Taxpayers with a recently discovered obligation to file the foreign bank or financial account (FBAR) report may still be eligible to file and avoid penalties.
Many taxpayers, such as tax exempt entities, trust funds and nuclear decommissioning funds (special entities), may be unaware of an important mandatory filing requirement that has recently received additional attention: the foreign bank or financial account (FBAR) report. This long-standing filing requires all U.S. persons to annually disclose any financial interest in all foreign financial accounts, including investments in foreign securities and hedge funds. Although the filing was technically due last June, the Internal Revenue Service (IRS) is permitting certain taxpayers to file without penalty as late as September 23, 2009.
Recently, the U.S. Department of the Treasury amended FBAR form TD F 90.22-1 and accompanying instructions for 2008, and the IRS adopted internal guidelines relating to the potential imposition of penalties. This recent emphasis on the FBAR filing process has sparked significant discussions over who must file FBAR forms, raising a general awareness of the FBAR filing requirement. For more information about these changes, see McDermott’s On the Subject “Recent Developments Encourage Voluntary Correction of Foreign Financial Account Reporting Violations,” dated April 14, 2009.
The following will assist special entities to better understand the FBAR filing and how it applies to them. Special entities should review the requirements and how their funds are invested.
Taxpayers Required to File
A U.S. person who has a financial interest in, signature or other authority over any foreign financial account, including bank, securities or other types of financial accounts, must file an FBAR form if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year. A U.S. person is defined generally as a citizen, a resident or a person in and doing business in the United States and includes domestic partnerships, domestic corporations, and domestic estates or trusts.
The secretary of the Treasury may authorize exceptions or exemptions from this filing requirement. Some commentators have called on the IRS to provide guidance that would apply to tax-exempt organizations such as pension trust funds, including exempting such funds from the filing requirement; however, neither the IRS nor Treasury has responded. In the absence of such guidance, special entities may be considered as U.S. persons for the FBAR filing requirement.
Financial Interest or Signatory Authority
Financial interest is broadly defined. A U.S. person has a financial interest if that person is the owner of record or holder of legal title of an account, regardless of whether that person is also the account beneficiary. A U.S. person may also have a financial interest in an account if another person such as an agent, lawyer or nominee, is the owner of record or holder of legal title of that account on the U.S. person’s behalf. A U.S. person with 50 percent or more direct or indirect ownership of a corporation or partnership, or interest in a trust has a financial interest in any accounts owned by such entities.
In addition to those with financial interests, U.S. persons with signature or other authority over accounts must file FBAR forms. A U.S. person has signature authority if the U.S. person can control the disposition of money or other property in the account by delivery of a document containing his or her signature (or his or her signature and that of one or more persons) to the bank or other person where the account is maintained. A U.S. person has other authority if that U.S. person can exercise comparable authority by communicating with the bank or other person where the account is maintained. Communication may either be direct or indirect through an agent, nominee, lawyer or in some other capacity, and may be oral or by some other means.
This may mean that more than one person technically is required to file FBAR forms for the same account. It also means that some taxpayers may have many accounts to report, which can be extremely burdensome. Taxpayers with financial interests or authority over more than 25 accounts can file a simplified form but must be able to provide all account information for the past five years if Treasury requests.
Under such broad definitions with few exceptions, trust plan fiduciaries and fund managers with legal financial interest in or authority over foreign accounts may need to file FBAR forms.
A “financial account” refers to any foreign “bank, securities, securities derivatives, or other financial instruments accounts.” This includes any account maintained with a foreign financial institution such as savings, demand, checking, debit card and prepaid credit card accounts or any comingled fund in which the account owner holds an equity interest in the fund. Mutual funds are thus included.
In June, the American Bar Association and the American Institute of Certified Public Accountants co-hosted a teleconference during which IRS officials indicated that an interest in a foreign hedge fund would be considered a financial account. According to the IRS, it appears that financial accounts would thus include offshore hedge funds or offshore feeder funds used by governmental plans and tax-exempt entities. Many large plan trusts invest in domestic funds through such offshore feeder funds.
The FBAR form must be filed with Treasury on or before June 30 of the succeeding year. Extensions are not granted. Taxpayers who receive an extension to file their tax return still must file the FBAR form by the June 30 deadline.
Failure to comply may result in civil penalties. For willful violations, the penalty can be as high as the greater of $100,000 or 50 percent of the amount of the account. For non-willful violations, the penalty will be no higher than $10,000. For a more detailed discussion on FBAR penalties, see McDermott’s On the Subject “Recent Developments Encourage Voluntary Correction of Foreign Financial Account Reporting Violations,” dated April 14, 2009.
For taxpayers that just recently became aware of the FBAR filing requirement, the IRS has issued guidelines to allow them to file without penalty. According to questions and answers posted on the IRS website, taxpayers who reported and paid tax on all of their 2008 taxable income may file the report by September 23, 2009, without penalty for failure to file the FBAR form. To qualify for this exemption, taxpayers must attach a statement explaining that the taxpayer only recently learned of the requirement to file and did not have sufficient time to gather information to properly file the FBAR form by June 30, 2009.
Taxpayers who reported and paid tax on all their taxable income for prior years but did not file FBAR forms for those years to report a foreign bank account or to report signature authority over bank accounts owned by an employer should file the delinquent FBAR forms by September 23, 2009, with copies of tax returns for all relevant years, and should attach a statement explaining why the reports are filed late. Recently released guidance indicates that the IRS will not impose a penalty for the failure to file the FBAR forms under this fact pattern.