June 22, 2009

Determine Whether an FBAR Must Be Filed for a Foreign Account or Offshore Fund

Any U.S. person with a financial interest in or authority over a foreign financial account (accounts that exceed $10,000 in the aggregate) must file an IRS Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) by June 30. This requirement also extends to U.S. citizens or residents with signature or other authority over a foreign financial account.

The IRS on June 24 indicated that late filings of 2008 FBARs will be accepted without penalty if a filer has only recently learned of the obligation to file—and the filer cannot collect the required information by the June 30 deadline. In such cases, the FBAR must be filed by September 23 and must include a statement describing why the filing is late.

This exception applies only if the filer reported and paid tax on 2008 income from the relevant foreign account (if applicable).

Penalties for Failing to File an FBAR

Penalties for failing to file an FBAR are severe. Failure to file a required FBAR can result in large civil fines, imprisonment of up to 10 years, or both. Violations do not have to be willful to result in penalties.

Given these potentially severe penalties, managers and investors should consider whether a filing is appropriate this year. Of course, the specific facts should be reviewed in order to determine whether FBAR filing obligations apply.

The filing deadline is fast approaching and extensions are not granted. Income tax extensions do not include FBAR filing—completing a report is the only way to ensure avoidance of all penalties. (Other disclosures may be required on tax returns.)

Accounts That Require FBAR Filings

Filing requirements may apply at the entity level as well as at the individual level (for those people who have the requisite signature or other authority over the foreign accounts in question).

In recent informal statements, the IRS has indicated that investors in offshore hedge funds, private equity funds and mutual funds, as well as the funds themselves, may be subject to the FBAR filing requirements. The IRS may expect FBAR filings from U.S. persons with the requisite authority over foreign accounts, including:

  • A domestic fund, domestic feeder fund or U.S. investor that directly invests in offshore investment funds
  • A domestic fund, domestic feeder fund or any U.S. investor who owns more than 50 percent of an entity that directly invests in offshore investment funds (including offshore master funds)
  • A domestic fund that has an offshore bank or securities account, or their equivalent
  • Investment managers who have a financial interest in or signature or other authority over offshore investment funds
  • Management companies in similar circumstances
  • Anyone, including U.S. managers, who can bind offshore investment funds utilizing their signature or other authority

Persons Required to File an FBAR

FBARs must be filed by U.S. citizens or tax residents, corporations, LLCs or partnerships formed in the United States, and trusts or estates treated as a U. S. taxpayer. (In future tax years, the definition of a U.S. person may be expanded to include "a person in or doing business in the United States.")

Foreign Accounts

The FBAR filing requirements unquestionably apply to banks, securities, securities derivatives, and other financial instrument accounts (including savings, demand, checking, deposit, or other similar accounts). Equity interests in funds with commingled assets (such as mutual funds) are also included. As noted above, offshore funds may also be foreign accounts.

Voluntary Disclosure of Delinquent FBARs

The IRS currently promises decreased penalties for delinquent FBAR taxpayers who voluntarily disclose foreign financial accounts. More information on voluntary disclosure is available in the previous article "New IRS Procedures for Undisclosed Foreign Accounts Demand Immediate Consideration."

FBAR forms are available on the IRS Web site or by clicking here.

The U.S. Treasury Department requires us to advise you that this written advice (including any attachments) is not intended or written by our firm to be used, and cannot be used by any taxpayer, for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code. Written advice from our firm relating to Federal tax matters may not, without our express written consent, be used in promoting, marketing or recommending any entity, investment plan or arrangement to any taxpayer, other than the recipient of the written advice.

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