Reporting Requirements for Foreign Financial Accounts

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1 Reporting Requirements for Foreign Financial Accounts Proposed FinCEN Regulations and IRS Guidance On Foreign Bank and Financial Account Reporting SUMMARY On February 26, the IRS issued Notice and Announcement on the required Report of Foreign Bank and Financial Accounts (the FBAR ). The Notice (i) provides that, for 2009 or any prior calendar year, the IRS will not enforce the filing requirement for persons with a financial interest in, or signature authority over, a foreign commingled fund, such as a foreign hedge fund or a private equity fund, unless it is a mutual fund and (ii) extends the FBAR filing deadline for 2010 and all prior calendar years to June 30, 2011 in the case of persons who have signature or other authority over a foreign financial account but no financial interest in the account. The Announcement continues the existing suspension of FBAR filing obligations for persons who are not United States citizens, residents, or domestic entities and permits any person to rely on the definition of United States person found in the July 2000 FBAR instructions. The Announcement also provides that all other requirements of the 2008 FBAR form and instructions (as modified by the Notice) remain in effect until changed by the Treasury Department. Also on February 26, the Financial Crimes Enforcement Network of the Department of the Treasury ( FinCEN ) published proposed revisions to regulations (the Proposed Regulations ) under the Bank New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

2 Secrecy Act with respect to FBARs. 1 The notice of proposed rulemaking that accompanied the Proposed Regulations also includes draft revised FBAR instructions. The Proposed Regulations would (1) define certain terms used in the current FBAR form and instructions, including United States person, bank account, securities account, and other financial account, (2) provide exemptions for persons with signature or other authority over, but no financial interest in, an account, (3) provide exemptions for foreign financial accounts held through qualified retirement plans, and (4) implement anti-abuse provisions. BACKGROUND The FBAR reports a United States person s financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country. 2 The FBAR must be filed for each calendar year with respect to a United States person s financial accounts, if the accounts exceed $10,000 in value in the aggregate, and the FBAR must be received by the Department of the Treasury on or before June 30th of the following year. 3 A revised FBAR was issued by the IRS for 2008 calendar year filings, making certain changes to and clarifying the FBAR instructions. Many uncertainties remained, however, including who would be considered a United States person for purposes of the filing requirement, 4 the extent to which persons with mere signature authority over (and no financial interest in) financial accounts were required to file, and the application of the filing requirements to interests in foreign hedge funds and foreign private equity funds. In June 2009, the IRS issued an Announcement, which reverted to the prior definition of United States person with respect to filings due June 30, 2009 and requested comments on the revised FBAR form and instructions. 5 The IRS subsequently extended the filing deadline to September 23, 2009 for taxpayers or The amendments to the regulations would be reflected in 31 C.F.R , which implements 31 U.S.C. 5314, part of the Bank Secrecy Act ( BSA ). 31 C.F.R C.F.R The definition of United States person contained in the FBAR instructions as revised in October 2008 included a person in and doing business in the United States in an attempt to conform more closely to the statutory language of the BSA. Form TD F (Rev. October 2008); 31 U.S.C The prior definition had included only (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust. Form TD F (Rev. July 2000). Announcement , I.R.B

3 United States persons who had recently learned of a requirement to file an FBAR but did not have sufficient time to gather the information necessary to properly file by June 30, In August, the IRS released a Notice, which announced the IRS s intention to issue regulations clarifying the FBAR requirements for persons (i) who have signature or other authority over a foreign financial account, but no financial interest in the account, and (ii) with a financial interest in, or signature authority over, a foreign financial account in which the assets are held in a commingled fund (such as a foreign hedge fund or a private equity fund). 7 This Notice also extended the FBAR deadline for these persons with respect to these accounts, for 2008 and all previous calendar years, to June 30, 2010, and requested comments with respect to several FBAR filing issues, including when a person with only signature authority, but no financial interest, over an account should be relieved from FBAR filing obligations, and when an interest in a foreign entity should be subject to FBAR reporting. CHANGES TO 2010 FILING REQUIREMENTS IN IRS GUIDANCE Notice modifies and supplements the August Notice. It extends the FBAR filing deadline for persons who have signature or other authority over a foreign financial account, but no financial interest in the account from June 30, 2010 to June 30, This extension applies to reports for 2010 and all previous calendar years. The Notice also provides that the IRS will not interpret the term commingled fund as applying to a fund other than a mutual fund for any calendar year prior to This effectively exempts from the filing requirement persons with a financial interest in, or signature authority over, a foreign hedge fund or private equity fund for 2009 and all prior years. The Notice also directs taxpayers to check the no box in response to the FBAR-related questions found on federal income tax returns for 2009 and earlier years if the taxpayer has only foreign financial accounts that qualify for relief under the notice. The IRS simultaneously released Announcement , which continues, for filings made for 2009, the suspension of FBAR filing obligations previously provided for persons who are not defined as United States persons in the July 2000 FBAR instructions (i.e., United States citizens, residents, or domestic entities). The Announcement also provides that all other requirements of the 2008 revised FBAR form and instructions (as modified by Notice ) remain in effect until changed by Treasury Department guidance. 6 7 Announcement ; Internal Revenue Service, Frequently Asked Questions (June 24, 2009), available at updated version (as of January 10, 2010) available at the IRS Voluntary Disclosure page at Notice , I.R.B

4 DEFINITIONS INCLUDED IN PROPOSED REGULATIONS The Proposed Regulations include new definitions of United States person, bank account, securities account, other financial account, and financial interest, 8 as well as of signature or other authority. The Proposed Regulations impose an FBAR filing requirement only on a United States person. The Proposed Regulations would define that term to mean (1) a citizen of the United States; (2) a resident of the United States [as defined under Internal Revenue Code section 7701(b), but using the 31 CFR (nn) definition of United States for this purpose]; (3) an entity, including but not limited to a corporation, partnership, trust, or limited liability company created, organized, or formed under the laws of the United States, any State, the District of Columbia, the Territories and Insular Possessions of the United States, or the Indian Tribes. This language would eliminate the filing requirement for non-u.s. persons in and doing business in the United States that had been introduced in the October 2008 FBAR instructions. The draft instructions would make clear that the tax treatment of an entity (e.g., whether an entity is disregarded for U.S. federal income tax purposes) has no effect on the entity s filing obligations. In defining the types of reportable accounts, the FinCEN notice of proposed rulemaking states that under the Proposed Regulations an account is not established simply by conducting transactions such as wiring money where no relationship has otherwise been established. Instead, an account means a formal relationship to provide regular services, dealings, and other financial transactions. 9 The notice of proposed rulemaking, however, also states that the length of time for which services are provided does not affect whether a relationship to provide services has been established. Thus, the notice provides that an escrow account can be a foreign financial account for this purpose. The term bank account is defined in the Proposed Regulations as a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking, and includes a certificate of deposit. A securities account is defined as an account with a person engaged in the business of buying, selling, holding or trading stock or other securities. The Proposed Regulations would further define an other financial account to include only: An account with a person that is in the business of accepting deposits as a financial agency; An account that is an insurance policy with a cash value or an annuity policy; An account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or An account with a mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions. 8 9 Proposed Regulations 31 C.F.R (a), 31 C.F.R (b), 31 C.F.R (c); 31 C.F.R (c). 75 FR 8844, 8846 (February 26, 2010). -4-

5 The Proposed Regulations reserve on the issue whether and when other investment funds will be treated as foreign financial accounts, and FinCEN states in the notice that it will continue to study the issue of whether hedge funds, private equity funds, and similar investment companies should be treated as other financial accounts, noting that pending legislative proposals may apply additional regulation and oversight over these types of funds. 10 The Proposed Regulations do, however, provide that nostro and similar correspondent accounts maintained by banks and used solely for bank-to-bank settlement need not be reported. 11 The proposed definition of a financial interest is similar to the definition in the current FBAR instructions (which generally contain provisions intended to cover both a holder of legal title and any beneficial owner of the account), except that the definition in the instructions is expanded to include (i) a look-through provision with respect to all entities (other than trusts) in which a United States person owns more than 50% by vote or value, (ii) attribution to a trust settlor if the settlor has an ownership interest in the trust account for U.S. tax purposes, and (iii) an anti-avoidance rule attributing a financial interest of an entity to a United States person if the United States person caused the entity to be created for a purpose of evading this section. Beneficiaries of a trust with a beneficial interest in more than 50% of the assets or receiving more than 50% of the income (who would generally be subject to filing requirements under both the current FBAR instructions and the Proposed Regulations) would nonetheless be exempt from filing if the trust, trustee, or agent of the trust is a United States person and files an FBAR with respect to the trust s financial accounts. 12 FILING REQUIREMENTS FOR SIGNATURE AUTHORITY The Proposed Regulations generally adopt and clarify the definition of signature authority provided in the current FBAR instructions, defining signature or other authority as 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 delivery of instructions (whether communicated in writing or otherwise) directly to the person with whom the financial account is maintained. 13 The Proposed Regulations include the following exceptions to the signature authority requirement in cases where the officer or employee has no financial interest in the account. These exemptions are FR 8844, 8846 (February 26, 2010). The Proposed Regulations also include certain exceptions to reporting with respect to accounts of U.S., state, or tribal government entities, and would include the exceptions in the current FBAR instructions for U.S. military banking facilities. Proposed Regulations 31 C.F.R (c)(4). Proposed Regulations 31 C.F.R (g)(5). Proposed Regulations 31 C.F.R (f)(1). -5-

6 generally broader than the exemptions in the current instructions for employees of certain banks and corporations whose shares are traded in the United States: An officer or employee of a bank, whether U.S. or foreign, that is examined by certain federal agencies need not report with respect to financial accounts owned or maintained by the bank; 14 An officer or employee of a financial institution that is registered with and examined by the Securities and Exchange Commission ( SEC ), such as a registered broker-dealer, or is registered with and examined by the Commodity Futures Trading Commission need not report with respect to financial accounts owned or maintained by the financial institution; 15 An officer or employee of an entity that is registered with and examined by the SEC and that provides services to an investment company registered under the Investment Company Act of 1940, such as an investment advisor to such a company, need not report with respect to financial accounts owned or maintained by the investment company (provided that the investment company is registered with the SEC); 16 An officer or employee of an entity, including a foreign corporation, with a class of equity securities listed on any U.S. national securities exchange need not report with respect to financial accounts of the entity; 17 An officer or employee of a U.S. subsidiary of an entity, including a foreign corporation, with a class of equity securities listed on any U.S. national securities exchange need not report with respect to financial accounts of the subsidiary if the subsidiary is included in a consolidated report of the parent (however, this exception would eliminate the provision in the current FBAR instructions exempting officers and employees of non-u.s. subsidiaries where the accounts are included in the parent s report); 18 and An officer or employee of a U.S. entity with a class of equity securities registered under section 12(g) of the Securities Exchange Act need not report with respect to financial accounts of the entity. 19 OTHER RULES In addition, the Proposed Regulations would provide that participants and beneficiaries in qualified retirement plans, IRAs and Roth IRAs are not required to file with respect to financial accounts held by These agencies are the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration. Proposed Regulations 31 C.F.R (f)(2)(i). A similar exception is in the current FBAR instructions. Proposed Regulations 31 C.F.R (f)(2)(ii). This exception would be an addition to the exceptions in the current FBAR instructions. Proposed Regulations 31 C.F.R (f)(2)(iii). This exception would be in addition to the exceptions in the current FBAR instructions. Proposed Regulations 31 C.F.R (f)(2)(iv). This exception would expand the listed company provision in the current FBAR instructions to include non-u.s. and non-corporate entities. Proposed Regulations 31 C.F.R (f)(2)(iv). Proposed Regulations 31 C.F.R (f)(2)(v). This exception would generally apply to U.S. corporations with over $10 million in assets and more than 500 shareholders, and would be an addition to the exceptions in the current FBAR instructions. -6-

7 the retirement plan or IRA. 20 rule. The plans and IRAs themselves would not be exempt from filing under this The Proposed Regulations and draft instructions would also (i) permit consolidated filing for any entity that is a United States person and owns more than a 50% interest in another entity required to make an FBAR filing, 21 and (ii) adopt the abbreviated approach under the current FBAR instructions for filing with respect to a financial interest in 25 or more accounts, and would permit a similar abbreviated method for signature authority over 25 or more accounts. 22 * * * Copyright Sullivan & Cromwell LLP Proposed Regulations 31 C.F.R (g)(4). The retirement plans included in this rule are plans described in sections 401(a), 403(a) and 403(b) of the Code. This rule is similar to the provision in the current FBAR instructions, but clarifies that consolidated reporting is permissible for all entities, not merely corporations, and that the parent entity must be a United States person. Proposed Regulations 31 C.F.R (g)(3). Proposed Regulations 31 C.F.R (g)(1), 31 C.F.R (g)(2). -7-

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