Tax Alert: IRS Unveils FBAR Guidance
3/03/2010
On February 26, 2010, the Internal Revenue Service (IRS) unveiled targeted guidance that should provide significant relief for taxpayers required to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). Announcement 2010-16 and Notice 2010-23, both issued February 26th (collectively, the “IRS Guidance”), (1) clarify that the term “commingled fund” is not as broad as previously understood, (2) extend the due date for FBAR filings for those with signature authority over, but no financial interest in, a foreign financial account, and (3) confirm the definition of “U.S. person” for 2009 and prior calendar years.
On February 25, 2010, the Financial Crimes Enforcement Network (FinCEN) division of the Treasury Department issued proposed rules on FBAR requirements. The IRS Guidance was generally consistent with but not as broad as the FinCEN proposed rules.
Notice 2010-23
Commingled Fund
The Notice indicates that the IRS will not interpret the term “commingled fund” as applying to funds other than mutual funds with respect to FBARs for 2009 and prior calendar years. The IRS specifically indicates that interests in private equity funds and hedge funds will not be considered foreign financial accounts and do not need to be reported on the FBAR for 2009 and prior calendar years.
Signature Authority Filing Deadline
On August 31, 2009, the IRS published Notice 2009-62 which extended to June 30, 2010 the FBAR filing deadline for 2008 and prior calendar years for persons with no financial interest in a foreign financial account but with signature or other authority over that account. Notice 2010-23 extends the FBAR filing deadline to June 30, 2011 for such persons.
FBAR-Related Questions on Federal Tax Forms
Taxpayers who qualify for the filing relief provided in the Notice, and who have no other reportable foreign accounts for the year in question, should check the "no" box in response to FBAR-related questions on the Federal tax forms for 2009 and earlier years that ask about the existence of a financial interest in, or signatory authority over, a foreign financial account.
Announcement 2010-16
New Definition of "U.S. Person"
A U.S. person was defined in the instructions to the FBAR revised October 2008 as including "a person in and doing business in the United States." The IRS received numerous questions and comments from the public concerning the changed definition. In response, and to reduce the burden on the public, the IRS issued Announcement 2009-51, which temporarily suspended the filing of FBARs due on June 30, 2009 by persons who are not United States citizens, United States residents, or domestic entities (corporations, partnerships, trusts, or estates). Announcement 2009-51 indicates that all persons can rely on the definition of “United States person” in the July 2000 version of the FBAR instructions to determine if they had a filing obligation.
Announcement 2010-16 suspends the requirement to file an FBAR for 2009 and prior calendar years only for persons who are not United States citizens, United States residents, or domestic entities. The Announcement also indicates that all persons may rely on the definition of “United States person” found in the July 2000 version of the FBAR instructions to determine if they have an FBAR filing obligation for 2009 and earlier calendar years. The definition of “United States person” from the July 2000 version of the FBAR is: (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust."
The definition of U.S. person from Announcement 2010-16 provides retroactive relief to foreign entities and foreign persons doing business in the U.S. They are not required to file FBARs for the 2009 and prior calendar years.
FinCEN Proposals
The following items are among the key comments and proposed revisions to the regulations implementing the Bank Secrecy Act regarding FBARs. While these rules are not final, they provide guidance on the expected direction of the FBAR filing requirements.
United States Person
FinCEN proposes to define a “U.S. person” in the same manner as in Announcement 2010-16 (see above). The determination of whether an individual is a resident of the United States would be made under the rules of the Internal Revenue Code, specifically IRC § 7701(b) and the regulations thereunder, except that the definition of the term “United States” provided in 31 CFR 103.11(nn) will be used instead of that in Treas. Reg. §301.7701(b)-1(c)(2)(ii)1 FinCEN believes this approach will provide uniformity regardless of where in the United States an individual may be, and that this approach takes into account that individuals may seek to hide their residence in an effort to obscure the source of their income or location of their assets.
Commingled Funds
Private equity funds, venture capital funds, and hedge funds are privately offered funds. Consequently their characteristics vary greatly. Furthermore, the lack of functional regulation over these kinds of funds makes it difficult to define and distinguish these types of accounts. Pending legislative proposals would apply additional regulation and oversight over the operations of some of these investment companies.
Accordingly, even though the IRS has stated that for the time being the term “commingled fund” will not apply to funds other than mutual funds with respect to FBAR’s for calendar year 2009 and prior years, FinCEN has reserved on the treatment of investment companies and will continue to study this issue.
FinCEN is proposing special rules to simplify FBAR filings in certain cases. Included among such proposals are:
Retirement Plans
Participants and beneficiaries in certain retirement plans under IRC §§ 401(a), 403(a) or 403(b) as well as owners and beneficiaries of individual retirement accounts under IRC §408 or Roth IRAs under IRC §408A will not be required to file an FBAR with respect to a foreign financial account held by or on behalf of the retirement plan or IRA.
Certain Trust Beneficiaries
A U.S. beneficiary of a trust in which such beneficiary either has a beneficial interest in more than 50 percent of the assets, or from which such person receives more than 50 percent of the income, will not be required to report the trust’s foreign financial accounts if the trust, trustee of the trust, or agent of the trust is a U.S. person that files an FBAR disclosing the trust’s foreign financial accounts and provides any additional required information.
For more information on this and other tax issues, including assistance in reviewing plans for compliance, please contact Jim Wall, J.H. Cohn principal and director of the Firm's International Tax practice, or your J.H. Cohn engagement partner, at 877-704-3500.
Jim Wall is a J.H. Cohn principal and director of the Firm's International Tax practice. He can be reached via email or at 646-254-7460.
[1] 31 CFR 103.11(nn) defines the United States as “the States of the United States, the District of Columbia, the Indian lands (as that term is defined in the Indian Gaming Regulatory Act), and the territories and insular possessions of the United States.” Treas. Reg. §301-7701(b)-1(c)(2)(ii) defines the United States to include the states and the District of Columbia. It also includes the territorial waters of the United States and the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the United States and over which the United States had exclusive rights in accordance with international law, with respect to the exploration and exploitation of natural resources. It does not include the possessions and territories of the United States or the air space over the United States.
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