Looking for FBARs in All the Wrong Places? Limited Relief in New Interim Guidance

On February 26, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) released proposed regulations intended to clarify the filing requirements for FBARs (a/k/a Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1). On the same day, the IRS issued some consistent interim relief, along with a postponement of certain FBAR filing deadlines. Because of the spillover effect of the FBAR rules on upcoming 2009 income tax returns – in particular, the "Do-you-have-a-foreign-financial-account" box on Schedule B of Form 1040 for individuals, due April 15 – understanding the impact of the interim guidance has immediate significance.

This Tax Alert highlights certain implications of the recent guidance for two ostensibly mundane categories of potential FBAR filers: corporate officers and employees, and retirement plan trustees and administrators. While enforcement actions targeted toward wealthy individuals with unreported foreign bank accounts and money-laundering cases have been highly publicized, FBAR compliance in routine corporate situations has received little attention.

Earlier revisions to the FBAR instructions in October 2008 significantly expanded the scope of the FBAR filing requirements, generating considerable confusion and concern. Failure to file a required FBAR (generally due each June 30, unextendibly) can result in severe penalties.

Key terminology: In general, an FBAR must be filed by a United States person having a financial interest in or signature or other authority over a bank, securities or other financial account of over $10,000 in a foreign country¹.

This Tax Alert is merely intended to note general areas of potential interest or concern and is not comprehensive. We stress that the proposed FinCEN regulations are not yet in effect and thus only the IRS interim guidance can be relied upon unless and until the regulations are finalized or reflected in updated FBAR instructions. The FBAR rules are complex and continue to have significant areas of ambiguity. We also note that pending legislative proposals, likely to be enacted, would layer on a broader new set of reporting rules and penalties for individuals and others, including investors in offshore investment funds.

Corporate officers and employees

It is understandable that corporations and other business entities with foreign financial accounts are covered by the FBAR filing requirements. Less obvious is the current rule that a corporation or other U.S. person is deemed to have a financial interest in any foreign financial account of a more-than-50%-owned subsidiary, leading to the requirement to report the foreign accounts of all foreign subsidiaries. Even more consternation can arise from the need for officers and employees to file by virtue of having signature authority over the company's (or subsidiaries') foreign accounts, even if they individually have no financial interest. The existing (October 2008) FBAR instructions confirm these requirements, but permit consolidated returns for corporate groups and provide some exceptions excusing officers and employees of certain regulated or publicly-traded companies that have reported the accounts on their own FBARs.

The new IRS interim guidance:

• Postpones FBAR filing obligations for "signature-only" filers: The filing deadline is extended until June 30, 2011 for FBARs for 2009 and prior years that would have otherwise been due on June 30, 2010. This postponement applies across the board, without exception.
  
  
• Excludes foreign hedge funds and private equity funds: Such funds will not be considered "commingled funds" within the definition of financial accounts for 2009 and prior years. Foreign mutual funds, however, continue to be covered, and the FBAR filing deadline for persons with financial interests in such funds (as distinct from signature-only cases) has not been extended. There could also be some definitional issues with respect to these various fund categories.
  
  
• Dovetails the income tax return box-checking requirements for persons eligible for the above relief: Thus, if an individual taxpayer excused under the foregoing relief has no other reportable foreign financial accounts, he should check "no" in response to FBAR-related questions on Form 1040 for 2009 and earlier returns.
  
  
• Effectively eliminates 2009 and prior year FBAR filing requirements for persons who are not U.S. citizens, U.S. residents, or domestic entities, even if they are in and doing business in the United States (such as U.S. branches of foreign corporations). However, as noted above, the U.S. parent of a foreign entity may be required to file.

The proposed FinCEN regulations would expand the existing exceptions that provide relief from duplicative FBAR filings by corporate officers and employees. The following additional categories of officers and employees with signature-only authority would be permanently exempted:

• Officers and employees of certain federally regulated firms – banks (not new), financial institutions registered with and examined by the SEC or CFTC, and registered investment advisors of mutual funds.
  
  
• Officers and employees of foreign companies, as well as U.S. companies (not new), whose shares are listed on U.S. exchanges or registered under section 12(g) of the Securities Exchange Act.
  
  • However, the "publicly-traded" exception may not cover all officers or employees of a corporate group: While officers and employees of U.S. subsidiaries of U.S. publicly-traded companies are exempt from FBAR filing as long as the U.S. parent includes the subsidiary on its consolidated FBAR, the proposed regulations appear to remove the current exemption for officers and employees of foreign subsidiaries. Unless this change was unintentional and is remedied in the final regulations, foreign subsidiaries' officers and employees – if they are "U.S. persons" – would need to file FBARs reporting corporate accounts over which they have signature authority. 
    
    
  •  In addition, officers and employees of U.S. subsidiaries of foreign companies appear not to be exempt, whether or not stock of the foreign parent is publicly traded in the United States, since only U.S. parent companies may file a consolidated FBAR (recall that foreign companies are not subject to the FBAR rules).

Also, see the discussion below regarding the favorably revised definition of "signature or other authority."

Retirement plan trustees and administrators

Retirement plan trustees and administrators are another surprising category of persons potentially caught up in the FBAR filing requirements.² Individuals in those roles must consider how to respond to the FBAR questions on their individual income tax returns, even if an institution or other entity is also filing an FBAR with respect to the plan.

The basic rule is that a person is considered to have signature or other authority if he has the authority – whether 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 directly to the person with whom the account is maintained. The proposed FinCEN regulations would eliminate a further provision in the current FBAR instructions that considers "other authority" to exist if a person can exercise comparable power by direct or indirect communication. This revised definition should be helpful to investment committees who decide on investments or investment policy but do not have authority to actually move funds in and out of the account.

The other key provision (unchanged by the proposed regulations) is that a person is considered to have a financial interest in an account if he is the owner of record or holder of legal title, regardless of whether the account is maintained for that person's benefit or for the benefit of another person.

Retirement plan trustees or other fiduciary or administrative personnel may thus have signature authority over, as well as possibly a financial interest in, a foreign financial account of the plan, depending on the facts and circumstances.

Under the IRS interim guidance:

• If a trustee or administrator has just signature-only authority, his filing obligations are deferred until June 30, 2011 and he can check "no" in the income tax return (e.g., Form 1040) box.
  
  
• However, if he is considered also to have a financial interest, the extended deadline does not apply and he must both meet the June 30, 2010 filing deadline for accounts held in 2009 and earlier years and check "yes" in the income tax return box.
  
  
• Notwithstanding the foregoing, the current exclusion of foreign hedge funds and private equity funds will eliminate the filing requirement for trustees or administrators even if they would be considered to have a financial interest in such assets, if those are the plan's only foreign financial accounts.

Some questions that may arise include:

• If a plan has individual trustees and an account is in the name of the trust, or in the name of the "trustees" of the trust, are the actual individual trustees considered owners of record or holders of legal title?
  
  
• Do trustees of plans with "participant-directed" accounts (e.g., under 401(k) plans), or those who are considered "directed trustees" with no discretionary authority over the underlying investments, "control" the disposition of assets in the account? One would think not, but this is not entirely clear. In any case, the plan (or trust) itself would be required to file as the owner of record.

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Due to the intricacy and evolving nature of the FBAR filing rules (as well as various pertinent legislative proposals), we encourage you to "inventory" potentially covered accounts and filers and to monitor developments closely. Comments on the proposed FinCEN regulations are due April 27, 2010, and there could well be additional IRS guidance or clarification later this year. Of most importance would be any revision to the FBAR form itself, since that would indicate which new aspects of the proposed FinCEN regulations – if any – the IRS considers already applicable. Ambiguities may in certain cases make "protective" filings advisable. Please let us know if we can be of further assistance in your FBAR compliance efforts.

For more information please contact the following attorneys:

Scott D. Michel at 202-862-5030 or sdm@capdale.com
Patricia Gimbel Lewis at 202-862-5017 or pgl@capdale.com
Richard W. Skillman at 202-862-5034 or rws@capdale.com
James E. Salles at 202-862-5012 or jes@capdale.com

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This alert is intended as a summary of legal issues for your general information. It does not provide legal advice, nor does it create an attorney-client relationship with you or any other reader. If you require legal guidance in any specific situation, you should engage a qualified lawyer for that purpose. Prior results do not guarantee a similar outcome.



FOOTNOTES:

1. One new provision of the proposed FinCEN regulations would treat insurance policies with cash values and annuity contracts as financial accounts.

2. Participants in a qualified plan or IRA would be expressly exempted from the FBAR filing requirements under the proposed FinCEN regulations, if they are not otherwise required to file an FBAR. The current rules are not as explicit.