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Deadline Extended for Filing Disclosure of Foreign Financial Accounts
The IRS has stepped up enforcement efforts against taxpayers who hide bank accounts or other assets outside the U.S. As part of its efforts, the IRS has expanded the scope of the long-standing annual filing requirements of U.S. persons who have a financial interest in a foreign financial account. The Report of Foreign Bank and Financial Accounts (Form TD F 90-22.1, or the “FBAR”) is used to disclose financial interests in all foreign financial accounts, including investments in foreign securities and hedge funds. Recently, this form and its accompanying instructions have been amended and the IRS adopted internal guidelines relating to the potential imposition of penalties for non-filers.
The increased emphasis on the FBAR filing process has created greater awareness of the filing requirements and has sparked discussion over who must file FBAR forms. Under an IRS voluntary compliance program with respect to the FBAR filings, the filing deadline for the 2008 calendar year (and for all prior years to 2003) has been extended, for certain taxpayers, from June 30, 2009 to September 23, 2009. Under the voluntary compliance program, taxpayers will avoid criminal prosecution and civil penalties for non-filing.
FBAR filings are required by U.S. persons with financial interests, or signature or other authority, in foreign financial accounts if the aggregate value of such person’s foreign financial accounts exceeds $10,000 at any time during the calendar year to which the filing relates. For purposes of these rules, “U.S. persons” includes both citizens and residents of the United States, as well as domestic entities such as corporations, partnerships, and estates and trusts.
A “financial interest” includes direct ownership as well as indirect ownership through a partnership, corporation or trust. A U.S. person is also considered to have a financial interest when such person acts through an agent or owns more than 50% of the (1) total profits of a partnership; (2) total value or voting power of shares of stock in a corporation; or (3) present beneficial interest in a trust’s assets (or receives more than 50% of the current income).
A “financial account” is defined in the FBAR instructions as including “…any bank, securities, securities derivatives or other financial instruments accounts”, and generally, “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)”. The IRS has taken the position that, in general, a financial account includes an interest in a foreign hedge fund.
It is important to recognize that U.S. persons with authority other than signatory rights over foreign accounts must also file FBAR forms. A U.S. person has other authority over an account if that person can exercise comparable authority over the account by communicating with the bank or other person where the account is maintained. Communication may either be direct or indirect through an agent, nominee, lawyer or in some other capacity, and may be oral or by some other means. This may mean that more than one person technically is required to file FBAR forms for the same account. It also means that some taxpayers may have many accounts to report, which can be extremely burdensome. (Those with financial interest or authority over more than 25 accounts can file a simplified form but must be able to provide all account information for the past five years if the IRS requests it.)
Under such a broad definition, with few exceptions, IRA and other trust plan fiduciaries, as well as fund managers with legal financial interest in or authority over foreign accounts, may need to file FBAR forms.
Failure to file the FBAR form is likely to result in civil penalties. For willful violations, the penalty can be as high as the greater of $100,000 or 50% of the amount of the account. For non-willful violations, the penalty will be no higher than $10,000.
Most taxpayers qualify for the extended September 23, 2009 deadline. Those taxpayers who have recently become aware of the FBAR filing requirement, and are not under IRS examination (even if the examination has nothing to do with undisclosed foreign accounts or entities), will qualify. Taxpayers who failed to file the FBAR for prior years but reported and paid tax on all taxable income should file FBARs for the prior six years by the September 23, 2009 deadline, with an attachment providing the reason why the FBARs were not timely filed, together with copies of their tax returns. In so doing, they will avoid penalties for the late filing of FBARs with respect to all prior years, even beyond 2003. Those taxpayers who may not have reported income from foreign accounts in prior years may still qualify for voluntary disclosure and should contact their tax advisor.
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