IRS Announces FBAR Filing Relief for U.S. Persons With Interests in Private Investment Funds and Other Recent FBAR Guidance

As previously noted in our March 2, 2010 Financial Services Alert, on February 26, 2010, the Internal Revenue Service (“IRS”) announced that, at least for 2009 and prior years, it would not seek to require U.S. persons to file a Report of Foreign Bank and Financial Accounts (commonly known as the “FBAR”) with respect to interests in foreign hedge funds and other private investment funds.  At the same time, the IRS issued other guidance related to the FBAR requirements, which is discussed below.

Notice 2010-23

Notice 2010-23 (the “Notice”) modifies and supplements the relief from filing FBARs by certain U.S. persons previously announced in Notice 2009-62.  As described in our August 10, 2009 Client Alert, “IRS Extends FBAR Filing Deadline for Certain U.S. Persons,” Notice 2009-62 extended until June 30, 2010 the deadline for filing FBARs for 2008 and prior years for two categories of U.S. persons: (i) U.S. persons who have signature authority over, but no financial interest in, foreign financial accounts, with regard to accounts of any type, including bank accounts and interests in investment funds; and (ii) U.S. persons who have a financial interest in, or signature authority over, a foreign commingled fund. 

With respect to the first category, the Notice further extends until June 30, 2011 the FBAR filing deadline for persons with signature authority over, but no financial interest in, any type of foreign financial account.  Such persons now will have until June 30, 2011 for filing FBARs for the 2010 calendar year and all prior years.

With respect to the second category, the Notice provides that the IRS will not interpret the term “commingled fund” as applying to funds other than mutual funds or similar pooled funds with respect to FBARs for calendar year 2009 and all prior years.  Thus, U.S. persons who have a financial interest in, or signature authority over, a foreign hedge fund, private equity fund or other private investment fund will not be required to file an FBAR with respect to such funds for 2009 and all prior years.

Statements made by IRS officials last spring indicating that they considered a foreign “commingled fund” to include a hedge fund or other private investment fund organized outside the United States had caused considerable confusion as to the FBAR filing obligations of U.S. persons with interests in such funds.   The exemption provided in the Notice allays those concerns for 2009 and prior years.  Nevertheless, the Treasury Department has stated that it remains concerned about the use of, for example, hedge funds to evade federal income taxes and intends to continue to study the issue of whether interests in other investment funds should be subject to FBAR reporting.  Thus, there can be no assurance that the exemption for such funds will be extended to 2010 and later years.   

Furthermore, it should be emphasized that the Notice leaves in place the June 30, 2010 deadline for filing FBARs for commingled funds not covered by the exemption.  Thus, U.S. persons who have a financial interest in an account with a foreign mutual fund or similar pooled fund are required to file an FBAR for 2009 – and, if they have not already done so, for prior years – on or before June 30, 2010.  For this purpose, a Proposed Rule that was issued by the Treasury Department simultaneously with the Notice (see below) would define a mutual fund or similar pooled fund as one which issues shares available to the public that have a regular net asset value determination and regular redemptions.  U.S. persons with only signature authority over an account with a foreign mutual fund or similar pooled fund, however, are eligible for the extension until June 30, 2011, as described above, which applies to persons with signature authority over any type of foreign financial account.

Finally, the Notice provides guidance on how FBAR-related questions on federal income tax forms for 2009 and earlier years should be answered.  For example, Schedule B of Form 1040, the “Other Information” section of Form 1041, Schedule B of Form 1065 and Schedule N of Form 1120, all contain questions that ask about the existence of a financial interest in, or signature authority over, a foreign financial account.  The Notice provides that if a taxpayer qualifies for the relief in the Notice and has no other reportable foreign financial accounts, then the taxpayer should check the “no” box in response to such questions.

Announcement 2010-16

The IRS also issued Announcement 2010-16 (the “Announcement”) on February 26.  This Announcement extends to the 2009 calendar year the suspension that had been previously provided for the 2008 calendar year and prior years of the broader definition of “U.S. person” that was included in the 2008 FBAR instructions.  The Announcement provides that all persons may rely on the definition of “United States person” found in the July 2000 version of the FBAR instructions to determine if they have an FBAR filing obligation for 2009 and earlier calendar years, as well as for purposes of answering FBAR-related questions on their federal income tax returns.  Under this definition, a “United States person” means: (i) a citizen or resident of the United States, (ii) a domestic partnership, (iii) a domestic corporation or (iv) a domestic estate or trust.

Proposed FBAR Regulations

Simultaneously with the issuance of the Notice (and in accordance with its previously stated intentions announced in Notice 2009-62), the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued a proposed rule regarding the FBAR filing requirements (the “Proposed Rule”).  This Proposed Rule is discussed in detail in our March 2, 2010 Financial Services Alert  – “IRS Issues Guidance and FinCEN Publishes Proposed Rule on FBAR Filings.”