Individuals and entities with a financial interest in, or signature or other authority over, a bank, securities or a financial account in a foreign country, beware. Subject to a narrow exception explained below, your annual Report of Foreign Bank and Financial Accounts (FBAR) for calendar year 2010 must be received by (not just mailed to) the Treasury Department by June 30, 2011; no further extensions are anticipated. Additionally, those filers who took advantage of the temporary relief provided by the IRS from filing the 2008 and 2009 FBARs must now file all FBARs by the June 30, 2011 due date. Failure to file a FBAR could result in a civil penalty of up to $10,000, without regard to whether the failure was willful, and in a criminal penalty of up to one-year imprisonment.
The FBAR filing requirement has existed since the passage of the Bank Secrecy Act of 1970. However, recent changes, including increased penalties for failure to follow the FBAR rules, a change in the enforcement authority from FinCen to the IRS, revised instructions to the FBAR form and new FBAR regulations, evidence the IRS’s focus on offshore compliance.
The new FBAR regulations, which were issued on Feb. 24, 2011 and were effective March 28, 2011, have become the primary source of authority for individuals and entities concerned with the filing requirements. An individual or entity may find themselves with a reporting responsibility when they previously had none. Alternatively, the new regulations provide some clarity and reporting exemptions to certain individuals and entities who previously thought they had a reporting responsibility.
As noted above, a FBAR filing requirement is imposed on all “U.S. persons” having a financial interest in, or signature or other authority over, a bank, securities or a financial account in a foreign country if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. The FBAR regulations clarified several terms in this requirement. First, a “U.S. person” is a determination made under the rules of the Internal Revenue Code, specifically, 26 U.S.C. 7701(b) and the regulations thereunder, with certain special rules for trusts. “[S]ignature or other authority” is limited to individuals with authority to control the disposition of funds by direct communication with the financial institution. Further, an account is not a foreign account under the FBAR if it is maintained with a financial institution located in the United States or it represents assets held in an omnibus account maintained by a global custodian (e.g. a U.S. bank that holds assets outside the United States as a global custodian pursuant to a contract between the U.S. person and the U.S. bank and pools securities and cash of numerous investors into one account pursuant to a subcustodian arrangement between the U.S. bank and a subcustodian). Additionally, FinCEN reiterated that “other financial account” includes a mutual fund that issues shares available to the general public, which generally should not include a hedge fund or private equity fund. It also includes only life insurance or annuity policies with a cash value and imposes the reporting obligation on the policyholder, not the beneficiary.
The regulations list several exceptions to the reporting requirement for officers and employees with signature or other authority over certain accounts of the following entities if the officer or employee does not have a direct financial interest in the account:
Additionally, the regulations (or the comments thereunder) note that a reporting obligation will be imposed in certain instances:
- Banks examined by specified boards and agencies.
- Financial institutions registered with and examined by the SEC or the Commodity Futures Trading Commission (this exemption no longer includes investment advisors, but see below).
- SEC-registered service providers servicing companies registered under the Investment Company Act of 1940 (ICA) (this exemption may include an investment advisor providing service to companies registered under the ICA).
- Entities with a class of equity listed on any U.S. national securities exchange.
- U.S. subsidiaries of entities with a class of equity listed on any U.S. national securities exchange, so long as the parent entity filed a consolidated FBAR naming the subsidiary.
- Entities with a class of equity securities registered (or American depository receipts for equity securities registered) under section 12(g) of the Securities Exchange Act of 1934.
To simplify reporting, the regulations also contain a few special rules. First, an entity that is a U.S. person and owns directly or indirectly more than a 50 percent interest in an entity required to file a FBAR will be permitted to file a consolidated report on behalf of itself and such other entity. (Note that the comments to the regulations provide that the ability to file a consolidated filing for funds organized by the same fund manager, specifically all foreign financial account information for all funds in the same fund family, will have to be addressed in specific guidance “because the factual situations may vary.”) Second, a U.S. person having a financial interest in 25 or more foreign financial accounts need only provide the number of financial accounts and certain other basic information on the report, but will be required to provide detailed information concerning each account when so requested. Similarly, a U.S. person having signature or other authority over 25 or more foreign financial accounts need only provide the number of financial accounts and certain other basic information on the report, but will be required to provide detailed information concerning each account when so requested.
- U.S. subsidiaries of a U.S.-exchange-traded foreign parent may not rely on the consolidated FBAR exception even though the shares of the foreign parent may be traded on U.S. exchanges because the parent has no legal obligation to file a FBAR.
- Even though a foreign subsidiary of a publicly traded U.S. corporation is not required to report its accounts on an FBAR, a U.S. person that is an officer or employee of a foreign subsidiary and has signature authority over an account of the foreign subsidiary is required to file an FBAR for the account even if the publicly traded parent was otherwise reporting the financial interest in the account. Note that this is a change from the prior rules and the exception is now limited and only applies with respect to foreign financial accounts owned by the entity (the parent or U.S. subsidiary) that is the same employer of the officer or employee with signature authority.
Some companies and individuals may have filed 2010 federal income tax and information returns before the March 28, 2011 effective date of the final rules without the now-required FBAR information. In these instances, the final rules provide taxpayers with the choice of using: (1) then-existing FBAR regulations that applied before the final rules; or (2) the final rules and revised form instructions. However, for income tax returns filed on or after March 28, 2011, the final FBAR rules apply.
On May 31, 2011, FinCen issued Notice 2011-1 extending the reporting deadline until June 30, 2012, for the following individuals in light of questions received concerning the application of the exceptions to them:
In addition to the above changes to the regulations, other recent initiatives evidence the IRS’s focus on compliance and improving the accuracy of reporting income by U.S. persons. For example, FBAR delinquent filers were/are the focus of the IRS’ 2009 and 2011 voluntary disclosure programs. Additionally, the Foreign Account Tax Compliance Act passed in March 2010 instituted a new reporting and withholding regime for foreign financial institutions doing business with U.S. persons. Under the Energy Improvement and Extension Act of 2008, those firms reporting sales on Forms 1099-B will now be required to report the customer’s adjusted cost basis, subject to certain exceptions. Finally, the IRS recently announced that it intends to begin automatically asserting penalties for information reporting filing failures (both late and erroneous filings) when withholding agents issue incorrect statements to foreign recipients for fixed or determinable annual or periodical income on Form 1042-S.
- An employee or officer of a covered entity who has signature or other authority over and no financial interest in a foreign financial account of another entity more than 50 percent owned, directly or indirectly, by the entity (a “controlled person”).
- An employee or officer of a controlled person of a covered entity who has signature or other authority over and no financial interest in a foreign financial account of the entity or another controlled person of the entity.
The FBAR regulations are available at http://www.fincen.gov/forms/files/Title31CFR103.pdf.
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