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By Edward Tanenbaum, Esq.
Alston & Bird LLP, New York, NY
Just in time for the filing season, the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury issued on February 23, 2011, a Final Rule amending the Bank Secrecy Act (BSA) and implementing regulations with respect to the Report of Foreign Bank and Financial Accounts, affectionately known as the "FBAR" (and less affectionately known as Form TD F 90-22.1).
The FBAR, you'll recall, must be filed by any U.S. person with a financial interest in, or signature or other authority over, a foreign financial account which exceeds $10,000 at any time during the taxable year.
FinCEN had earlier issued Proposed Regulations under the BSA which, for the most part, represented an expanded form of the then-current instructions to the FBAR. At the same time, the IRS issued Notice 2010-23 and Announcement 2010-16 relating to certain aspects of the FBAR filing requirements. The Proposed Regulations, and the related Notice and Announcement, were helpful interpretations of the FBAR filing requirements but did not provide needed (and desired) clarification in a number of areas. The Final Rule is generally quite helpful but it also provides for some disappointments.
The Final Rule deals with five major areas: (1) the types of persons required to file the FBAR; (2) the meaning of the term "financial account;" (3) the meaning of the term "financial interest;" (4) the definition of "signature or other authority;" and (5) miscellaneous reporting requirements.
In addition, the revised FBAR (March 2011) with new instructions was released to coincide with the issuance of the Final Rule and is the form that is to be used for filings due June 30, 2011.
Types of Persons Required to File
With respect to the types of persons required to file the FBAR, the Final Rule confirms that only U.S. persons are required to file. The Final Rule indicates that foreign persons "in and doing business" in the United States are not required to file the FBAR, something that should come as welcomed relief to foreign persons.
The U.S. persons required to file include U.S. citizens, U.S. residents (as defined under the Internal Revenue Code, i.e., lawful permanent residents (even those who have filed as nonresidents under a tie-breaker provision) and those meeting the "substantial presence" test), and entities (trusts and business entities, regardless of whether a business entity has elected to be a disregarded entity) formed under the laws of the United States, the District of Columbia, Territories and Insular Possessions of the United States, or the Indian Tribes.
The Final Rule rejected suggestions to remove trusts from the definition of "U.S. person" and it retained the definition of a trust as an entity formed under the laws of the United States, rather than relying on the definition in §7701(a)(30), for fear that it would be too easy to avoid reporting by either providing control to foreign trustees or by providing for foreign court supervision.
The Meaning of the Term "Foreign Financial Account"
The Final Rule retains, as reportable accounts: (1) foreign-issued insurance or annuity policies with a cash value; and (2) foreign mutual funds and similar pooled funds with shares offered to the general public with a regular net asset value determination and regular redemptions. The Final Rule continues to reserve on the issue of whether interests in offshore private investment vehicles, such as hedge funds and private equity funds, constitute reportable financial accounts, which means that, for the time being, such interests need not be reported.
The Final Rule also confirms that an account physically located with a foreign branch of a U.S. bank is a foreign financial account whereas an account physically located with a U.S. branch of a foreign bank is not a foreign financial account.
FinCEN clarified that a U.S. account containing holdings or assets of foreign entities does not render the account "foreign" for purposes of the FBAR; the reporting obligation only arises when the account is held with a foreign financial institution. Further, if a U.S. bank acting as a global custodian creates an account, commonly called an "omnibus account," to hold one or more U.S. persons' assets outside the United States, the U.S. person(s) does not have to file an FBAR if such person: (1) does not have any legal rights in the omnibus account; and (2) can only access his/her/its holdings outside the United States through the U.S. global custodian bank. If, however, the specific custodial arrangement permits the U.S. person to access its foreign holdings maintained at a foreign institution directly, the U.S. person would have a foreign financial account subject to FBAR reporting.
Additionally, FinCEN rejected suggestions to exempt from the reporting requirement: (1) accounts located in jurisdictions that are not considered to be "tax havens" or that have highly functional bank regulation and information exchange agreements with the United States; (2) individuals living abroad; (3) regulated financial institutions, such as those that qualify for exempt recipient status for purposes of filing an IRS 1099 series form; or (4) certain pension plans and welfare benefit plans, or at least large ERISA plans. The explanation was that the FBAR creates a financial trail that assists law enforcement and other agencies to identify accounts outside of the United States and an exemption is not appropriate if the U.S. person chooses to place assets in accounts outside the United States or chooses to live abroad. Further, the purpose of the FBAR is broader than tax administration, so FinCEN did not believe it would be appropriate to exempt entities based on tax-exempt, or tax-preferred, status.
The Meaning of the Term "Financial Interest"
A financial interest in a bank, securities, or other financial account includes an interest owned by a U.S. person who: (1) is the owner of record or holder of legal title; (2) names an agent, nominee, or attorney to act on his/her/its behalf; (3) beneficially owns more than 50% of the vote or value of a corporation or a partnership; (4) is the trust grantor and has an ownership interest in the trust for U.S. federal tax purposes; or (5) has a present beneficial interest in more than 50% of trust assets or receives more than 50% of the trust's current income. (As such, reporting is not required by beneficiaries of a discretionary trust, and remainder interests are not subject to reporting.) Moreover, if the trustee is a U.S. person who files an FBAR, the beneficiaries will not be required to do so. The revised FBAR form also refers to any other entity in which the U.S. person owns, directly or indirectly, more than 50% voting power or equity/profits interest. This would, presumably, include foreign estates as well.
The Final Rule also adopts an anti-avoidance rule where it treats a U.S. person that causes any entity to be created for a purpose of evading FBAR reporting as having a financial interest in any bank, securities, or other financial account in a foreign country for which the entity is the owner of record or holder of legal title.
Signature or Other Authority
Signature or other authority means the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds, or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained. The test for determining whether an individual has signature or other authority over an account is whether the foreign financial institution will act upon direct communication from that individual regarding the disposition of assets in that account. Such authority does not exist if an individual merely participates in a decision to allocate assets or has the ability to instruct or supervise others with signature or other authority over a reportable account.
FinCEN received several general and specific comments and suggestions regarding signature or other authority. Generally speaking, some comments requested the elimination altogether of the requirement, especially with respect to the reporting of signature or other authority by employees with respect to employer foreign financial accounts that are reported by the employer. The concern was perceived duplication of reporting, as well as a perceived lack of utility to law enforcement, when both individuals with signature authority and those with a financial interest file FBARs with respect to the same account. In rejecting the idea, FinCEN stated that a change could lead to an increased opportunity to evade reporting because the signature authority requirement also acts as an independent check on FBAR reporting.
Miscellaneous Reporting Requirements
With respect to a U.S. person having a financial interest in, or signature or other authority over, 25 or more foreign financial accounts, the U.S. person is only required to provide on the FBAR the number of financial accounts and certain other basic information, including the financial interest holder if not the person reporting, but will be required to provide detailed information concerning each account when so requested by the IRS. The Final Rule drastically reduces the burden of such U.S. persons with only signature authority because, under prior rules, the entire form was required to be completed rather than merely providing the number of accounts and basic information.
An entity that is a U.S. person and that owns directly or indirectly more than a 50% interest in one or more other entities required to file an FBAR is permitted to file a consolidated report on behalf of itself and such other entities (and the subsidiary need not file). However, consolidated filing with U.S. subsidiaries is expressly unavailable to foreign parent corporations.
Owners and beneficiaries of an IRA are not required to file FBARs with respect to foreign financial accounts held by the IRA. The same holds true for participants in tax–qualified retirement plans.
Exceptions exist for employees and officers of certain regulated entities who have only signature authority and no financial interest in a foreign account of an employer.
Officers and employees of certain U.S. listed corporations need not report if they only have signature authority, and officers and employees of certain U.S. subsidiaries need not report if they only have signature authority and if the U.S. parent is listed and has filed a consolidated report that includes the subsidiary.
However, FinCEN rejected providing exceptions from reporting to officers and employees (with only signature authority) of: (1) foreign subsidiaries of U.S. corporations; (2) U.S. subsidiaries of foreign corporations; (3) U.S. parents with respect to foreign accounts of the U.S. subsidiaries of the U.S. parent; and (4) U.S. subsidiaries with respect to foreign accounts of the U.S. parent.
This seems draconian and unnecessary since in many of the above cases multiple filings with respect to the same foreign accounts will ensue.
All in all, however, the Final Rule provides much guidance with respect to FBAR filings which, heretofore, was missing. Nonetheless, there's room for improvement, especially in areas that currently exact needless multiple filings with respect to the same account.
This commentary also will appear in the June 2011, issue of the Tax Management International Journal.
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