘United States military banking facility’’ (or ‘‘United States military finance facility’’) operated by a United States financial institution designated by the United States Government to serve United States government installations abroad.
Correspondent or nostro accounts that are maintained by banks and used solely for bank-to-bank settlements.
Exemptions for Certain Trust Beneficiaries and Certain Retirement Plan Participants and Beneficiaries
The Proposed Rule would provide clarity regarding FBAR filing obligations for certain trust beneficiaries. A beneficiary of a trust in which a U.S. person either has a beneficial interest in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income would not be required to report the trust’s foreign financial accounts if the trust or a trustee or agent of the trust is a U.S. person that files an FBAR with respect to the trust’s foreign financial accounts and provides any additional information required by the report. FinCEN would not require reporting by such beneficiaries because it believes that, in most cases, the trust or its trustees are better positioned to determine whether FBAR reporting is required.
The Proposed Rule also would exempt participants and beneficiaries in retirement plans under sections 401(a), 403(a) or 403(b) of the Code and owners and beneficiaries of IRAs under section 408 of the Code or Roth IRAs under section 408A of the Code from reporting with respect to foreign financial accounts held by or on behalf of the retirement plan or IRA.
The Proposed Rule would include an anti-avoidance rule under which a U.S. person would be deemed to hold a financial interest in any foreign bank, securities or other financial account that the U.S. person creates to evade FBAR reporting requirements. This anti‑avoidance rule is not intended to apply to a person who makes a good faith effort to comply with FBAR reporting requirements.
Summary Filing and Consolidated Reports
As permitted under the existing Filing Instructions, a U.S. person with a financial interest in 25 or more foreign financial accounts would only be required to report the number of financial accounts and certain basic information regarding the accounts in an FBAR. In addition, the Proposed Rule would clarify that a U.S. person with signature or other authority over 25 or more foreign financial accounts would similarly be permitted to report only the number of accounts and provide basic information. All such persons would be required to provide detailed information regarding the foreign financial accounts in which they have a financial interest or over which they have signature or authority to the Treasury Department upon request.
In addition, a U.S. entity that owns directly or indirectly more than a 50 percent interest in an entity required to report foreign accounts would be permitted to file a consolidated FBAR on behalf of itself and such entity. The broad language of the Proposed Rule would clarify that consolidated reporting is available for non-corporate subsidiaries, such as LLCs or partnerships.
Comments on the Proposed Rule are due to FinCEN by April 27, 2010.