FBAR – A Constantly Changing Filing Obligation

With no pronouncement, on September 30, 2008, the IRS posted a revised Treasury Department Foreign Bank and Financial Accounts (FBAR) form on its website. The form – which is to be used for all filings by U.S. persons subsequent to December 31, 2008 to report the existence of a financial interest, signature authority or other authority over foreign financial accounts, if in the aggregate at any time during the preceding calendar year the balance of all such accounts equals or exceeds $10,000 – included notable definitional changes.

The IRS has since issued amendments and other declarations, and recently suspended the requirement for taxpayers to report their investments in a foreign commingled fund until 2010. The shifting FBAR filing obligations – and a September 2009 taxpayer deadline for reporting offshore noncompliance – merit a closer look.

Background

The FBAR is not a tax filing, but rather is an informational return that must be received by the IRS on June 30. There are generally no extensions for late-filed FBARs, and the penalties for failure to comply are punitive. Each of the respective terms is defined quite broadly and multiple persons can have a filing obligation to report the existence of the same accounts.

The Revised FBAR

The revised FBAR included a significant definitional change to the definition of U.S. person, which has since been tolled by the IRS. The persons required to file an FBAR previously included U.S. citizens, residents, domestic partnerships, domestic corporations, domestic trusts and domestic estates. The revised FBAR expanded the definition to include “a citizen or resident of the United States, or a person in and doing business in the United States.” The IRS introduced insufficient guidance as to who would classify as being “in and doing business in the United States.” Consequently, on June 5, 2009, the IRS issued Announcement 2009-51, which suspends the requirement for persons who are not citizens, residents or domestic entities to file an FBAR for the 2008 tax year.

Defining a Financial Account

The definition of a financial account in the prior instructions included “any bank, securities, securities derivatives or other financial instruments accounts. Such accounts generally also encompass any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund. The term also means any savings, demand, checking, deposit, time deposit or any other account maintained with a financial institution or other person engaged in the business of a financial institution.” The revised FBAR expanded the definition to make clear that it also encompasses the use of a debit or credit card.

Notwithstanding, on June 12, 2009, an IRS representative stated on a telephone conference call sponsored by the American Institute of Certified Public Accountants and the ABA Sections of International Law Committee on International Taxation and Section of Real Property Trust & Estate Law that an FBAR was required to be filed for U.S. persons with an investment in a foreign hedge fund, foreign private equity fund or a foreign partnership if those investments were operated similar to a mutual fund, whereby funds were commingled, regardless of the ownership percentage the U.S. person held in the investment (“foreign commingled funds”). This marked the first time the IRS had publicly stated that the definition for a foreign account reached such investments.

Reporting Extension Granted for Commingled Funds

On August 7, 2009, the IRS suspended the need for taxpayers to report their investment in a foreign commingled fund until June 30, 2010. The IRS intends to introduce further guidance explaining the types of foreign commingled funds that must be reported on an FBAR. This 10-month extension follows the relief provided on June 24, 2009, when the IRS stated that taxpayers who had recently learned of their need to file an FBAR with regard to their investment in a foreign commingled fund could file the form by September 23, 2009.

Termination Date Approaches for Offshore Income Reporting Initiative

The IRS Offshore Income Reporting Initiative (Initiative) through which taxpayers with offshore noncompliance – including the failure to file FBARs or report the income associated with a foreign account – can resolve their problems terminates on September 23, 2009. To avoid increased penalties, such as civil fraud and potential criminal prosecution, it is imperative to come forward prior to September 23. The Initiative is open to all taxpayers regardless of the extent of their noncompliance, even taxpayers with undisclosed UBS accounts.

Your Holland & Knight team welcomes questions regarding the extent of the FBAR filing obligations or the Initiative.