FBARs and Offshore Hedge Funds
The California Tax Lawyer (Summer 2009 Edition) published my article: FBARs and Offshore Hedge Funds. Please see copy below.
FBARs and Offshore Hedge Funds
After the landmark agreement between the U.S. and Swiss government over secret UBS Swiss bank accounts held by U.S. citizens, the IRS is now focusing on hedge funds in the Cayman Islands. Recently, IRS officials advised that certain U.S. investors in off-shore hedge funds must file a FBAR.
On June 12, 2009, an IRS official stated that the term “financial interest” (which requires a FBAR filing) includes hedge funds that “function as mutual funds.” It appears the IRS and Justice Department will identify U.S. taxpayers who evade U.S. taxes by investing with off-shore hedge funds. The IRS and Justice Department are pressing foreign financial institutions to provide them with information about Americans with “foreign, secret bank accounts.”
Senate Finance Committee Chairman Max Baucus (D., Mont.) has introduced legislation that would require an FBAR to be filed with a tax return. It would also require U.S. financial institutions to report to the IRS transfers of money into any foreign financial account. This would make it possible for the IRS to have information about the creation of a foreign account at the beginning.
Penalty Regime for Foreign Bank Account Filing (FBAR)
The California Tax Lawyer (Summer 2009 Edition) published my article: Penalty Regime for Foreign Bank Account Filing (FBAR), please see copy below.
Penalty Regime for Foreign Bank Account Filing (FBAR)
Each U.S. person who has a financial interest in, or signature or other authority over, one or more foreign financial accounts (valued over $10,000, at any time during a calendar year) is required to report the account on Schedule B/Form 1040, and TD F 90-22.1 (Report of Foreign Bank and Financial Accounts (FBAR)), due by June 30 of the succeeding year (I.R.M. 5.21.6.1. (2/17/09)). The IRS has six years to assess a civil penalty against a taxpayer who violates the FBAR reporting rules.
Failure to file the required report or maintain adequate records (for 5 years) is a violation of Title 31, with civil and criminal penalties (or both). For each violation a separate penalty may be asserted.
(I) Non Willful Violation: Civil Penalty - Up to $10,000 for each violation.
(II) Negligent Violation: Civil Penalty - Up to the greater of $100,000, or 35 percent of the greatest amount in the account.
(III) Intentional Violations -
(1) Willful Failure to File FBAR or retain records of account: (a) Civil Penalty - Up to the greater of $100,000, or 50 percent of the greatest amount in the account; (b) Criminal Penalty - Up to $250,000 or 5 years or both.
(2) Knowingly and Willfully Filing False FBAR: (a) Civil Penalty - Up to the greater of $100,000, or 50 percent of the greatest amount in the account; (b) Criminal Penalty - $10,000 or 5 years or both.
(3) Willful Failure to File FBAR or retain records of account while violating certain other laws: (a) Civil Penalty - Up to the greater of $100,000, or 50 percent of the greatest amount in the account; (b) Criminal Penalty - Up to $500,000 or 10 years or both.
FBAR: Filing Requirements for Gold or other Non-Cash Assets
Under IRS (6/29/09) FAQs regarding Report of Foreign Bank and Financial Accounts (FBAR), the IRS confirmed:
1. An FBAR must be filed whether or not the foreign account generates any income;
2. An FBAR is required for account maintained with financial institutions located in a foreign country if the account holds gold (or other non-cash assets).
FBAR Filing: Domestic Corporations with Foreign Accounts
In the IRS Workbook on the Report of Foreign Bank and Financial Accounts, the IRS advised that a domestic (e.g., NY) corporation that has foreign accounts:
1. The corporation must file a FBAR for the corporations’ accounts.
2. A majority shareholder (over 50% of the value of the stock), must also file a FBAR.
For a domestic corporation with foreign accounts, both the corporation and the majority shareholder must each file a FBAR to report the foreign account (owned by the domestic corporation).
FBAR Filing: Tax Practitioners and Professional Responsibility
U.S. Taxpayers, who fail to file FBAR’s to disclose foreign bank accounts, may seek a reasonable cause exception based on their “tax preparer’s” failure to file the FBAR.
Tax Practitioners (Attorneys, CPA’s) must comply with the FBAR rules as part of their due diligence (as to accuracy) obligation under IRS Circular 230 (Section 10.22).
The FBAR (TD F 90-22.1) is not a tax return. The FBAR is an information report required under the Bank Secrecy Act (BSA) 31 USC 5314 (and related regulations CFR 103.24, 103.27). Related records are required under 31 CFR 103.24 and 103.32.
The Practitioners’ professional responsibility does not require that the Practitioner “audit” their client.
The Practitioner must:
1. Make reasonable inquiries in response to Taxpayer’s information of overseas accounts/transactions.
2. A Practitioner may rely on information provided by a client in good faith.
3. The Practitioner must make reasonable inquiries if information appears incorrect, inconsistent or incomplete.
FBAR Filings: Financial Accounts (U.S. Hedge Funds)
In the IRS 6/29/09 FAQ’s regarding FBAR filings, the IRS advised:
1. If a hedge fund is located in the U.S., with foreign operations, a financial interest in the U.S. hedge fund is not an interest in a foreign financial account for FBAR reporting purposes.
2. If a domestic partnership has a financial interest in a foreign financial account, then it may have to file a FBAR.
3. If a U.S. Person who is an officer, employee or partner of the partnership has a financial interest in, or signature or other authority over a foreign financial account then that person may have to file a FBAR.
4. If a person owns an interest in more than 50% of the profits of the partnership or more than 50% of the capital of the partnership, then that person has a financial interest (for FBAR reporting purposes) in the foreign financial accounts of the partnership and may have to file a FBAR.
FBAR Tax Compliance Issues (U.S. Taxpayer)
FBAR rules are not found in the Code. Rather, they are set forth in the Bank Secrecy Act, first enacted by Congress in 1970. Since 2003, however, the IRS bears responsibility for enforcing these rules.
The FBAR rules require that every U.S. Person report (i) any financial interest or authority over a (ii) financial account in a foreign country with (iii) an aggregate value over $ 10,000 at any time during the taxable year. The report must be filed on a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (hence the acronym “FBAR”). U.S. Persons must also disclose the existence of the account on their Form 1040, Schedule B, Part III. This is commonly referred to as “checking the ‘B’ box.”
Taxpayers who fail to disclose the account on their Form 1040 could be subject to criminal sanctions for filing a false tax return.
The FBAR report is due on June 30th. This due date is not subject to extensions. The FBAR report must be filed separately from the U.S. Person’s tax return.
Financial Interest Or Authority
A U.S. Person has a financial interest in a foreign account if he or she is the legal or beneficial owner. Attribution rules apply in making this determination. A person serving as a shareholder, partner, and trustee may also be deemed to hold a financial interest if the owner of the account is (i) a person acting as an agent on behalf of the U.S. Person, (ii) a corporation where the U.S. Person owns, directly or indirectly, more than 50 percent of the outstanding stock, (iii) a partnership in which the U.S. Person owns more than 50 percent of the profits, or (iv) a trust in which a U.S. Person has either a present interest in more than 50 percent of the assets or from which the U.S. Person receives more than 50 percent of the income. If these thresholds arc met, the U.S. Person has an FBAR reporting obligation, regardless of whether he or she has any authority over the account.
Non-owners with authority over a foreign account are also subject to the FBAR reporting rules. Authority means the U.S. Person has the ability to order a distribution or disbursement of funds or other property held in the account. This is not limited to signature authority, but includes the ability to order distributions by verbal commands or other communication. Authority does not include persons who have the right to invest, but not distribute, the foreign account funds.
There is no limitation for taxpayers who have authority over a foreign account, but only in an official capacity. (For example, the president of a corporation, the general partner of a partnership, or the manager of an LLC may be subject to these rules.)
Both the entity, as beneficial owner, and the representative, who has control over the account, may be required to file an FBAR report. Similarly, when more than one U.S. Person has authority over an account, i.e., president and vice president, both persons may have an FBAR reporting obligation.
Even when the account is subject to joint control, and the signature of someone other than the taxpayer is required to cause a distribution, the taxpayer is still considered to have authority over the account for FBAR reporting purposes.
Financial Account In A Foreign Country
The term financial account is broadly defined as any asset account and encompasses simple bank accounts (checking or savings), as well as securities or custodial accounts. It also includes a life insurance policy or other type of policy with an investment value (i.e., surrender value).
Foreign country naturally refers to any country other than the United States. Puerto Rico, U.S. possessions and territories are included as part of the United States (as they should) for these purposes. Accounts held by U.S. Persons in these areas are not foreign accounts subject to FBAR reporting.
The IRS has indicated that a traditional credit card with a foreign bank is not a foreign account. However; use of a credit card as a debit or check card could trigger foreign account status and thus an FBAR reporting obligation.
$10,000 Threshold
To be reportable, the account must have assets the value of which during the year, exceeds $10,000.
The Instructions to the FBAR report state that if the aggregate value of all financial accounts exceeds $10,000 at any time during the year, the U.S. Person must file an FBAR report. A U.S. Person who possesses multiple foreign accounts, all of which have less than $10,000, but which collectively exceed $10,000, may have an FBAR reporting obligation.
Taxpayers may transfer an appreciating asset to a foreign account, such as stock or securities. As these assets increase in value, they may trigger an FBAR reporting requirement.
Whether the account generates any income is not relevant.
Penalties
In an attempt to improve compliance, Congress enhanced the FBAR penalties in 2004. Under pre-2004 law, civil penalties applied only to willful violations. In 2009, civil penalties up to $10,000 may be imposed on non-willful violations. This penalty may be avoided if there was reasonable cause and the U.S. Person reported the income earned on the account. 31 U.S. C. §5321(a)(5).
Although reasonable cause is not defined, the IRS will likely apply the reasonable-cause standard for late-payment/late-filing penalties.
The penalty for willful violations is far more severe. It is equal to the greater of $100,000 or 50 percent of the balance of the account at the time of the FBAR violation. No reasonable cause exception exists for a willful violation. 31 U. S. C. §5321(a)(5)(c) .
The IRS has six years to assess a civil penalty against a taxpayer that violates the FBAR reporting rules.
Amnesty Deadline Extended for Offshore Accounts
Amnesty Deadline Extended for Offshore Accounts
The NYTimes.com is reporting that the IRS is extending its amnesty program to October 14, 2009.
…The so-called voluntary disclosure program, which began in March as a way of luring American clients of the Swiss bank UBS out of the woodwork, has attracted 3,000 taxpayers so far, compared with just 80 last year…
Click link above for complete article.
FBAR Filings: Financial Interest/Signatory Authority
The FBAR is not a tax return. The FBAR is a financial disclosure (i.e., a report of the Taxpayer’s foreign financial accounts). The FBAR must be filed even if the reported accounts generate no interest or other taxable income. All income earned on the foreign account must be reported on the tax return of the beneficial owner which is an entirely separate reporting from the FBAR. However, once a Taxpayer discloses a foreign account on their Form 1040 Schedule B, the FBAR must be filed.
The FBAR form is designed to disclose the US Taxpayer’s connection to a foreign financial account. The form details the US Taxpayer (e.g., name, address, identification number and balance held in the account over $10,000). The form asks for the name of the financial institution, the country and the account number for each account, if more than one. If there are joint owners, their names and identification numbers are requested and if the person who is reporting claims to have no financial interest in the account (such as a person holding a power of attorney or a corporate officer who has no shares in the corporation), then the name and the identification number of the beneficial owner must be disclosed.
Any US Person who has a financial interest in, or signatory authority over, any financial accounts in a foreign country if the total value of such accounts exceeds $10,000 at any time during the calendar year must file a FBAR. The accounts in Puerto Rico, Guam, and the Northern Mariana Islands, American Samoa, and the US Virgin Islands are exceptions to this rule (see IRS Manual Workbook on Foreign Bank and Financial Accounts, FBAR 11/16/06).
US Taxpayers include resident aliens and other foreign individuals who are considered US Persons under the Substantial Presence Test (i.e., because of the time spent in the US in a given year [IRC §§7701(b)(1)(A)(ii) and 7701(b)(3)]). (FBAR rules also apply to a domestic trust, estate, partnership or corporation.)
A US Taxpayer has a required financial interest in an account if they:
1. Are the owner of the account.
2. Have legal title to the account (even if it is for someone else’s benefit).
Both financial interest and the signatory authority generate the requirement to file the FBAR. When the account is in joint names, all joint owners must file their own FBAR (even though the funds may belong to only one of them). An exception to the joint account rule applies only if the joint owners are husband and wife (if they live together).
FBAR: Reporting Foreign Life Insurance Policy (Tax Year 2008)
In response to my inquiry, the IRS clarified (by FAQ) that a foreign life insurance policy is a foreign financial account if it includes a cash surrender value. The IRS 7/31/09 response:
1. Is a foreign life insurance policy with cash surrender value a financial account for FBAR reporting purpose?
A financial account, as defined in the FBAR General Instructions, includes “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.” An insurance policy with cash surrender value can “store” cash, available for withdrawal at a later time, and for this reason is treated as a financial account with a financial institution for FBAR purposes. If the insurance policy is located in a foreign country and has cash surrender value, the policy holder may have to report the policy on a FBAR. For FBAR reporting purposes, the cash surrender value of the policy is the value of the account. Insurance policies that are issued by a foreign-owned company but that are acquired through an insurance agent located in the United States is not a foreign financial account and is not required to be reported on an FBAR.
For Tax Year 2008, if the foreign life insurance policy is owned by either an individual, or a trust with one beneficiary, the FBAR filing is due by September 23, 2009.
If the foreign life insurance policy is owned by a trust with two or more beneficiaries, a beneficiary of more than 50% of trust assets must file the FBAR (on account of the trust).
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