As we reported in our June 24 legal alert, the IRS has adopted an expansive view of what may constitute a financial account subject to FBAR reporting obligations. U.S. persons should be aware that those duties extend not only to persons with beneficial interests in such accounts but also those who have signature authority over the accounts (e.g., individual officers with signature authority over any foreign financial accounts).
The Investment Management and Employee Benefits practice groups will monitor sources for FBAR developments and will inform you of updates accordingly. However, you may contact any of the attorneys indicated below for assistance with determining potential FBAR applicability.
June 24, 2009
The Report of Foreign Bank and Financial Accounts (an “FBAR”) is a form used to report foreign financial accounts held by U.S. persons to the Internal Revenue Service (IRS). Generally, U.S. persons with combined financial interests exceeding $10,000 in foreign accounts must file FBAR by June 30 each year. However, changes made to the FBAR in 2008 may now also require that U.S. investors, fund managers and pension plans with financial interests in offshore funds file an FBAR for the 2008 calendar year and, if applicable, the previous five calendar years.
In October 2008, the IRS changed FBAR by, among other things, expanding the definition of “financial account.” Previously, a financial account was defined in the FBAR instructions to include “any bank, securities, securities derivatives or other financial instruments accounts”, including equity accounts in commingled funds. Under the October changes, the definition was clarified to also include “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).”
In a June 12, 2009 panel discussion addressing open questions regarding FBAR for calendar year 2008, IRS representatives publicly stated that under the definition, an offshore hedge fund is a “foreign financial account” for FBAR purposes. Accordingly, they indicated that every U.S. investor in such a fund must file an FBAR, whether or not the fund itself has any offshore bank or securities accounts. These statements, which have been widely reported but have not yet been published by the IRS, came as a surprise to the industry, since (i) the IRS had not previously indicated that the term “commingled fund” was intended to include hedge funds or other privately-offered vehicles, and (ii) the panel’s comments seem inconsistent with previous comments by IRS representatives published subsequent to an IRS 2007 National Phone Forum.
We are reaching out to our industry and IRS contacts for further clarification of these issues. However, until further guidance is provided, it is not clear whether the panelists’ interpretation is correct, or whether it applies only to hedge funds or also to private equity and other funds. If broadly applied, the following “U.S. persons” are among those who may need to file an FBAR:
Additionally, the IRS representatives indicated that taxpayers who failed to file the FBAR for prior years and paid tax on all taxable income should submit an FBAR for each of the prior six years by September 23, 2009, with an explanation of why the FBARs were not timely filed.
At this point, the IRS has not provided written confirmation of the June 12 panel comments. However, it appears that until such guidance is available, the only way to be certain of avoiding potentially severe penalties ($10,000 or, in willful cases, up to 1/2 of the value of the account) is to file for all such entities. Please be advised that, unlike most IRS forms, the FBAR for calendar year 2008 must be received by the IRS, not merely postmarked, by June 30.
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