Any “U.S. Person” having a financial interest in or “authority” over a foreign financial account during a calendar year is required to file an information report with the U.S. Department of the Treasury by June 30 of the following year. These reporting requirements are broad in their reach, and the penalties for non-compliance can be significant. Clients who have not fully satisfied these information-filing requirements in the past are strongly urged to consult with their McDermott Will & Emery lawyer prior to taking steps to rectify any such non-compliance.
Foreign Financial Accounts
A financial account is broadly defined as any bank, securities, securities derivatives or other financial instrument accounts. This includes accounts in which assets are held in a commingled fund and in which the account owner holds an equity interest in the fund. The term also includes savings, demand, checking, deposit, time deposit or any other account maintained with a financial institution or other person engaged in the business of a financial institution.
A financial account is maintained in a foreign country even if it is held at an affiliate of a U.S. bank or other U.S. financial institution. However, an account maintained with a branch, agency or other office of a foreign bank or other institution that is located in the United States, as well as accounts maintained in Guam, Puerto Rico and the Virgin Islands, are not considered foreign financial accounts for these purposes.
Who Is Required to File?
A U.S. Person who, at any time during the prior calendar year, has either a financial interest in or signatory or other authority over a foreign financial account is required to file information reports relating to such account, but only if the aggregate value of all foreign accounts in which the U.S. Person has the requisite financial interest in or authority over, exceeds $10,000 at any point during the calendar year. For these purposes, a U.S. Person includes:
- an individual who is a citizen or resident of the United States
- a domestic partnership
- a domestic corporation
- a domestic estate or trust
A U.S. Person has a financial interest in each account for which such person is the owner of record or has legal title, regardless of whether the account is maintained for the person’s own benefit or for the benefit of others (including non-U.S. Persons). If an account is maintained in the name of two persons jointly or if several persons each own a partial interest in an account, each of those U.S. Persons is considered to have a financial interest in that account.
A U.S. Person is considered to have a financial interest in each foreign financial account in which the owner of record or holder of legal title is a person acting as an agent, nominee, lawyer or in some other capacity on behalf of the U.S. Person. A U.S. Person is also considered to have a financial interest in any foreign financial account held by (1) a corporation in which the U.S. Person owns directly or indirectly more than 50 percent of the total value of shares of stock; (2) a partnership in which the U.S. Person owns an interest in more than 50 percent of the profits (distributive share of income); or (3) a trust in which the U.S. Person either has a present beneficial interest in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income.
A U.S. Person has signatory authority over an account if such person can control the disposition of money or other property in the account by delivering a document containing such person’s signature (or the U.S. Person’s signature and that of one or more other persons) to the bank or other person with whom the account is maintained. Other authority over an account exists if a U.S. Person can exercise comparable power over the account by direct communication to the bank or other person with whom the account is maintained (either orally or by some other means).
Exceptions to the information reporting requirements described above are available in the case of:
- an officer or employee of a bank that is subject to the supervision of certain federal regulatory agencies if the person has no personal financial interest.
- an officer or employee of a U.S. corporation (a) whose equity securities are listed on a national securities exchange or (b) which has assets exceeding $10,000,000 and 500 or more shareholders, provided that (i) the officer or employee has no personal financial interest in the account, (ii) the account is in the employer’s name, and (iii) the officer or employee has been advised in writing by the corporation’s chief financial officer (CFO) that the corporation has filed a current report, which includes the account in question. In general, domestic subsidiaries of domestic corporations that satisfy this exception also qualify. On the other hand, a domestic subsidiary of a foreign corporation is not eligible for the exception.
- accounts maintained at military banking facilities.
Redundancy is not an exception. If there is more than one U.S. Person who has a financial interest in or signing or other authority over a particular account, each person is required to separately file the requisite reports. For example, assume a U.S. partnership has a financial interest in a foreign financial account that exceeds $10,000. Assume also that an employee of the partnership has signatory or other authority over the account, and a U.S. Person owns an interest in more than 50 percent of the partnership’s profits. In that case, the partnership, the employee and the greater than 50 percent owner, are each required to file the appropriate reports relating to such account.
What Needs to be Filed?
Federal Income Tax Return
If a U.S. Person has the requisite financial interest in or authority over a foreign financial account during a calendar year, such person must notify the U.S. Internal Revenue Service (IRS) of the existence of such account on its federal income tax return for such year. For example, an individual taxpayer would provide the requisite notice by checking “yes” on Schedule B, Line 7 filed as part of his or her individual Form 1040 for the particular year. A corporation would provide notice on Schedule N, Line 6a to Form 1120, a trust would provide notice on Line 3 under “Other Information” on Form 1041, and a tax partnership would provide notice on Schedule B, Line 9 to Form 1065.
Form TD F 90-22.1
In addition to providing notice to the IRS of the existence of a foreign financial account, detailed information regarding the account must be separately provided to the U.S. Department of the Treasury by filing Form TD F 90-22.1. This form must be filed on or before June 30 of the calendar year following the year in which a U.S. Person has the requisite interest in or authority over a foreign financial account. Form TD F 90-22.1 requires detailed information regarding the account, including the name of the financial institution where the account is maintained and account numbers.
A U.S. Person who has a financial interest in or authority over an account that is required to be reported must retain records containing specified information regarding the account for five years. These records should include the name in which each foreign financial account is maintained, the number or other designation of the account, the name and address of the foreign bank or other person with whom the account is maintained, the type of the account and the maximum value of each account during the reporting period.
Use of Information
Although the detailed account information included on Form TD F 90-22.1 is filed with the U.S. Department of the Treasury, this information may be referred to any other department or agency of the United States upon the request of the head of such department or agency for use in a criminal, tax or regulatory investigation or proceeding. The information may also be provided to appropriate state, local and foreign law enforcement and regulatory personnel in the performance of their official duties.
Civil penalties for non-compliance with respect to these reporting and record-keeping requirements can be assessed at any time within six years of the date of the event of non-compliance. For violations that are not due to willfulness, the maximum civil penalty is $10,000, but an exception is available for violations due to reasonable cause and for which the “amount of the transaction or the balance in the account at the time of the transaction was properly reported.” (Presumably the quoted phrase refers to reporting for U.S. income tax purposes.) For violations that are willful, the maximum civil penalty is the greater of $100,000 or 50 percent of the amount of the transaction or account at issue. These civil penalties are effective with respect to failures to report occurring on or after October 22, 2004. The civil-penalty regime for failures occurring before October 22, 2004, did not apply to non-willful non-compliance and included different penalties for willful non-compliance.
Criminal penalties for willful non-compliance—including fines and imprisonment—may also be imposed.
Clients who have not fully satisfied these information-filing requirements in the past are strongly urged to consult with their McDermott Will & Emery lawyer prior to taking steps to rectify any such non-compliance.