Treasury Issues Final Rules Regarding Foreign Financial Account Reporting


By Ron Kramer

On February 23, 2011, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued final changes to regulations implementing the Bank Secrecy Act’s (BSA) reporting requirements for foreign financial accounts. The final rules address who is required to file reports, what types of foreign accounts are reportable, and how to provide relief from reporting for certain individuals.

The final rules apply to Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts, (known as the FBAR) required to be filed by June 30, 2011 with respect to foreign financial accounts maintained in calendar year 2010, and reports for all subsequent years.

In February 2010, the Internal Revenue Service (IRS) issued IRS Notice 2010-23, which provided administrative relief to certain U.S. persons who might have otherwise been required to file FBARs for calendar year 2009 and earlier calendar years. Notice 2010-23 permitted those filers to defer filing FBARs for 2009 and prior calendar years until June 30, 2011. The provisions of IRS Notice 2010-23 will be discussed further on in this Insight.  However, it should be noted that the preamble to the final rules provides that FBAR filers who properly deferred their FBAR filing obligations pursuant to Notice 2010-23 may apply the final rules in determining their FBAR requirements for reports due by June 30, 2011, with respect to foreign accounts maintained for calendar years beginning before 2010.

Reporting for Foreign Bank and Financial Accounts (FBAR’s)
Under the Bank Secrecy Act regulations, each U.S. person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account located in a foreign country must report certain information to the Commissioner of Internal Revenue for each year in which such account is maintained.

The foreign account information is reported on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). The FBAR is required to be filed when the aggregate value of all foreign financial accounts exceeds $10,000 during a calendar year. The FBAR must be filed by June 30 for foreign accounts maintained during the previous calendar year. Accordingly, the FBAR for foreign accounts maintained during 2010 is due by June 30, 2011.  Also, the BSA rules require that filers maintain records of the foreign accounts for a period of 5 years.

Civil and criminal penalties for non-compliance with the FBAR filing requirements are severe.  Civil penalties for a non-willful violation can range up to $10,000 per violation. Civil penalties for a willful violation can range up to the greater of $100,000 or 50% of the amount in the account at the time of the violation. Criminal penalties for violating the FBAR filing requirements can range from a $250,000 to a $500,000 fine, 5-10 years of imprisonment, or both. Also, the civil and criminal penalties may be imposed together.
Note: On February 8, 2011, the Internal Revenue Service announced a new (the second) special voluntary disclosure initiative designed to encourage those U.S. persons who still have unreported income from undisclosed offshore accounts or entities ( i.e. have not filed FBARs) to bring these accounts and income back into compliance with U.S. tax laws (IR-2011-14). The new amnesty program, called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) will allow those U.S. persons to get current with their taxes and to avoid higher penalties or the possibility of criminal prosecution by following special procedures that will be available to them through August 31, 2011.

The IRS also announced that the new program will allow those taxpayers who have previously reported all income related to foreign accounts, but are delinquent in filing FBARs and certain other foreign information returns related to these accounts, to get current with these filings. These taxpayers will also have until August 31, 2011 (except for the 2010 FBAR which is due on June, 30, 2011) to file these forms and avoid delinquent return penalties.  See our Insight titled IRS Offers a Second Chance to Those Holding Assets Offshore, dated February18, 2011, for more information on the new OVDI program.

Persons Filing Under IRS Notice 2010-23
In February 2010, the IRS released Notice 2010-23 to provide continued administrative relief to certain persons who otherwise might be required to file the FBAR for calendar year 2009 and earlier calendar years. IRS Notice 2010-23 was a continuation of relief provided by the IRS in Notice 2009-62 that was granted to allow the IRS time to develop further FBAR guidance with respect to signature authority and investment in foreign commingled funds.

Specifically, IRS Notice 2010-23 provided for the following deferral of FBAR filing obligations:

  • Signature Authority – Persons with signature authority over, but no financial interest in, a foreign financial account for which an FBAR would otherwise have been due on June 30, 2010 will now have until June 30, 2011 to report those foreign financial accounts for the 2010 and prior calendar years.
  • Certain Foreign Commingled Funds – Persons with a financial interest in, or signature authority over, a foreign commingled fund that is a mutual fund are required to file an FBAR. In IRS Notice 2010-23 the IRS indicated it will not interpret the term “commingled fund” as applying to funds other than mutual funds with respect to FBARs for calendar year 2009 and prior years. Notice 2010-23 also specifically provides that the IRS will not apply its enforcement authority adversely in the case of persons with a financial interest in, or signature authority over, any other foreign commingled fund with respect to that account for calendar year 2009 and earlier calendar years.

In Notice 2010-23, the IRS made clear that a financial interest in, or signature authority over, a foreign hedge fund or private equity fund is not required to be reported on an FBAR for calendar year 2009 and earlier calendar years. However, at the time it was issued, Notice 2010-23 did not address, and left for further guidance, whether FBAR reporting related to a foreign commingled fund (other than a mutual fund) may be required for 2010 filings.

Fortunately, in the final regulations, FinCEN specifically continues to reserve for comment the FBAR treatment of investment companies other than mutual funds or similar pooled funds. Accordingly, investments in foreign hedge funds or private equity funds will not be required to be included in the FBAR reporting due June 30, 2011 for calendar year 2010 accounts.

Unfortunately, the final FinCEN regulations do not eliminate the signature or other authority filing requirements for FBAR. FinCEN believes the signature authority filing requirement to be a necessary component of an effective FBAR regulatory regime. Therefore, FBARs for 2010 and the prior calendar years deferred by Notice 2010-23 will be due by June 30, 2011 for all persons having signature or other authority over foreign accounts.

Notable Changes and Clarifications In the Final Rules
Some notable changes and clarifications to the rules were made in response to comments received by FinCEN. The final rules:

  • Clarify whether an account is foreign and therefore reportable as a foreign financial account and address the treatment of custodial accounts in this context. An account is not a foreign account under the FBAR if it is maintained with a financial institution located in the United States. Assets held in an omnibus account and maintained by a U.S. based global custodian are not subject to FBAR. In this situation, the U. S. customer maintains an account with a financial institution located in the United States. However, if the specific custodial arrangement permits the United States person to directly access their foreign holdings maintained at the foreign institution, the United States person would have a foreign financial account.
  • Revise the definition of signature or other authority to more clearly apply to individuals who have the authority to control the disposition of assets in the account by direct communication (whether in writing or otherwise) to the foreign financial institution.
    FinCEN has decided to revise the proposed definition of signature or other authority as follows:

    Signature or other authority means the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained.

    Thus, the test for determining whether an individual has signature or other authority over an account is whether the foreign financial institution will act upon a direct
    communication from that individual regarding the disposition of assets in that account. The definition of signature authority wouldn’t apply to an individual who merely participates in the decision to allocate assets or has the ability to instruct or supervise others with signature authority over a reportable account.
  • Clarify that officers or employees who file an FBAR because of signature or other authority over the foreign financial account of their employers are not expected to personally maintain the records of the foreign financial accounts of their employers.
  • Clarify that a corporation is a “United States person” that may be required to file an FBAR only if the corporation is created, organized, or formed under the laws of the United States, any state, the District of the Columbia, the territories and the insular possessions of the United States, or the Indian tribes.
  • Clarify that filers may rely on provisions of the final rules in order to determine their filing obligation for FBARs in situations when filing was properly deferred under prior Treasury guidance (i.e. IRS Notice 2010-23).
  • Retain the rule that an account with a mutual fund or similar pooled fund is a reportable account. The definition of mutual fund includes a requirement that shares be available to the general public, in addition to having a regular net asset value determination and regular redemption feature.
  • Continues to reserve on the treatment of accounts with investment companies other than mutual funds or similar pooled funds (i.e. foreign hedge funds and private equity accounts).
  • Clarify that the final rules apply to pension plans and welfare benefit plans. Because the purpose of the FBAR is broader than tax administration, FinCEN does not believe that it is appropriate to exempt entities from the FBAR requirement based on their tax-exempt status. However, the final rule has provided a number of clarifications that address concerns regarding the scope of foreign financial accounts that are reportable, and the definitions of signature authority and financial interest.
  • Provide that participants and beneficiaries in retirement plans under Sections 401(a), 403(a) or 403(b) of the Internal Revenue Code as well as owners and beneficiaries of individual retirement accounts under section 408 of the Internal Revenue Code or Roth IRAs under section 408A of the Internal Revenue Code 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.
  • Provide that a beneficiary of a trust is not required to report the trust's foreign financial accounts if the trust, trustee of the trust, or agent of the trust is a United States person that files an FBAR disclosing the trust's foreign financial accounts and provides any additional information as required by the report.

The FBAR for reporting foreign financial accounts maintained during calendar year 2010 is due by June 30, 2011.  In addition, those persons who have deferred their FBAR filing obligation for 2009 and prior calendar years under IRS Notice 2010-23 must also file these FBARs by June 30, 2011. All of these FBARs should be filed applying the provisions of the final FinCEN regulations.

Civil and criminal penalties for non-compliance with the FABR filing requirements are severe. Those U. S. persons who are delinquent in filing FBARs for prior years, should consider availing themselves of the provisions of the new OVDI program to reduce or eliminate any penalties associated with those delinquent filings.

If you have any questions regarding your FBAR filing obligations, please contact Ron Kramer or your Schneider Downs Tax Advisors representative for assistance.

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