Foreign Bank Account Reporting is Due June 30, 2009. Late or Didn't Know to File? What To Do Now.

By Ron Cohen, CPA, MST
Partner
Greenstein, Rogoff, Olsen & Co., LLP

The I.R.S. has warned they will take this filing deadline more seriously than in the past and impose penalties on late or non-filers. PLEASE TAKE THIS SERIOUSLY!

Form TD F 90-22.1 (Report of foreign Bank and Financial Accounts, commonly known as an “FBAR”).

Who Must File this Report. Each United States person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing this report with the Department of the Treasury on or before June 30, of the succeeding year.

***

FBAR Filings Must Be Received by June 30.

Unlike the rule for tax forms, FBAR forms are deemed filed when received by the IRS, not when postmarked. (As a result, use of certified mail with return receipt requested is recommended.) No extension of time to file is granted.

1) Penalties for failure to comply with the Bank Security Act requirement that United States persons report their financial interest in, or authority over, financial accounts located in a foreign country.

U.S. citizens, residents, and certain other persons, must annually report their financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account (such as a bank or investment account) that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign accounts exceeded $10,000 at any time during the year. This reporting requirement is met by filing Form TD F 90-22.1 (Report of foreign Bank and Financial Accounts, commonly known as an “FBAR”). FBARs are filed with a Department of the Treasury facility located in Detroit and are not to be filed with tax returns; the filing date for FBARs is June 30th. The requirement to file FBARs is in the regulations under 31 U.S.C. § 5314 (which is a provision of the Bank Secrecy Act). Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account. Criminal penalties may also apply. Refer to IRM 4.26.16.4 for additional FBAR penalty considerations.

See: http://www.irs.gov/pub/irs-pdf/f90221.pdf

Street Address for FBAR submissions by private delivery services:

IRS Detroit Computing Center
Attn: FBAR Mail Room, 4th Floor
985 Michigan Ave.
Detroit, MI 48226

The contact phone number to give to the delivery service for the IRS Detroit Computing Center is 313-234-1062.

Hedge-Funds and Private Equity Funds have suddenly become aware they are subject to the FBAR rules.

Please see: IRS Steps Up Scrutiny of Offshore Funds

Confusion over filing requirement for non-U.S. residents and non-domestic legal entities.  They are Not Required to File, until the IRS issues new rules.

According to a FAQ still available on the IRS Web site as of this writing on July 1, 2009, the October, 2008 revised instructions for Form TD F 90-22.1 would have changed the definition to include a citizen or resident of the United States, or a person in and doing business in the United States. The term “person” would include individuals and all forms of business entities, trusts and estates. Instead, the IRS is reverting to the definition in the old instructions, under which the term “United States person” means (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 IRS said that it will need to issue additional guidance on the filing requirements for future years with regard to non-citizen, non-resident, filing requirements.

See IRS Website Link on this issue at:   http://www.irs.gov/newsroom/article/0,,id=209418,00.html   and Announcement 2009 – 51 at:  http://www.irs.gov/pub/irs-drop/a-09-51.pdf

Comment: This possible future filing requirement will keep non-Citizens, non-residents, and non-domestic entities from doing business in the United States for fear they will have to disclosure non-U.S. investment accounts.  This is a very anti-competitive requirement.  I realize this filing is intended  to help fight money laundering and terrorism by tracking financial accounts, but, at what cost to the economy?

More Clarification on the FBAR mess.....

Certain investments will likely require you to file form TD F 90-22.1, irrespective of the percentage of ownership. A financial account includes a “commingled fund” in which the owner has an equity interest. For this purpose, a “commingled fund” specifically includes mutual funds. Thus, accordingly, the Treasury Department has taken the position that a “commingled fund” includes hedge funds and private equity funds.

This expanded filing requirement is not clear from the instructions to the FBAR; nonetheless, based on the statements of IRS officials and the severity of possible penalties for failure to file, we strongly recommend filing if you have any remote concern you need to file, PLEASE FILE. There is no penalty for over-filing, but a penalty for under-filing.

Others have commented that the FBAR penalties are the worst (in $ amount and %) in the entire Internal Revenue Code.

How this confusion began:

In a June 12, 2009 panel discussion with the IRS addressing open questions regarding FBAR for calendar year 2008, IRS representatives publicly stated that under their 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…and regardless of how much of the total fund they own!!!. 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.

Until further guidance is provided (no change as of 7/26/09), 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:

• A U.S. investor in an offshore investment fund (or in an offshore feeder fund in a master/feeder fund structure), including U.S. tax-exempt investors (there are indications that this includes a trustee or investment fiduciary of a pension fund or custodian of an IRA account);
• A U.S. investor that owns more than 50% of a U.S. or foreign entity which is a direct investor in an offshore investment fund;
• A U.S. investor in a foreign blocker or other foreign corporation which itself may be considered a commingled fund;
• A U.S. fund of funds, or U.S. feeder fund, that invests in an offshore investment fund;
• A U.S. investment manager with a financial interest (for example, a carried interest common to venture capital investors) in an offshore investment fund; and
• A U.S. individual with signature or other authority to bind an offshore investment fund, or to bind the general partner or managing member of such a fund (in addition to the general partner or managing member itself if it is a U.S. entity).

Again, there has been no change to this interpretation as of 7/24/09, however, an extension until September 23, 2009 has been provided for taxpayers who recently found out they need to file. PLEASE see the extension to make sure you qualify and the procedure to file.

For more information on this topic, please see Ron Cohen's International Tax Blog