Foreign Income & Taxpayers
Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), is used to report a financial interest in or signature authority over a foreign financial account. A U.S. person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.
The instructions to the October 2008 version of Form TD F 90-22.1 defined a financial account to include
any bank, securities, securities derivatives or other financial instruments accounts. Such accounts generally also encompass any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund (including mutual funds). [Form TD F 90-22.1 instructions, p. 6, General Definitions, Financial Account (rev. October 2008) (emphasis added)]
For tax years prior to 2009, Treasury and the IRS had not issued any formal guidance to help taxpayers determine whether the FBAR filing requirements applied to a foreign investment fund, such as a hedge fund or a private equity fund. However, senior personnel at the IRS had informally indicated that certain foreign pooled investment funds might be viewed as “foreign financial accounts” for purposes of the FBAR filing requirements (see, e.g., Paul, Hastings, Janofsky & Walker, LLP, “‘FBAR’ Filing Requirement May Apply to Interests in Foreign Pooled Investment Funds; IRS Has Issued New Guidance on June 30 Filing Deadline,” StayCurrent, A Client Alert from Paul Hastings, p. 2 (June 2009)).
As a result of this uncertainty, it had been considered prudent for funds and fund managers with an interest in or signature or other authority over foreign pooled investment funds (hedge funds or private equity funds included) to make “protective FBAR filings” for years prior to 2009. Further, various shareholders and investors in hedge funds and private equity funds, such as tax-exempt investors and U.S. investors with either a financial interest in or signature or other authority over a financial account held by a hedge fund or private equity fund, were seen to be within the scope of the FBAR filing requirements at that time as well.
On August 31, 2009, the IRS published Notice 2009-62, which extended the filing deadline for persons with a financial interest in, or signature authority over, a foreign financial account in which the assets were held in a commingled fund (hereinafter referred to as a “foreign commingled fund”).
To assist in the development of comprehensive FBAR guidance, Notice 2009-62 also requested public comments regarding a U.S. person’s FBAR filing obligations, including whether a U.S. person should be relieved from an FBAR filing requirement for a foreign commingled fund in other circumstances, such as when filing would be duplicative of other reporting.
Prior to the issuance of Notice 2010-23, Treasury published proposed FBAR regulations under 31 C.F.R. Part 103, as well as proposed revisions to clarify instructions for the FBAR. To clarify the instructions for certain filing obligations, and as a result of significant public comment (originally requested under Notice 2009-62), the IRS issued Notice 2010-23, which provided administrative relief for certain foreign commingled funds.
Specifically, the notice provided as follows:
Persons with a financial interest in, or signature authority over, a foreign commingled fund that is a mutual fund are required to file an FBAR unless another filing exception, as provided in the FBAR instructions or other relevant guidance, applies. The IRS will not interpret the term “commingled fund” as applying to funds other than mutual funds with respect to FBARs for calendar year 2009 and prior years. Thus, the IRS has determined that it will not apply its enforcement authority adversely in the case of persons with a financial interest in, or signature authority over, any foreign commingled fund with respect to that account for calendar year 2009 and earlier calendar years. A financial interest in, or signature authority over, a foreign hedge fund or private equity fund is included in the administrative relief provided in the preceding sentence.
On February 26, 2010, the Financial Crimes Enforcement Network (FinCEN) published a notice of proposed rulemaking (NPRM) that proposed changes to the rules for reporting foreign financial accounts (RIN 1506-AB08, 75 Fed. Reg. 8844 (2/26/10)). Most significantly, the NPRM proposed to (1) define the scope of individuals and entities required to file the FBAR, (2) delineate the types of reportable accounts, and (3) exempt certain persons and accounts from the reporting requirement and provide additional relief. The changes proposed in the NPRM were accompanied by proposed changes to the FBAR for instructions.
In response to the NPRM, FinCEN received comment letters expressing concern over the filing requirements for mutual funds. Commentators noted that the term “mutual fund” may have a different meaning outside the United States and might potentially cover hedge funds and private equity funds that have periodic redemptions (Preamble to final RIN 1506-AB08, 76 Fed. Reg. 10234, 10239 (2/24/11)). In response to these concerns, FinCEN, when finalizing the NPRM, reiterated that the definition of a mutual fund included a requirement that the shares be available to the general public in addition to having a regular net asset value determination and a regular redemption feature.
FinCEN believed that some of the concerns of commentators arose because the draft instructions to the form published with the proposed rule did not include the words “which issues shares available to the general public” The instructions have been revised to reflect the language of the definition contained in the final rule, as follows: “A financial account includes . . . shares in a mutual fund or similar pooled fund (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions)” (Form TD F 90-22.1 instructions, p. 6, General Definitions, Financial Account (rev. March 2011)).
Thus, in consideration of the foregoing, and with the issuance of the amendments to the Bank Secrecy Act regulations, effective March 28, 2011, investments in or management of hedge funds and private equity funds should not be included within the scope of the FBAR filing requirements as long as the shares of those funds are not available to the general public.
Alan Wong is a senior manager at Holtz Rubenstein Reminick LLP, DFK International/USA, in New York, NY.
For additional information about these items, contact Mr. Wong at (212) 697-6900, ext. 986, or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with DFK International/USA.