Update: Form 90-22.1 Report of Foreign Bank Accounts (FBAR)
To Our Clients and Friends,
In our Tax Alert of June 4, 2009, we reminded you of the filing requirement of U.S. Treasury Department Form TD F90-22.1 for non-U.S. bank and financial accounts if the aggregate value of the financial account(s) exceeds $10,000 at any time during the year. Form 90-22.1 is filed separately from your tax return and must be received for 2008 by the Treasury Department (rather than merely postmarked) no later than June 30, 2009.
The form is required to be filed by any U.S. person (including an individual, corporation, partnership, trust or estate) which has a financial interest in or signature or other authority over any foreign financial account. A financial account broadly includes any bank, securities, securities derivatives, or other financial instruments account (including any savings, demand, checking, deposit, or other account maintained with a financial institution). Where assets are held in a commingled fund, such as a mutual fund, an equity interest in the fund is also considered a financial account under the form’s current instructions. However, many significant reporting issues remain unresolved in the absence of clarifying official guidance, including application to U.S. persons and entities holding interests in foreign partnerships, foreign corporations and other entities holding and/or trading securities.
On June 12, 2009, the ABA in conjunction with the AICPA presented an FBAR teleconference including a panel of three Internal Revenue Service (IRS) personnel. The IRS representatives stated that an offshore hedge fund is a “foreign financial account” for FBAR purposes and 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. It is not clear whether this interpretation is correct and whether it applies only to hedge funds or also to private equity and other funds.
If broadly applied, this interpretation may require filing of Form TD F 90-22.1 by, among others, a:
- Direct 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 (we understand that the trustee of a pension fund or custodian of an IRA account may need to file);
- U.S. investor that owns more than 50% of a U.S. or foreign entity which is such a direct investor;
- U.S. investor in a foreign blocker or other foreign corporation which itself may be considered a commingled fund;
- U.S. fund of funds, or U.S. feeder fund, that invests in an offshore investment fund;
- U.S. investment manager with a financial interest (for example, a carried interest) in an offshore investment fund;
- 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).
We are not certain that such a broad interpretation of the FBAR filing requirements is accurate and are exploring resolution of several issues with IRS representatives. However, until more complete official guidance is available, the only way to be sure of avoiding penalties is to file for all such entities. Please be reminded that generally penalties for late filings may only be abated for reasonable cause in the IRS’s discretion and that the IRS has also previously announced a Voluntary Disclosure Program for Offshore Accounts and Income through September 23, 2009, which permits filing of late and amended FBAR and other returns for the previous six years under certain circumstances.
You may contact a Frank, Rimerman + Co. LLP tax professional for assistance completing this form or determining whether an individual or entity is required to file it. If you are required to file, we recommend that you file the form via U.S. Certified Mail, Return Receipt Requested.
Frank, Rimerman + Co. LLP
Any tax advice in this communication is not intended or written by Frank, Rimerman + Co. LLP to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein. With this communication, Frank, Rimerman + Co. LLP is not rendering any specific advice to the reader.