Any U.S. person with a financial interest in or authority over a foreign financial account (accounts that exceed $10,000 in the aggregate) must file an IRS Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) by June 30. This requirement also extends to U.S. citizens or residents with signature or other authority over a foreign financial account.
Given the severe penalties associated with failing to file, managers and investors should consider whether a filing is appropriate this year. Of course, the specific facts should be reviewed in order to determine whether FBAR filing obligations apply.
The filing deadline is fast approaching and extensions are not granted. Income tax extensions do not include FBAR filing—completing a report is the only way to ensure avoidance of all penalties. (Other disclosures may be required on tax returns.)
Accounts That Require FBAR Filings
Filing requirements may apply at the entity level as well as at the individual level (for those people who have the requisite signature or other authority over the foreign accounts in question).
In recent informal statements, the IRS has indicated that investors in offshore hedge funds, private equity funds and mutual funds, as well as the funds themselves, may be subject to the FBAR filing requirements. The IRS may expect FBAR filings from U.S. persons with the requisite authority over foreign accounts, including:
- A domestic fund, domestic feeder fund or U.S. investor that directly invests in offshore investment funds
- A domestic fund, domestic feeder fund or any U.S. investor who owns more than 50 percent of an entity that directly invests in offshore investment funds (including offshore master funds)
- A domestic fund that has an offshore bank or securities account, or their equivalent
- Investment managers who have a financial interest in or signature or other authority over offshore investment funds
- Management companies in similar circumstances
- Anyone, including U.S. managers, who can bind offshore investment funds utilizing their signature or other authority
Persons Required To File An FBAR
FBARs must be filed by U.S. citizens or tax residents, corporations, LLCs or partnerships formed in the United States, and trusts or estates treated as a U.S. taxpayer. (In future tax years, the definition of a U.S. person may be expanded to include "a person in or doing business in the United States.")
Foreign Accounts
The FBAR filing requirements unquestionably apply to banks, securities, securities derivatives, and other financial instrument accounts (including savings, demand, checking, deposit, or other similar accounts). Equity interests in funds with commingled assets (such as mutual funds) are also included. As noted above, offshore funds may also be foreign accounts.
Penalties For Failing To File An FBAR
Penalties for failing to file an FBAR are severe. Failure to file a required FBAR can result in large civil fines, imprisonment of up to 10 years, or both. Violations do not have to be willful to result in penalties.
Voluntary Disclosure Of Delinquent FBARs
The IRS currently promises decreased penalties for delinquent FBAR taxpayers who voluntarily disclose foreign financial accounts. More information on voluntary disclosure is available in the previous article "New IRS Procedures for Undisclosed Foreign Accounts Demand Immediate Consideration."
FBAR forms are available on the IRS Web site or by clicking here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.