The annual report of Foreign Bank and Financial Accounts (FBAR) for calendar year 2008, filed on Form TD F 90-22.1, was due to be received by the IRS on June 30, 2009. With that deadline past, companies now need to consider whether they should file for years 2003 to 2008 under an amnesty program that ends on September 23, 2009.
On August 10, 2009, the IRS issued Notice 2009-62, which provides an extension to June 30, 2010, for FBARs relating to 2003 to 2008 for (i) persons with signature authority over, but no financial interest in, a financial account; and (ii) persons with a financial interest in, or signatory authority over, a foreign financial account in which the assets are held in a commingled fund. Helpfully, this latter point applies to U.S. investors that hold 50-percent-or-less interests in offshore private equity funds, hedge funds, and similar funds.
It is important to understand that the extension in Notice 2009-62 does not apply in all circumstances. Where it does not apply, taxpayers should consider working to gather material for a timely submission of FBAR returns and attachments for prior years to meet the September 23 amnesty deadline.
The FBAR report must be filed by any U.S. person who has a “financial interest” in, or “signature authority” over, any “financial account” in a foreign country, if the aggregate value of the account or accounts exceeds $10,000 at any time during the calendar year. The term “financial account” is broadly defined and includes any bank, securities, securities derivatives, or other financial instrument accounts. It includes any savings, demand, checking, deposit, or other account maintained with a financial institution.
For the 2008 FBAR, the term “United States person” means a (1) citizen or resident of the U.S., (2) domestic partnership, (3) domestic corporation, or (4) domestic estate or trust. There is no exemption from the filing requirement for U.S. tax-exempt investors. A domestic partnership includes a U.S. private equity fund and fund of funds, as well as a limited liability company taxed as a partnership.
Penalties for failure to make a required FBAR filing can be severe—up to $10,000 for each violation, and the greater of $100,000 or 50 percent of the balance of the account for willful violations. Penalties may be abated for reasonable cause at the discretion of the IRS. Criminal penalties may also be imposed.
The FBAR instructions for 2008 state that financial accounts “generally also encompass any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund (including mutual funds)” (emphasis added). Before the 2008 filing deadline on June 30, 2008, the IRS clarified that it interpreted the instructions to require the reporting by U.S. investors of less-than-50-percent holdings in offshore private equity funds, hedge funds, and similar funds.
Amnesty—September 23, 2009, deadline
The IRS has stated that U.S. persons who failed to file FBARs for any of the prior six years (2003 to 2008), but reported and paid tax on all taxable income, should file FBARs for such years by September 23, 2009, with an attachment providing the reason why the FBARs were not filed on time, together with copies of their tax returns. In such cases, the IRS has advised that no penalties will be imposed for the late filing of FBARs. Note that the mailing address for submitting the amnesty is different from the mailing address for filing the regular FBAR return.
Many U.S. investors only recently became aware of the need to make FBAR filings. As a result of this amnesty provision, taxpayers should consider whether they had FBAR obligations for prior years. If they do, they should try to take advantage of the amnesty and file for such prior years in a timely manner.
This amnesty is not unconditional. The taxpayer must (i) explain the reason for the late filing, (ii) have reported and paid all taxable income for each applicable year, and (iii) attach copies of tax returns for each applicable year. The rationale that the U.S. investor was not aware of the filing obligation in the particular circumstances should result in qualifying for the amnesty. This should be the case despite the official IRS position that the guidelines for FBAR filing are broad and have not changed for many years.
IRS notice 2009-62—recent extension
New IRS Notice 2009-62 provides an extension to June 30, 2010, for FBARs relating to 2008 and earlier calendar years for (i) persons with signature authority over, but no financial interest in, a financial account; and (ii) persons with a financial interest in, or signatory authority over, a foreign financial account in which the assets are held in a commingled fund.
The first point should cover, for example, employees of financial institutions or fund managers that only have signatory authority over offshore bank accounts. The second point should apply to U.S. investors that hold 50-percent-or-less interests in offshore private equity funds, hedge funds, and similar offshore funds.
The extension is welcome news. It is possible that, before June 30, 2010, the IRS may decide that U.S. investors do not have to file FBARs with respect to their 50-percent-or-less interests in offshore private equity funds, hedge funds, and similar offshore funds. Accordingly, U.S. investors may want to hold off on making an amnesty filing for these types of interests.
What the new extension does not cover; looming September 23 deadline
IRS Notice 2009-62 is relatively narrow and does not apply to many circumstances. For example, it does not apply to a U.S. individual or entity that directly holds an offshore bank account.
In 2006, United Kingdom individuals established a U.S. Delaware limited liability company (LLC). The LLC immediately opened and continues to hold a bank account in the United Kingdom with cash deposits exceeding US$10,000. The LLC has an FBAR reporting obligation for the bank account for 2006–2008. The extension in IRS Notice 2009-62 does not apply.
Importantly, a U.S. person is deemed to hold a financial interest in a foreign account and has an FBAR reporting responsibility in the following situations:
Accordingly, the following circumstances give rise to an FBAR filing requirement:
In 2006, a U.S. private equity master fund formed an offshore fund in the Cayman Islands and transferred funds to it. All of the interests, except for 20 percent of the profits interests, are held by the U.S. master fund. The offshore fund immediately opened and continues to hold a bank account in the Cayman Islands with cash deposits exceeding US$10,000. The U.S. master fund has an FBAR reporting obligation for the bank account for 2006–2008.
In 2006, a U.S. private equity master fund formed an offshore feeder fund in the Cayman Islands. It caused two U.S. tax-exempt pension funds, A and B, to invest in the offshore feeder fund. U.S. tax-exempt investor A owns more than 50 percent of the interests in the offshore feeder fund. The offshore fund immediately opened and continues to hold a bank account in the Cayman Islands with cash deposits exceeding US$10,000. U.S. tax-exempt investor A has an FBAR reporting obligation for the bank account for 2006–2008.
In neither of the above two examples does the extension in IRS Notice 2009-62 appear to apply. In such cases, the U.S. taxpayers should try to meet the September 23 deadline for amnesty filings.
Any amnesty filings for calendar years 2003 through 2008 must be mailed no later than September 23, 2009. Taxpayers should determine if they can benefit from such an amnesty filing, while deferring the reporting of items qualifying for the extension in IRS Notice 2009-62.
To ensure compliance with IRS requirements, we inform you that any federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication.