Update on the 2008-2009 changes to Form TD F 90-22.1
The U.S. Internal Revenue Service announced in 2009 that it intends to increase its focus and scrutiny of foreign investments and holdings. As a result of 2008-2009 changes in the FBAR reporting requirements, anyone with direct or indirect foreign investments or holdings should re-examine whether or not he or she has a reporting obligation.
What is the FBAR?
The FBAR is the Foreign Bank Account Reporting Form (Form TD F 90-22.1 – Report on Foreign Bank and Financial Accounts) on which required filers have to report financial accounts in a foreign country which have an aggregate value exceeding $10,000 at any time during the calendar year. The instructions to the FBAR require that the exchange rate in effect at the end of the year should be used when determining the value of any foreign account.
Who has to file the FBAR?
Prior to the 2008 changes to the FBAR instructions by the IRS, only a “citizen or resident of the United States, U.S. partnership, U.S. corporation, U.S. estate or trust” who has a financial interest in or signatory authority over a financial account the value of which exceeded $10,000 at any time during the calendar year had to file the FBAR. (See below for discussion on what is meant by the terms “financial interest” and “financial account”.)
Since the 2008 changes, the FBAR technically has to be filed by any “citizen or resident of the United States, or a person in and doing business in the United States” who has a financial interest in or signatory authority over a financial account the value of which exceeded $10,000 at any time during the calendar year. As a result of numerous public comments and questions regarding how to determine whether a person is “in and doing business in the United States”, the IRS temporarily suspended the change regarding the definition of who has to file for calendar year 2008 and extended this suspension for calendar year 2009. Therefore, during the suspension, required filers are once again those identified in the preceding paragraph. It is not yet known whether the suspension will continue for calendar year 2010.
Regardless of whether the 2008 changes go into effect, some clients are concerned about the term “resident” and whether or not it applies to them. For purposes of the FBAR, the term “resident” remains somewhat un-defined. The Internal Revenue Manual states that “someone who is living in the U.S. and not planning to permanently leave the U.S.” is considered to be a resident for purposes of the FBAR. The Internal Revenue Manual also states that someone that does not (1) have a green-card, (2) meet the substantial presence test (183 days in the U.S.), and (3) has filed a first year election under [Internal Revenue Code] § 7701(b) (4) can establish that he is not a resident for FBAR purposes.
Does a green-card holder who does not currently live in the U.S. have to file an FBAR? The IRS does not provide a straight-forward answer; however, it is generally understood by practitioners that green-card holders are required to file the FBAR, like U.S. citizens, even if they are not living in the U.S.
What does it mean to have a “financial interest in or signatory authority over” an account?
A reporting person has a “financial interest in” an account if the person owns:
- As to a corporation, more than 50% of the shares either by value or vote; or
- As to a partnership, more than 50% of the profits (distributive share of income, taking into account any special allocation agreement) or more than 50% of the capital; or
- As to a trust, a present beneficial interest, either directly or indirectly, in more than 50% of the assets or if the person receives more than 50% of the current income.
Furthermore, a reporting person that has established a trust in which a trust protector has been appointed is considered to have a financial interest in any account in the name of the trust or in the name of a person acting on behalf of the trust.
The term “signatory authority” also covers more than what one might initially expect. A reporting person has signatory authority if he or she can order the distribution, disbursement or transfer of funds or assets from the account. This authority qualifies as signatory authority regardless of whether the authority is exercised by signing a document, orally or by other means of communication. Moreover, the exercise of authority need not be direct, but also qualifies as signatory authority if the reporting person can exercise the authority through an intermediary.
What is a “financial account”?
In addition to the classics (bank, securities, securities derivatives and other financial instruments accounts), the IRS considers “any account in which the assets are held in a commingled fund and the account owner holds an equity interest in the fund” to be a “financial account” that requires reporting. Mutual funds are specifically mentioned by the IRS as an example of such an account. Although the IRS has advised informally that hedge funds and private equity funds are also covered by this expanded definition, the IRS has noted that for purposes of calendar year 2009 and prior years, it will not apply the term “commingled fund” to any funds other than mutual funds. Records on financial accounts must be kept for at least a period of five (5) years, and longer in the event of fraudulent or false reporting or indictment for a criminal tax violation.
The IRS specifically excludes individual bonds, notes, stock certificates and unsecured loans to a trade or business (other than to a financial institution) as financial accounts.
You missed the deadline....what are the penalties?
Generally, the deadline for the Treasury Department to receive the FBAR is June 30. Because the FBAR is filed with the Treasury Department and not the IRS, the typical “mailbox” rule does not apply and thus simply mailing the FBAR on June 30th is not sufficient for meeting the deadline.
Generally, there are no extensions of time for filing the FBAR. However, the IRS announced that (i) persons with signature or other authority over, but no financial interest in, a foreign financial account and (ii) persons with a financial interest in, or signature or other authority over, a foreign commingled fund have until June 30, 2011, to file the Form that would have otherwise been due on June 30, 2010.
Civil penalties range, per account, from $500-$10,000 for non-willful failures to file and up to the greater of $100,000 or 50% of the amount of the closing balance in the account on June 30 for willful violations. Criminal penalties can be as imposing as $500,000 and/or ten (10) years imprisonment.
FBAR reporting violations can be pursued by the IRS for a period of six years after the violation.
No harm, no foul....right?
Over the past few years, individuals that have failed to file the FBAR in the past have quietly amended their income tax returns to report income earned on previously non-reported foreign accounts. This “quiet” disclosure was done on theory that as long as income taxes are paid on income earned in a foreign financial account, there is no harm in not separately reporting the financial account on the FBAR.
The IRS has stated that “quiet” disclosure does not cure a violation of the FBAR reporting laws and regulations and taxpayers remain at risk of being examined and potentially criminally prosecuted. In case there was any doubt, the IRS has affirmed that is identifying amended returns that reported increases in income and in each case determining whether enforcement action is appropriate.
Stay Tuned.
As previously mentioned, the IRS is expected to clarifying the meaning of a person “in and doing business in the United States” since those “in and doing business in the United States” will be required to file FBARs for calendar year 2010.
Determining whether or not you need to file a Foreign Bank Account Reporting Form is not always simple, especially these days when certain definitions are in flux. In addition to the brief information provided herein, not only are there exceptions to the rules, but there are also more complicated factors when determining whether an employee or other individual has to report a company account. This article is intended to alert you to the need to carefully consider with your tax advisor the recent changes to the filing requirements and whether or not you are now a reporting person for purposes of Form TD F 90-22.1.
This article may constitute advertising. It should not be considered as a substitute for legal advice on particular fact situations.
IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding U.S. tax penalties.
For more information contact : Sophie Migliazzo
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