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Foreign Bank and Financial Account Reporting Requirements

Tax Alert Terrence W. Stein

Each United States person who had a financial interest in or signature authority over a foreign financial account with an aggregate value over $10,000, at any time during calendar year 2008, must file a Report of Foreign Bank and Financial Accounts (the "FBAR") with the Department of the Treasury on or before June 30, 2009. This update provides a general explanation of the FBAR filing requirements.

Who is Required to File?

For purposes of FBARs required to be filed by June 30, 2009, the term "United States person" includes a citizen or resident of the United States, a domestic partnership, a domestic corporation, or a domestic estate or trust. Although the instructions that accompany each FBAR define the term "United States person" more broadly by including foreign individuals and entities in, and doing business in, the United States, the Internal Revenue Service (the "IRS") has announced that that this broader definition will not be applied for purposes of FBARs required to be received on or before June 30, 2009.

A United States person has a financial interest in a foreign financial account when the United States person is the owner of record or has legal title to the account. A United States person also holds a financial interest in a foreign financial account if the owner of record or holder of legal title to the account (a) acts as an agent, nominee or attorney for such United States person; (b) is a corporation in which such United States person directly or indirectly owns more than 50 percent of the total stock value or voting control; (c) is a partnership in which such United States person directly or indirectly owns more than 50 percent of the profits or capital; or (d) is a trust in which such United States person has a present beneficial interest, directly or indirectly, in more than 50 percent of the assets or from which such United States person receives more than 50 percent of the current income. A United States person also holds a financial interest in a foreign financial account if the owner of record or holder of legal title to the account is a trust (or a person acting on behalf of a trust) that was established by such United States person and for which a trust protector has been appointed.

A United States person has signature authority over a foreign financial account if he or she can control the disposition of money or other property in the account by delivering a signed document to the bank or other person with whom the account is maintained.

It is possible that multiple United States persons will need to submit an FBAR for a single foreign financial account, such as, for example, a corporation that owns a foreign financial account and officers of such corporation with signatory authority over the corporation's foreign accounts.

A corporation that directly or indirectly owns more than a 50-percent interest in one or more entities required to file an FBAR can file a consolidated report on behalf of itself and those entities.

What is a Foreign Financial Account?

All financial accounts that are geographically located outside of the United States (and its territories and possessions) are considered foreign accounts.

A financial account is any bank, securities, securities derivatives, or financial instruments account. Financial accounts include savings, demand, checking, deposit, time deposit, debit cards, prepaid credit card accounts, or any other account maintained with a financial institution. According to the FBAR instructions, financial 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)," but individual bonds, notes, or stock certificates held by a filer are not financial accounts. Based upon these instructions, investments in offshore corporate vehicles, such as a blocker corporation, generally should not require an FBAR filing unless the investor owns more than a 50-percent interest in the corporation. It is uncertain, however, whether or under what circumstances an equity interest in a non-corporate offshore hedge fund, feeder fund, or private investment fund should be treated as a foreign financial account. In light of this uncertainty, it may be prudent for most United States persons with a financial interest in or signatory authority over non-corporate offshore hedge funds, offshore feeder funds, or private investment fund to file protective FBAR filings.

United States persons invested in a domestic feeder fund that, in turn, invests in foreign financial accounts generally should not be required to file an FBAR unless those United States persons own more than a 50-percent interest in the domestic feeder fund.

Late Filings and Penalties

An FBAR required to be filed by June 30, 2009 must actually be received by the Department of the Treasury, or delivered to a local office of the Internal Revenue Service for forwarding to the Department of the Treasury, by June 30, 2009. An extension of the filing deadline is not available.

A United States person that fails to file a required FBAR may be assessed a civil or criminal penalty, or both, depending on the circumstances. Civil penalties for a non-willful violation can range up to $10,000 per violation. Civil penalties for willful violations can range up to the greater of $100,000 or 50 percent of the amount in the foreign financial account. Criminal penalties for violating the FBAR requirements while also violating other laws can range up to $500,000, 10 years imprisonment, or both.

The IRS has established a voluntary disclosure program for taxpayers who failed to report foreign financial accounts and also failed to report taxable income from their foreign financial accounts. This voluntary disclosure program allows taxpayers who file FBARs for the last six years and pay delinquent taxes and substantial penalties before September 23, 2009 to avoid potentially harsher civil penalties and also generally avoid the risk of criminal prosecution.

The voluntary disclosure program does not apply to taxpayers who failed to file FBARs but nevertheless properly reported and paid taxes, if any were due, on their income from foreign financial accounts. The IRS has stated that if such taxpayers file their delinquent FBARs (by checking the amended box on the form, attaching a statement explaining why the reports are being filed late and copies of tax returns for the relevant years, and submitting these documents to the Philadelphia Offshore Identification Unit) by September 23, 2009, the IRS will not impose a penalty for the failure to timely file the FBAR.

This update is intended as a general summary of legal matters and not as legal advice. If you have questions or would like to discuss the FBAR reporting requirements, please contact Terrence Stein at 312-715-5029 / terrence.stein@quarles.com,  Krupa Shah at 312-715-5027 / krupa.shah@quarles.com, or your Quarles & Brady tax attorney.