Originally published May 27, 2010
Keywords: Financial Crimes Enforcement Network, FinCen, FBAR, employee benefit plan, financial accounts, Notice 2010-23, Announcement 2010-16, United States person, Bank Secrecy Act
The US Internal Revenue Service and the Financial Crimes Enforcement Network ("FinCen") of the Department of Treasury issued guidance in February 2010 with respect to the "Report of Foreign Bank and Financial Accounts." The guidance was provided in the form of proposed regulations under the Bank Secrecy Act (the "BSA"), IRS Notice 2010-23 and IRS Announcement 2010-16. These materials provide important relief and guidance with respect to FBAR filings. This Update briefly describes the guidance contained in those materials and reviews issues associated with their application to employee benefit plan-related FBAR filings.
The BSA requires any resident or citizen of the United States, or a person in, and doing business in, the United States, to "keep records and file reports, when the resident, citizen or person makes a transaction or maintains a relation for any person with a foreign financial agency." Existing guidance implementing the BSA requires a United States person with a "financial interest in," or "signature or other authority over," any bank, securities, or other financial account in a foreign country to report such relationship to the IRS for each year in which such relationship exists if the aggregate value of the account(s) exceeds $10,000 in such year. The filing deadline for each calendar year is June 30 of the following calendar year. The form used to file the account is the "Report of Foreign Bank and Financial Account." (Form TD F 90-22.1 or "FBAR"). In addition, Schedule B to IRS Form 1040 requires that the taxpayer disclose whether he or she has an interest in a financial account in a foreign country.
In October 2008, a revised FBAR form and instructions were issued. The new instructions to the form modified the definition of "financial accounts" that trigger FBAR filings to specifically reference mutual funds, and broadened the definition of "United States person" and the circumstances in which a person will be deemed to have a financial interest in a foreign account. These changes, as well as certain remarks by IRS representatives in June of 2009 regarding the application of the requirements to offshore hedge funds and private equity funds (which had not previously been understood to be subject to FBAR), generated awareness of the applicability of the FBAR filing requirements to various categories of fiduciaries of employee benefit plans that hold investments in such offshore funds. Under the definitions of "financial interest" and "signature or other authority" contained in the revised FBAR instructions, it appeared that, in the case of a pension plan invested in an offshore fund, any one or more of the following persons could be subject to the FBAR filing requirements: the plan trustee, sponsor, investment committee members and other officers and employees with responsibilities with respect to the plan, investment managers, and participants. In light of the need for additional guidance relating to the application of the FBAR filing requirements to such persons, as well as strong concerns expressed with respect to the application of the FBAR filing requirements to investors in hedge funds and private equity funds, the IRS extended the deadline for FBAR filings for 2008 until September 23, 2009, for filers who satisfied certain conditions, including a requirement that they had only recently learned of their obligation to make an FBAR filing.
Thereafter, the IRS issued Notice 2009-62, which further delayed the deadline for FBAR filings for 2008 and earlier years until June 30, 2010 for (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.
In response to the need for additional guidance, FinCen published proposed regulations under the BSA that would expand and modify existing guidance, and the IRS issued Notice 2010-23 and Announcement 2010-16, which provide certain short-term relief from the FBAR filing requirements under certain circumstances.
Notice 2010-23 and Announcement 2010-16
Extended deadline for persons with only signatory authority. Under Notice 2010-23, persons with signature or other authority over, but no financial interest in, foreign financial accounts for which FBAR filings for 2009 and earlier years would otherwise have been due on June 30, 2010, will now have until June 30, 2011, to make such filings. As a corollary, under Notice 2010-23, persons who qualify for the relief described in the preceding sentence and who have no other foreign financial accounts that are not eligible for relief in the year in question were not required to report their relationship to such foreign accounts in Schedule B to the 2009 1040; instead Notice 2010-23 provides that such taxpayers should check the "no" box in response to FBAR-related questions on the federal tax forms for 2009 and earlier years.
Nonenforcement for foreign commingled funds other than mutual funds. FBAR filings must be made with respect to a foreign mutual fund, but the IRS has determined that it will not enforce the FBAR filing requirements for 2009 and prior years with respect to persons with a financial interest in, or signature or other authority over, any other foreign commingled fund (i.e., any fund other than a mutual fund). Foreign hedge funds and foreign private equity funds are included in this relief.
Modified definition of United States person. As noted above, the 2008 instructions to the FBAR broadened the definition of "United States person." Previously the instructions had defined United States person to include United States citizens and residents, and domestic corporations, partnerships and trusts and estates. In the revised 2008 instructions, the new definition of "United States person," among other changes, added "persons in and doing business in" the United States, which would have included a branch of a foreign entity doing business in the United States even if not separately incorporated in the United States. The IRS issued Notice 2009-51, which permitted potential filers to use the definition of "United States person" contained in the July 2000 version of the FBAR instructions to determine if they had a filing obligation. As a result, the requirement to make an FBAR filing on June 30, 2009, was suspended for persons who were not United States citizens, residents or domestic entities. New Announcement 2010-16 suspends the requirement to make an FBAR filing on June 30, 2010, for persons who are not United States citizens, residents or domestic entities, and provides that for 2009 and earlier years taxpayers may rely on the definition of United States person contained in the July 2000 version of the FBAR instructions.
Revised definitions. As noted above, the BSA requires United States persons to report their financial interests in, or signature or other authority over, bank, securities and other financial accounts in a foreign country. Changes to the 2008 instructions and IRS remarks that suggest that mutual funds and possibly hedge funds and private equity funds are subject to FBAR have raised a substantial amount of controversy. The proposed regulations include definitions of the bank securities, and other financial accounts that must be reported, while reserving guidance on certain points. The proposed regulations would include in the definition of an "other financial account" an account with a person that is in the business of accepting deposits as a financial agency, an account that is an insurance policy with a cash value or an annuity policy, an account with a person that acts 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 an account with a mutual fund or similar pooled fund that issues shares available to the general public that have a regular net asset value determination and regular redemption. Significantly, however, the proposed regulations reserve for further guidance the issue of whether private equity funds, venture capital funds and hedge funds require FBAR filings. The proposed regulations also include certain other definitions, including among others "signature or other authority over," which we discuss below in the section on the application of the rules to qualified plans.
In addition, the proposed regulations include the following important exemptions from the FBAR filing requirements.
Exemption for plan participants and beneficiaries. Under the proposed regulations, participants and beneficiaries in plans (which would include 401(k) plans) described in Internal Revenue Code Sections 401(a), 403(a) and 403(b), and owners and beneficiaries of IRAs described in Sections 408 and 408A, would not be required to make an FBAR filing with respect to a foreign financial account held by or on behalf of the retirement plan or IRA. The regulations expressly provide, however, that this exception does not exempt the plan or IRA itself from FBAR filings.
Exemption for government plans. The new instructions to the FBAR issued with the proposed regulations expressly provide that no FBAR filing by any person is required with respect to a foreign financial account of any government entity, including a retirement or welfare plan of a government entity.
Effective dates. The proposed regulations do not include an effective date, nor do they provide for reliance prior to the date that they become effective. Announcement 2010-16 provides that the 2008 version of the FBAR and the instructions thereto are to remain in effect, subject to those modifications created by Notice 2010-23 and Announcement 2010-16 described above, until modified by subsequent guidance.
Application to Qualified Retirement Plans
Notwithstanding the relief provided by the new guidance, the determination of which persons associated with a qualified plan, if any, must make an FBAR filing requires a complex analysis, with differing results depending on the specific facts of each arrangement. The following is not intended to be an exhaustive discussion of the analysis that needs to be undertaken, but instead to provide some parameters for analysis primarily for 2010, with some thoughts on future years.
Identify foreign accounts. The first step would be to determine whether the plan holds any accounts that could be considered bank, securities or other financial accounts in a foreign country. For 2010, if the plan has no foreign financial accounts except for commingled funds, and if none of the foreign commingled funds is a foreign mutual fund (e.g., the plan's foreign accounts consist only of private equity or hedge funds), then under Notice 2010-23 the IRS will not enforce the FBAR filing requirements for the filings that would otherwise be due June 30, 2010 (for the 2009 year). Note, however, that the determination of whether a plan holds foreign financial accounts and the identification of those accounts may be complicated, even in 2010, by the fact that there are many types of foreign accounts other than commingled accounts in which a plan may hold an interest, and the fact that under a number of circumstances described in the regulations, foreign accounts in which a person has an indirect interest must be reported.
Identify persons with financial interests in foreign accounts. If the plan has investments with respect to which the IRS will enforce the FBAR filing requirements (FBAR accounts), such as a foreign mutual fund, or a separately managed account, the next step would be to determine which persons have a financial interest in the accounts. The definition of "financial interest" contained in the 2008 instructions (and generally the proposed regulations) provides, in part, that a person has a financial interest in each account for which the person is the owner of record or has legal title, whether the account is maintained for his or her own benefit or for the benefit of others (or if the owner of the account acts as an agent, nominee or attorney, or in some other capacity on behalf of the US person). Given that, under the common law of trusts, a trustee holds legal title to the trust assets, the trustee of a qualified plan would generally be deemed to have a financial interest in any foreign accounts held by the plan (including those in which the plan has a type of indirect interest described in the regulations) and will be required to make an FBAR filing. (Further there is some concern that in some cases separate filings by the trust and the trustee may be required.)
Note that under an alternative prong of the definition of "financial interest," it appears that even a plan sponsor may be deemed to have a financial interest in any foreign accounts held by a trusteed retirement plan, and thus may also be required to make an FBAR filing. Under the instructions to the 2008 form (as well as the proposed regulations), a United States person has an interest in a foreign account for which the holder of legal title or owner of record is a trust established by such United States person and for which a "trust protector" has been appointed. A "trust protector" is defined under the 2008 instructions as "a person who is responsible for monitoring the activities of a trustee, with the authority to influence the decisions of the trustee or to replace or recommend the replacement of the trustee." The functions of a trust protector, as defined in the instructions sound remarkably similar to those of a named fiduciary with the authority to appoint and remove the trustee. Hence, in those instances in which a plan sponsor has appointed a named fiduciary with such powers with respect to the trustee, the instructions would seem to treat the plan sponsor as having a financial interest in the plan.
Identify persons with signature or other authority over any foreign accounts, and with respect to the filing due June 30, 2010, verify that they have no financial interest in such accounts. As noted above, notwithstanding the general requirement of the statute and the 2008 instructions that a person with signature authority over a foreign account must make an FBAR filing, Notice 2010-23 provides that a person who has signature or other authority over, but no financial interest in, a foreign account will not be required to make an FBAR filing for 2009 and earlier years, until June 30, 2011. Thus, for 2010, it is only necessary to confirm that persons who could be considered to have signature or other authority over accounts held by a plan have no financial interest in the account. (It has been suggested that if a plan fiduciary has signature authority over an account and is a plan participant, there is an issue as to whether the individual's interest in the plan is a financial interest in foreign accounts held by the plan that would render the individual ineligible for the extended deadline. In at least one informal conversation, IRS representatives were unwilling to state that an individual's interest as a participant would not disqualify him from the extended deadline, and advised that there would need to be an analysis of the nature of the individual's interest in the plan to determine whether it met the definition of a "financial interest" in foreign accounts held by the plan under the relevant guidance. We believe that the complete exemption for participants and beneficiaries under the proposed regulation (while not controlling on this particular issue) would seem to signal FinCen's acknowledgement that, as a matter of policy, such persons do not possess the sort of interest in plan investments that should trigger FBAR filings, and that most fiduciaries will disregard their status as plan participants in assessing whether they qualify for the extended FBAR filing deadline for those with only signature authority.)
Assuming that the IRS does not issue additional relief, it will be necessary in 2011 for each person with signature or other authority over any foreign account held by a plan to make an FBAR filing. The 2008 instructions provide that a person has signature or other authority over an account "if such person can control the disposition of money or other property in it by delivery of a document containing his or her signature (or his or her signature and that of one or more other persons) to the bank or other person with whom the account is maintained. Other authority exists in a person who can exercise comparable power over an account by communication with the bank or other person with whom the account is maintained either directly or through an agent, nominee, attorney, or in some other capacity on behalf of the US person either orally or by some other means." Fortunately, the proposed regulations would narrow the definition so as to limit the persons treated as possessing "signature or other authority" to those persons with the authority(alone or in conjunction with others) to control the disposition of assets held in an account by the "delivery of instructions" (written or otherwise) directly to the person with whom the account is maintained. Even under the revised definition in the proposed regulations, however, multiple interpretive issues remain and the application of the concept of signature or other authority to the facts of any specific case (e.g., employees of a plan sponsor or named fiduciary, investment and administrative committee members, investment managers and their employees) may require close analysis.
The existing guidance together with the proposed regulations is complex, subject to a number of ambiguities, and includes numerous issues not discussed in this memorandum. Finally, the HIRE Act, which was recently signed into law by President Obama, substantially incorporates the Foreign Account Tax Compliance Act of 2009 ("FATCA") as introduced in 2009, discussed generally in our April 20, 2010, Legal Update, "Foreign Account Tax Compliance Act of 2009." Among the provisions of FATCA is a requirement that individuals with interests in specified foreign financial assets attach a disclosure statement to their return for any year in which the aggregate value of all such assets is greater than $50,000. A discussion of this requirement is beyond the scope of this memorandum, but we note that the Joint Tax Committee explanation accompanying the new provision expressly provides that it is not a substitute for the FBAR reporting provisions, which are unchanged by the new provision.
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