Press Room: Tax Release

March 02, 2011

Foreign Financial Account Reporting Update

The U.S. Treasury Department, through its Financial Crimes Enforcement Network (FinCEN) division, recently finalized regulations relating to foreign financial account reporting on Form TD F 90-22.1 (Report on Foreign Bank and Financial Accounts, also known as "FBAR"). U.S. persons who have a “financial interest” in or “signatory authority” over, any “foreign financial account," if the aggregate value of these financial accounts exceeds $10,000 at any time during the year, must file an FBAR. These filing requirements can be quite complex to analyze for (i) high net worth individual taxpayers with sophisticated investment and entity structure holdings that include international investments, and (ii) for corporations with international operations and their U.S. officers or employees. Significant penalties may be imposed for noncompliance.

The regulations were finalized after consideration by FinCEN of numerous public comments by many interested parties in response to proposed regulations issued approximately one year ago. The new final rules apply to FBARs for foreign financial accounts maintained in calendar year 2010, which are required to be filed by June 30, 2011, and for all reports required to be filed in subsequent calendar years.

Key Provisions for High Net Worth Individual Taxpayers

The key provisions of general interest to high net worth individual taxpayers are summarized below:

  1. Signatory Authority-Related Filings: FBAR filing for U.S. persons having signatory authority over a foreign financial account had been deferred for 2009 and 2008. FinCEN has restored signatory authority-related FBAR filings for 2010, and any prior years where taxpayers deferred their FBAR filings based on prior IRS guidance pending the issuance of the final regulations. The FBAR filing(s) is due on June 30, 2011. Thus, for example, a U.S. individual with signatory authority over a foreign bank account for an overseas relative is required to file an FBAR for this account for 2010, and prior years, if applicable. Additionally, the final regulations clarify that signatory authority means the authority of an individual to control the disposition of funds in a foreign financial account by “direct communication."  Thus, for example, a family member who might participate in making recommendations or decisions in allocating assets in a foreign financial account held by a family partnership would not have signatory authority if that individual could not directly instruct the disposition of an asset in that account.
  2. Reporting for Interests in Hedge Funds and Private Equity Funds: The final regulations “reserve” on the issue of whether an ownership interest in certain of these funds is a form of “foreign commingled fund” that is a reportable foreign financial account. Assumedly, IRS will extend the present filing moratorium so that there will be no investor reporting for these fund investments at this time.
  3. Definition of U.S. person: The final regulations continue to define a U.S. person as (i) a citizen or resident of the United States under U.S. income tax rules or (ii) entities, including corporations, partnerships, trusts, and limited liability companies (LLCs) that are formed under the laws of the United States. A legal permanent resident (i.e., a “green card” holder) that elects under a tax treaty to be treated as a non-resident for U.S. income tax purposes, however, must still file an FBAR. Due to ownership attribution rules, multiple filings for the same foreign financial account are required in many cases. For example, in the case of a U.S. citizen that owns 100 percent of a U.S. LLC holding a foreign financial account, both the U.S. citizen and the LLC must file an FBAR, even if the LLC is treated as a disregarded entity for U.S. income tax purposes.
  4. Certain Trust Changes: The final regulations modify the reporting rules for discretionary trusts, which are of primary interest to foreign trusts with U.S. beneficiaries. Only U.S. beneficiaries with a “present” beneficial interest in at least 50 percent of the assets or 50 percent of the “current” income from the trust are subject to FBAR filing. Thus, certain discretionary beneficiaries and holders of remainder interests in a trust will not be required to report. The final regulations eliminate, subject to anti-avoidance rules, a provision in the proposed regulations that would require U.S. grantors of trusts (typically foreign trusts) with trust protectors to make FBAR filings. The final regulations retain an exception for FBAR filing for U.S. beneficiaries where the trust, trustee of the trust, or an agent of the trust is a U.S. person that files an FBAR for the trust.

Key Provisions for Corporations and Their U.S. Officers or Employees

Subject to special rules for signatory authority-related filings for U.S. officers or employees of banks and financial institutions and investment advisors for mutual funds, the key provisions of general interest to corporations with international operations and their U.S. officers or employees are summarized below:

  1. Signatory Authority-Related Filings: Signatory authority-related filings over foreign financial accounts has been restored for U.S. officers or employees of corporations for 2010 and prior years. Thus, for example, if a U.S. corporation, not described in 2 and 3 below, had a foreign financial account and the U.S. CFO had signatory authority over that account in 2009, the U.S. corporation was required to file an FBAR for 2009; the U.S. CFO could have deferred an individual signatory authority-related FBAR filing obligation. If the same account exists in 2010, the U.S. corporation must file an FBAR and the U.S. CFO must file an FBAR for both 2010 and 2009 (if the 2009 FBAR obligation was deferred).
  2. Special Rules for Corporations Listed on a U.S. Exchange: U.S. officers or employees of corporations—both U.S. and foreign (including foreign corporations with listed American Depository Receipts (ADRs))—with equity securities listed on a U.S. national securities exchange are not required to make individual signatory authority-related FBAR filings. Additionally, U.S. officers or employees of U.S. parent corporations and U.S. officers or employees of 50 percent of greater subsidiaries (both U.S. and foreign) that make a consolidated FBAR filing will not need to make individual signatory authority-related filing and the U.S. parent can make a consolidated FBAR filing of foreign financial accounts owned directly and by 50 percent or greater owned subsidiaries. The consolidated filing rule, however, does not apply to foreign parents listed on a U.S. exchange. Thus, for example, while U.S. officers or employees of a foreign parent listed on a U.S. exchange would not need to make an individual signatory authority related filing, U.S. officers or employees of U.S. or foreign subsidiaries of the foreign parent would need to make individual signatory authority-related filings over any foreign financial accounts held by those subsidiaries.
  3. Special Rules for Corporations Registered under Section 12(g) of the Securities and Exchange Act (SEA): U.S. officers or employees of certain corporations are not required to make individual signatory authority related FBAR filings. The exception applies to corporations with more than $10 million of assets and more than 500 shareholders of record registered under Section 12(g) of the SEA . Similar to the rules in the preceding paragraph, consolidated FBAR filings for U.S. parent corporations and 50-percent-owned subsidiaries can be made.