Investors in Foreign Hedge Funds and Other Foreign Investment Funds May Qualify
On August 7, 2009, the Internal Revenue Service (the "IRS") extended the filing deadline until June 30, 2010, for U.S. persons to report certain foreign financial accounts on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR"). In Notice 2009-62, the IRS stated that persons with signature authority over, but no financial interest in, a foreign financial account, and persons with a financial interest in, or signature authority over, a foreign commingled fund, have until June 30, 2010, to file an FBAR for the 2008 and earlier calendar years with respect to such foreign financial accounts. Notice 2009-62 will appear in I.R.B. 2009-35, dated August 31, 2009.
The FBAR filing extension provided for in Notice 2009-62 supplements the September 23, 2009 extended filing deadline previously announced by the IRS. That previous IRS pronouncement extended the filing deadline for certain taxpayers with previously undisclosed foreign financial accounts (as discussed below).
U.S. persons having a financial interest in, or signature authority or other authority over, financial accounts in a foreign country are required to report those accounts to the Department of the Treasury if the aggregate value of such financial accounts exceeded $10,000 at any time during the calendar year. U.S. persons who are required to report their accounts must file an FBAR each year that they have a financial interest in, or signature authority, or other authority over any financial accounts in a foreign country, including bank, securities or other types of financial accounts. For each calendar year for which an obligation to file an FBAR exists, such FBAR must be filed with the Department of the Treasury on or before June 30, of the succeeding year.
Who Has a Reporting Obligation?
Each U.S. person must file an FBAR if such person has a financial interest in or signature or other authority over certain foreign financial accounts. The term "financial account" includes any bank, securities, securities derivatives, or other financial instruments accounts. According to the Instructions to the FBAR, the term "financial account" also encompasses any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund (including mutual funds).
A U.S. person has a "financial interest" in a foreign financial account if such person is the owner of record or has legal title of such account, regardless of whether the account is maintained for such person's benefit. U.S. persons having certain relationships with a corporation, partnership, or trust are also considered to have a financial interest in the foreign financial account owned by such corporation, partnership, or trust.
A U.S. person has "signature" authority if such person can control the disposition of money or other property by delivery of a document containing his or her signature to the account holder. Similarly, a U.S. person has "other" authority over a foreign financial account if such person can exercise comparable power over an account by communication with the account holder. Accordingly, with certain exceptions, officers and employees of businesses having signature authority over foreign business financial accounts may individually be required to file an FBAR for such accounts.
IRS Extends FBAR Filing Deadline With Respect To Certain U.S. Persons
According to the Instructions to the FBAR, the term "financial account" encompasses any account in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund (including mutual funds). The parenthetical "including mutual funds" was added in October 2008, and its practical application has been unclear due to the potentially broad interpretation of what the IRS deems to be a commingled fund. Adding further confusion, the IRS made numerous unofficial comments in June 2009, indicating that equity investments in foreign hedge funds and foreign private equity funds are reportable for FBAR purposes. Consequently, many investors (including tax-exempt investors and U.S. qualified plans) in commingled funds, such as foreign hedge funds and foreign private equity funds, have been uncertain as to their FBAR reporting obligation, if any.
Due to a lack of formal guidance, U.S. persons with signature authority over, but no financial interest in, a foreign financial account have likewise been uncertain as to their FBAR reporting obligation.
Notice 2009-62 extends the filing deadline for persons with signature authority over, but no financial interest in, a foreign financial account, and persons with a financial interest in, or signature authority over, a foreign commingled fund, until June 30, 2010, to file an FBAR for their 2008 and earlier calendar years with respect to such foreign financial accounts. As a result of substantial public comments, the Department of the Treasury has stated that it intends to issue regulations clarifying the FBAR filing requirements pertaining to those persons with respect to these financial accounts.
IRS Requests Comments On FBAR Reporting Obligations
In Notice 2009-62, the IRS requested comments by October 6, 2009, on the following issues with respect to FBAR filing obligations:
When a person who has signature authority over, but no financial interest in, a foreign financial account should be relieved of an FBAR filing obligation for such account;
In what circumstances certain exceptions for filing an FBAR should apply, including, in part, the exception for certain officers and employees of certain publicly-traded domestic companies;
When an interest in a foreign entity should be subject to FBAR reporting;
The possible application of certain passive asset and passive income thresholds with regard to foreign entities; and
Whether there are other circumstances when a U.S. person should be relieved from the FBAR filing requirement with respect to a foreign commingled fund.
Civil and Criminal Penalties For Failure To File An FBAR
U.S. persons failing to comply the FBAR filing requirements could face civil and criminal penalties for non-compliance. Civil penalties for a non-willful violation of FBAR reporting requirements is up to $10,000 per violation, and civil penalties for a willful violation is the greater of $100,000 or 50 percent of the amount in the account at the time of the violation. For each violation, civil and criminal penalties may be imposed simultaneously.
Certain Taxpayers With Previously Undisclosed Foreign Financial Accounts May Still Disclose Such Accounts By September 23, 2009
Notice 2009-62 supplements a new policy of voluntary compliance that allows taxpayers with previously undisclosed foreign financial accounts to settle their tax liabilities with the IRS. Taxpayers who participate in the IRS's voluntary compliance program may be able to reduce or avoid penalties and criminal prosecution. Aside from the extension for filing an FBAR, as provided in Notice 2009-62 and as described above, for certain U.S. persons, taxpayers wishing to take advantage of the policy must voluntarily disclose their foreign financial accounts by September 23, 2009. For additional information on the IRS's voluntary disclosure program related to undisclosed foreign financial accounts, please see Fulbright's April 2009 Briefing – IRS Makes Limited Time Offer To Taxpayers With Undisclosed Offshore Accounts.
This article was prepared by Fulbright's Tax Practice Group. If you have any questions or need any assistance related to these matters, please feel free to contact Andrius R. Kontrimas (firstname.lastname@example.org or 713 651 5482), James K. Dreyfus (email@example.com or 212 318 3248), Jasper G. Taylor III (firstname.lastname@example.org or 713 651 5670), Lisa Rossmiller (email@example.com or 713 651 8451), Kathryn Keneally, Shawn R. O'Brien, Gregory M. Matlock or Jennifer A. Morgan.
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