On February 24, 2011, the Department of Treasury Financial Crimes Enforcement Network (FinCEN) issued a final rule that amends the regulations (the "Final Regulations") under the Bank Secrecy Act (BSA) regarding the Report of Foreign Bank and Financial Accounts. The Final Regulations, which were issued following FinCEN receipt and review of comment letters from tax professionals and industry experts, largely adopt the proposed regulations issued on February 26, 2010. The final rule (i) addresses the scope of the persons that are required to file reports of foreign financial accounts; (ii) specifies the types of accounts that are reportable; (iii) provides filing relief in the form of exemptions for certain persons with signature or other authority over foreign financial accounts; and (iv) adopts provisions intended to prevent persons subject to the rule from avoiding their reporting requirement. The Final Regulations are effective March 28, 2011 and apply to FBAR reports for 2010 that are required to be filed by June 30, 2011, as well as any FBARs for prior years, which were deferred under prior IRS guidance.

Background

The Final Regulations generally require a US person who has a financial interest in, or signature or other authority over, one or more foreign financial accounts that have an aggregate value exceeding $10,000 at any time during the calendar year to disclose that interest to the IRS. The disclosure must be made on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), and the FBAR form must be filed on or before June 30 of each calendar year for accounts maintained during the previous calendar year.1 In March 2011, the IRS published a revised FBAR form with accompanying instructions that reflect the changes made by the Final Regulations.

Key provisions of the Final Regulations include:

US Person

  • The term US person includes a US citizen, US resident or domestic entity (including, but not limited to a corporation, partnership, trust,2 or limited liability company). In the case of trusts, a US trustee must file the FBAR for the trust.
  • A legal permanent resident who elects under a tax treaty to be treated as a non-resident for tax purposes must nonetheless file the FBAR.

Financial Interest

  • The Final Regulations state that a US person has a financial interest in a bank, securities or other financial account in a foreign country if:
    1. The US person is the owner of record or has legal title to the account, regardless of whether the account is maintained for his own benefit or for the benefit of others.
    2. A person acts as an agent, nominee, attorney or in some other capacity on behalf of the US person with respect to the account.
    3. The account is held by a corporation in which the US person owns directly or indirectly more than 50 percent of the voting power or the total value of the shares.
    4. The account is held by a partnership in which the US person owns directly or indirectly more than 50 percent of the partnership's profits or capital interest.
    5. The account is held by any other entity in which the US person owns directly or indirectly more than 50 percent of the voting power, total value of the equity interest or assets, or interest in profits.
    6. A trust, in which the US person is the trust grantor and the US person has an ownership interest in the trust for US Federal tax purposes.
    7. The account is held by a trust in which a US person either has a present beneficial interest in more than 50 percent of the assets or from which such US person receives more than 50 percent of the current income.3

Signature or Other Authority

  • An individual has "signature or other authority" over a financial account if he (alone or in conjunction with another) has the authority to control the disposition of money, funds or other assets held in the account by direct communication (whether in writing or otherwise) to the person maintaining the account. The preamble to the Final Regulations states that the test for determining whether a US person has signature or other authority over an account (and thus a FBAR filing obligation) is whether the foreign financial institution will act upon a direct communication from such US person regarding the disposition of assets in that account. In addition, the preamble to the Final Regulations clarifies that officers and employees who are obligated to file FBARs because they have signature or other authority over an employer's foreign financial accounts are not required to personally maintain the records of the foreign financial accounts of their employers.
  • The officers and employees with signature or other authority over the foreign financial account of the following entities are not required to report that he has signature or other authority over that account as long as he has no financial interest in the account:
    1. Banks that are examined by the Office of the Comptroller of Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, or the National Credit Union Administration;
    2. Financial institutions registered with and examined by the US Securities and Exchange Commission (the "SEC") or the US Commodity Futures Trading Commission;
    3. Entities that are registered with and examined by the SEC that provide services to investment companies registered under the Investment Company Act of 1940;
    4. Entities with a class of equity securities (or American depository receipts) listed on any US national securities exchange, and US subsidiaries of US entities with a class of equity securities listed on a US national securities exchange if the US subsidiary is identified on a consolidated FBAR report filed by the parent.
    5. Entities with a class of equity securities (or American depository receipts in respect of equity securities) registered under section 12(g) of the Securities Exchange Act.

Reportable Foreign Financial Accounts

  • Bank Accounts. A "bank account" is a savings deposit, demand deposit, checking, or any other account maintained with a person that is in the banking business.
  • Securities Account. A "securities account" is an account maintained with a person involved in the business of buying, selling, holding, or trading stock or other securities.
  • Other Financial Account. The term "other financial account" means (i) an account with a person in the business of accepting deposits as a financial agency; (ii) an account that is an insurance or annuity policy with a cash value4; (iii) an account with a person acting as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or (iv) an account with a mutual fund or similar pooled fund which issues shares that are available to the general public in addition to having a regular net asset value determination and regular redemptions.
    • The proposed regulations specifically reserved the treatment of investments companies other than mutual funds or similar pooled funds, and the Final Regulations continue to do so. As a result, for the time being, interests in other investment entities such as foreign hedge funds and private equity funds that have periodic redemptions are not considered foreign financial accounts, and therefore FBARs do not have to be filed with respect to such interests.
    • The preamble to the Final Regulations clarifies that an account is not a foreign account under the FBAR if it is maintained with a financial institution located in the US even though the account may contain holdings or assets of foreign entities. The preamble also clarifies that, in general, the FBAR rules do not apply to omnibus accounts in which a US bank, acting as a global custodian combines the assets of multiple investors and creates pooled cash and securities accounts in non-US markets. The preamble states that as long as the US customer cannot directly access their foreign assets maintained at the foreign institution, the US customer maintains an account with a financial institution located in the US, and therefore will not have to file a FBAR with respect to assets held in the omnibus account and maintained by the global custodian.

Other Special Rules

  • 25 or more Foreign Financial Accounts. A US person that has a financial interest in, or signature or other authority over 25 or more foreign financial accounts is only required to provide the number of financial accounts and certain other basic information on the FBAR report; however, such US person will be required to provide detailed information concerning each account when requested by the IRS.
  • Consolidated Reports. US entities are permitted to file consolidated FBAR reports on behalf of itself and any entity in which it owns directly or indirectly more than a 50 percent interest.
  • Participants and Beneficiaries in Certain Retirement Plans. Participants, owners, and beneficiaries in retirement plans under IRC sections 401(a), 403(a), 403(b), 408, and 408A are not required to file a FBAR report for any foreign financial account held by or on behalf of the retirement plan.

Links to our prior Tax Client Alerts on the FBAR are provided below:

Treasury Proposes New FBAR Regulations (March 17, 2010)
Foreign Bank Account Reports (FBARs) Due June 30, 2010 (June 22, 2010)

Footnotes

1Note: Unlike most tax forms which are considered filed with the IRS on the mailing date, the FBAR must be received by the IRS on or before June 30, 2011; and unlike the Federal income tax return where an extension of time to file will be granted, taxpayers may not request an extension for filing the FBAR.

2 The preamble indicates that a trust that is created, organized, or formed under the laws of the U.S. is considered a U.S. person for purposes of FBAR reporting obligations even if it is not considered a U.S. person for federal income tax purposes.

3 Note: A beneficiary of such a trust is not required to report the trust's foreign financial accounts if the trust, trustee of the trust, or agent of the trust is a U.S. person that files an FBAR disclosing the trust's accounts and provides any additional information as required by the report.

4 The obligation to file the FBAR in the case of life insurance rests with the policyholder and not the beneficiary.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.