The Treasury Department's Financial Crimes Enforcement Network (FinCEN)1 bureau has issued proposed regulations regarding the US foreign bank account report (FBAR) annual filing requirements. Among other changes, the proposed regulations would eliminate FBAR filing requirements for non-US persons. In the wake of the ongoing investigation of UBS clients reportedly numbering in the tens of thousands who failed to report their Swiss bank accounts, the IRS and taxpayers have begun paying more attention to these rules, but currently, the only real authoritative source of guidance on these requirements is the IRS instructions to the FBAR form, which is known officially as Form TD F 90-22.1.
The FBAR form and the accompanying instructions were updated by the IRS in October 2008. The 2008 revisions significantly expanded the scope of the filing requirements as well as the information required to be disclosed. Notably, while the authorizing statute only imposes on United States persons the requirement to file FBARs, the revised instructions require certain non-US resident individuals and entities to file FBARs by treating them as US persons for this purpose. In addition, in a series of conference call presentations following the issuance of the new instructions, senior IRS officials informally advised practitioners that the requirement in the instructions to report interests in a "commingled fund" applies not only to interests in foreign mutual funds, as indicated by the instructions, but also to interests in private vehicles such as hedge funds, private equity funds, and even private family investment companies.
Following a host of complaints by practitioners regarding the scope of these rules, the IRS announced last year that for purposes of FBAR filings that were due in 2009, filers should ignore the rule in the new instructions requiring certain non-US persons to file FBARs and should instead rely on the definitions contained in the prior instructions to the FBAR form. In addition, the IRS issued a notice extending the FBAR filing deadline for 2008 and earlier calendar years to June 30, 2010, for persons with signature authority over, but no financial interest in, a foreign account and for persons with financial interests in, or signature authority over, a commingled fund.
With the 2010 filing deadline approaching, the proposed regulations are an important step by the Treasury Department toward clearing up the confusion surrounding FBAR filings. FinCEN also issued a draft of a new set of instructions for the FBAR form which would replace the existing instructions if the proposed rules are finalized. In many respects, the proposed regulations would codify the guidance contained in the existing instructions to the FBAR form, but they include a number of significant changes and clarifications.
One important change the rules would make is to eliminate the 2008 amendment to the instructions that required certain non-US person to file FBARs. Another important change is the elimination of the troublesome "commingled fund" requirement, which would be replaced with a narrower requirement that would apply only to mutual funds or similar funds that issue shares to the general public that have a regular net asset value determination and regular redemptions. This definition would exclude hedge funds and private equity funds and other private investment vehicles.2 The proposed regulations' filing requirements would continue to apply to ordinary brokerage accounts. The new rules would, for the first time, also require filing a report for foreign issued insurance policies that have a cash value feature and for foreign annuities.
The proposed rules also include new exceptions for employees that have signature authority over foreign financial accounts of their employer. These exceptions would exempt officers and employees of financial institutions, registered investment companies (such as hedge funds) or their investment advisors, and publicly traded or other SEC registered companies from FBAR filing requirements.
Another aspect of the existing rules that has proved to be controversial is the requirement that beneficiaries of trusts (among other indirect holders of financial interests) are required to file an FBAR with respect to foreign financial accounts of the trust if the beneficiary either has a beneficial interest in more than 50% of the assets of the trust or is entitled to receive more than 50% of the trust's income. In informal guidance, IRS officials took the position that this rule also requires discretionary beneficiaries of trusts to file FBARs if the trustee has the power to allocate more than 50% of the trust's assets to the beneficiary. The proposed rules would leave the 50% test for trust beneficiaries in place (and unfortunately do not provide any clarification on the treatment of discretionary beneficiaries), but would relieve the beneficiary of the requirement to file an FBAR if the trustee of the trust files one with respect to the trust's accounts.
Pending finalization of the proposed rules, the IRS issued temporary relief for the upcoming June 2010 filing deadline for calendar year 2009 FBARs. This relief came in the form of an announcement and a notice issued at the same time as the proposed regulations. Announcement 2010-16 continues the suspension of the rule in the 2008 revisions that would require FBAR filings by certain non-US persons. (As noted, the proposed rules would permanently eliminate that requirement.) Notice 2010-23 extends the deadline for filing FBARs for 2009 and prior years with respect to filers that have signature authority only but no financial interest in a foreign account. The deadline for such filers, which was previously extended to June 30, 2010, is now extended until June 30, 2011. Notice 2010-23 also provides that for 2009 and prior years, the IRS has determined that it will not apply its enforcement authority adversely in the case of persons with a financial interest in, or signature authority over, a foreign commingled fund other than a mutual fund. Specifically, this relief is intended to cover interests in hedge funds and private equity funds.
1. The IRS is charged with administering and enforcing the FBAR filing requirements, but FinCEN retains the authority to promulgate regulations interpreting the relevant statutory provisions of the Bank Secrecy Act.
2. The preamble to the proposed regulations notes that Treasury remains concerned about the use of, for example, hedge funds to evade taxes and that FinCEN will continue to study this issue.
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