The Department of Treasury has issued two releases from the Internal Revenue Service and published proposed regulations under the Bank Secrecy Act that impact the filing of the Report of Foreign Bank and Financial Accounts (FBAR).
The two IRS releases provide administrative relief and guidance regarding filing an FBAR with respect to 2010 and earlier years for persons with only signature authority over a foreign financial account, and 2009 and earlier years for persons meeting the definition of a "United States Person," and for a person having a financial interest in "commingled funds." On the same day, February 26, 2010, the Department of Treasury's Financial Crimes Enforcement Network (FinCEN) published proposed regulations under the Bank Secrecy Act that revise the existing regulations regarding who must file an FBAR.
Announcement 2010-16 suspends the FBAR filing obligation for persons who are not US citizens, US residents or domestic entities with regard to 2009 and earlier calendar years, by providing that all persons may rely on the definition of United States Person contained in the July 2000 version of the FBAR instructions. This Announcement simply extends for another year the definition applicable to the 2008 reporting year, as previously provided in Announcement 2009-51.
Similarly, the proposed regulations revise the definition of a "United States Person" subject to the FBAR filing obligation to be consistent with the Internal Revenue Code, with the exception that the term "United States" includes Indian lands and US Territories and Insular Possessions. This definition excludes persons who are not US citizens, US residents or domestic entities. Therefore, if the proposed regulations are finalized so as to apply to calendar year 2010, it is not unlikely that the suspended filing obligations for foreign persons for 2008 and 2009 will become permanent and there will be no further reporting obligation for 2010 and later years.
However, the proposed regulations also provide that US entities that are disregarded entities for tax purposes are United States persons with an FBAR filing obligation independent and separate from their owners.
Notice 2010-23 further extends from June 30, 2010, to June 30, 2011, the FBAR filing deadline for persons with signature authority over, but no financial interest in, a foreign financial account during 2010 and earlier years. Notice 2010-23 also clarifies that, with respect to 2009 and earlier years, a "commingled fund" required to be reported on the FBAR does not include funds other than mutual funds. The Notice specifically provides relief to foreign hedge funds and private equity funds. Further, Notice 2010-23 clarifies that a person qualifying for the relief provided by the Notice may answer the FBAR-related questions on federal tax forms in the negative.
Similarly, the proposed regulations contain definitions of specific types of accounts subject to reporting. Notably, the proposed definition of "Other Financial Account," while including mutual funds and "similar pooled funds that issue shares available to the general public," excludes private equity, venture capital, and hedge funds. FinCEN advises however, that it continues to be concerned with the potential abusive use of these funds and has reserved treatment of them for 2010 and later while it continues to "study the issue." Provided that the proposed regulations are finalized as written on the question of whether a foreign private equity, venture capital, or hedge fund falls within the definition of "Other Financial Account" for the 2010 reporting year, the combination of Notice 2009-62, Notice 2010-23, and the proposed regulations, as finalized, should remove the requirement to report foreign private equity, venture capital, and hedge fund investments on the FBAR for any reporting year.
The proposed regulations also contain a definition of "financial interest" that applies to trusts. Under the proposed regulations, a United States Person will have a financial interest in a foreign financial account not only when that person has an interest in more than 50 percent of the assets or current income of the trust, as is provided for in the existing FBAR instructions, but also when a United States Person is the settler of the trust and has an ownership interest in the account for federal tax purposes, or when the United States Person established the trust and has appointed a trust protector subject to the United States Person's direct or indirect instruction.
The proposed regulations contain a number of exceptions to the reporting requirement, including an exception for employees of certain federally regulated institutions that only have signature or other authority over reportable accounts. The proposed regulations also provide special reporting rules for certain persons, such as those with multiple reporting obligations and participants and beneficiaries in certain retirement plans.
Treasury also published draft instructions for the FBAR reporting form, TD F 90-22.1, consistent with the proposed regulations, in the Federal Register on February 26, 2008, and has requested that written comments on the proposed regulations be submitted to FinCEN on or before April 27, 2010. No specific effective date is provided in the proposed regulations; however, FinCEN has told us that it will propose an effective date for the regulations after the comment period.
To view the proposed regulations, please click here.