As the April 17, 2007, filing date for Schedule B of Form 1040 quickly approaches and the annual June 30 filing date looms on the horizon, the IRS has reminded taxpayers about Form TD F 90-22.1, Report of Foreign Bank and Financial Authority (FBAR).
The Bank Secrecy Act requires U.S. persons who have a financial interest in, OR signature or other authority over one or more foreign bank accounts, brokerage accounts or other financial accounts to file an FBAR annually by June 30. Hedge fund managers and investment managers and/or their employees, officers and directors with such authority over offshore financial accounts may be subject to these rules.
Who must file an FBAR?
The FBAR must be filed by each U.S. Person with the requisite interest in a foreign financial account.
Pepper Points – A U.S. Person includes: (i) a citizen or resident of the United States, (ii) a domestic partnership, (iii) a domestic corporation, or (iv) a domestic estate or trust.
There are several narrow exceptions to the filing requirement, including an officer or employee of a public company so long as the officer or employee has no personal financial interest in the account, and the corporation has a currently filed FBAR and has provided the officer with written notice that it has filed.
When must the FBAR be filed?
The FBAR must be filed annually by June 30 of each year.
Pepper Points – The disclosure by a domestic corporation of a non-U.S. financial account on Form 1120, Schedule N does not excuse the filing of an FBAR and vice-versa.
If you are an individual, you may need to file an FBAR, and you also may need to “check” either or both of the boxes at the bottom of Schedule B Form 1040.
What is a “financial account” for FBAR purposes?
A financial account for FBAR purposes includes a bank account, securities account, securities derivative account, an account in which assets are held in a commingled fund and other financial accounts or accounts maintained with any financial institution. FBAR reporting is required if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year.
Pepper Points – A custody account holding hedge funds assets or CDO or investment company assets falls under this definition.
What is a “foreign” account?
FBAR applies to financial accounts in a foreign country. A foreign country includes all geographical areas located outside the United States, Guam, Puerto Rico and the U.S. Virgin Islands.
Pepper Points – An account located in a foreign country must be reported even if held at an affiliate of a United States bank or other financial institution. Thus, an account at “XYZ U.S. Bank, NA’s,” London, UK branch is a foreign account for FBAR purposes.
An account maintained with a branch, agency or other office of a foreign bank or other institution located in the United States, Guam, Puerto Rico or the Virgin Islands is not a foreign account.
What is the required “financial interest” in a foreign financial account?
A U.S. Person has a financial interest in each account for which such person is the owner of record or has legal title, regardless of whether the account is maintained for his or her own benefit or for the benefit of others (including non-U.S. persons). In addition, a financial interest exists in each foreign account for which the owner of record or holder of legal title is (i) a person acting as agent, nominee attorney or in some other capacity on behalf of the U.S. Person; or (ii) a corporation, partnership or trust as to which the U.S. Person has more than a 50 percent interest.
Pepper Points – For example, if a U.S. Person owns an interest in more than 50 percent of a foreign partnership’s profits (i.e., distributive share of income), the U.S. Person needs to file an FBAR with regard to the non-U.S. financial accounts held by the foreign partnership whether or not the U.S. Person has signatory authority over the account.
What constitutes “signature or other authority over” an account?
“Signature or other authority over” a financial account generally includes the ability to control the disposition of money or other property in or from the account, whether by delivery of a document containing a signature (or a signature and that of one or more other persons), or otherwise by direct communication with or to the financial institution with which the account is maintained.
An investment manager (whether or not registered) who can move client monies in and out of foreign accounts must comply with FBAR. Individual employees also may be required to file an FBAR if they exercise such authority on behalf of their employer.
What are the penalties for failure to file?
The minimum civil penalty for failure to timely file an FABR is $10,000. The maximum civil penalty for willful violations is $100,000 or 50 percent of the value of the foreign account(s).
Pepper Points – Criminal penalties and imprisonment also may apply for failure to file or supply information, and for the filing of false and fraudulent reports.
A violation does not have to be willful in order for the minimum penalty to be applied. It can be abated if there is reasonable cause for the failure to file, but the burden of showing reasonable cause is on the taxpayer.
This also dovetails with the reporting obligations on Schedule B of Form 1040 for individuals. The failure to check these boxes, as appropriate, could subject the individual to penalties for filing incomplete tax returns.
Finally, the Treasury Department reportedly has stepped up its enforcement of the FBAR filing requirement significantly.
Gregory J. Nowak and Leonard Schneidman
