March 02, 2010

Treasury Clarifies Rules for FBAR Filers

The rules governing who must file a Report of Foreign Bank and Financial Accounts (FBAR) may be getting clearer—and more sensible.

On February 26, 2010, The U.S. Treasury Financial Crimes Enforcement Network issued a Notice of Proposed Rulemaking (NPR) regarding FBAR reporting (Form TD F 90-22.1). On the same date, the IRS published two documents also relating to FBARs: IRS Notice 2010-23 and IRS Announcement 2010-16.

The IRS Notice and Announcement. The IRS Notice and Announcement provide specific relief or interim guidance regarding filing of FBARs for calendar year 2009 (due June 30, 2010) and certain prior years.

Highlights of the Notice and Announcement include:

  • Hedge funds, private equity funds and similar funds aren't—for now—reportable as foreign financial accounts. The Notice temporarily carves out these types of funds for FBAR reporting (in part because Treasury believes other statutory changes are imminent regarding regulation of them; see below). However, the IRS continues to require FBAR filings regarding investments in foreign mutual funds.
  • Persons with signature authority over, but no financial interest in, a foreign account for which an FBAR would otherwise be required to be filed on June 30, 2010, and for prior calendar years, have until June 30, 2011 to report these accounts. These might include, for example, employees of financial institutions and mutual fund advisors with signature authority over a foreign financial account in which they don't personally have a financial interest.
  • Persons who otherwise have no FBAR filing requirement except with respect to foreign financial accounts over which they have signature authority, but no beneficial interest, may check the box "no" on their Federal income tax returns, for 2009 and earlier years. The Notice thus clears up an FBAR filing question and how the "foreign bank account question" on the tax returns should be answered in this limited situation.
  • The 2010 FBAR-filing requirement (for foreign accounts held in 2009) for persons who are not U.S. citizens, U.S. residents, or domestic entities is suspended. The Announcement suspends this for 2009 and for prior calendar years, as a result in part of the IRS receiving numerous comments and complaints regarding its proposed expanded definition in the changed FBAR instructions in October 2008 that would have required FBAR filings, for example, by nonresident aliens "in or doing business in the United States."

The NPR. The proposed regulations address several definitions that are covered by FBARs and the Bank Secrecy Act, on which FBARs are based.

  • For now, hedge funds and private equity funds are not a "financial account." The NPR "reserves"—for now—the reporting obligation of pooled investment companies, such as hedge funds, private equity funds and venture capital funds. Treasury is "aware" of pending legislation that would impose statutory regulation and oversight of these types of investment companies.

  • Employees of financial institutions and mutual fund advisors with signature authority over a foreign financial account won't have to file FBARs. The NPR includes exceptions to the rule requiring FBARs from persons with signature authority over a foreign financial account. Importantly, employees of financial institutions registered with the SEC fall within the exception as do employees of service providers who are registered with the SEC and provide services to an investment company registered under the Investment Company Act of 1940. (Note that the exception applies only if the employee does not have a financial interest in the account.)
  • The definition of "financial account" is broad. Of particular interest regarding the proposed revisions to the "financial account" definition in the NPR is the proposed inclusion of foreign insurance policies having a cash value or annuity policies, accounts with brokers or dealers for futures or options transactions, and accounts with mutual funds or similar pooled funds which issue shares available to the general public.
  • The NPR would flesh out the definition of "United States" and "United States Person." A resident will be defined under the Internal Revenue Code definition but United States continues to be defined to include the States of the United States, the District of Columbia, Indian lands (as that term is defined in the Indian Gaming Regulatory Act), and the Territories and Insular Possessions of the United States. Additionally, the NPR makes it clear that entities (irrespective of whether they have or have not made a "flow-through" election for U.S. tax purposes) are subject to the FBAR reporting requirement.
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