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Are You Required to File an FBAR? FinCEN and IRS Issue Additional Guidance Important to Benefit Plans and Their Fiduciaries

Publisher: Day Pitney Alert
March 8, 2010
Day Pitney Author(s) Kathy A. Lawler

On February 26, 2010, the Internal Revenue Service and the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury each issued guidance concerning "Report of Foreign Bank and Financial Accounts" (or FBAR) filings on Form TD F 90-22.1.  Generally, United States persons or entities having a financial interest in or signatory authority over financial accounts located in foreign countries with an aggregate value greater than $10,000 are required to file an FBAR annually, on or before June 30 of the year following the applicable reporting year (i.e., June 30, 2010, for the 2009 reporting year).

FinCEN's guidance comes in the form of proposed regulations that clarify which persons will be required to file the FBAR and which foreign accounts will in fact be reportable.  The proposed rules would also exempt certain persons from the filing requirement and include provisions intended to prevent those who are required to file from avoiding their reporting obligation.  The IRS issued its FBAR guidance in the form of Notice 2010-23 and Announcement 2010-16.  The latter temporarily suspends the FBAR filing requirement for persons who are not U.S. citizens, U.S. residents, or domestic entities, while the former provides FBAR and Form 1040 filing relief for certain persons having a financial interest in or signature authority over foreign financial accounts.

The issues addressed and relief provided under the FinCEN and IRS publications are directed at the general community of U.S. persons subject (or potentially subject) to the FBAR and Form 1040 disclosure requirements.  However, please note that the purpose of this memorandum is to provide a brief overview of the guidance as it relates to those who file for pension plans and their related fiduciaries.

The IRS Guidance

IRS Notice 2010-23 provides the most relevant guidance for employee benefit plans, their fiduciaries, and applicable service providers.  It provides that:

  • Persons with signature authority over but no financial interest in a foreign financial account for which an FBAR would otherwise be due on June 30, 2010, now have until June 30, 2011, to report.  In addition (providing perhaps the most immediate relief for individual plan fiduciaries having signatory authority with respect to foreign financial accounts), persons who are subject to this filing extension need not report the existence of foreign accounts on their 2009 Form 1040 tax return (provided that such persons have no other reportable financial interest, as defined in the instructions to Form TD F 90-22.1, in a foreign financial account).
  • 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 subject to another filing exception under the FBAR instructions or other guidance).  The FBAR reporting rules will not, however, be enforced with respect to those persons having a financial interest in or signature authority over any other type of foreign commingled fund, such as foreign hedge funds or private equity funds, for 2009 and earlier reporting years.

While Notice 2010-23 gives those persons having only signature authority with respect to a foreign financial account a one-year filing extension, it is important to note that U.S. persons having a financial interest in such foreign accounts, including foreign mutual funds, will be required to file an FBAR (and, if applicable, report the existence and location of the foreign financial accounts on their Form 1040 for the 2009 tax year) no later than June 30, 2010.  In addition, individuals with signatory authority over a pension plan's foreign accounts-for example, fiduciaries who are also participants in individual account plans where the participant has invested in one or more foreign financial accounts via a self-directed brokerage account-could also be deemed to have a financial interest therein.  In addition, based upon the financial interest rule, a benefit plan trust (i) in which an individual presently holds a direct or indirect beneficial interest in more than 50 percent of the assets or (ii) from which an individual receives more than 50 percent of the income may also trigger a filing obligation with respect to such an individual.

In Announcement 2010-16, the IRS clarifies that foreign persons (i.e., those persons who are not U.S. citizens, U.S. residents, or domestic entities) are not required to file an FBAR for 2009 or prior years.  This exception applies even if the foreign person has been present or doing business in the United States.

The Proposed FinCEN Rules

The proposed FBAR filing regulations provide guidance on the following pension-related issues, among others:

  • Certain U.S. persons may not be required to file FBARs. This includes (i) owners of privately offered interests in private equity funds, hedge funds, venture capital funds, and certain offshore "blocker corporations" (subject to the issuance of future guidance from FinCEN); (ii) governmental pension plans; (iii) pension plan participants and IRA owners (provided that the plan or trustee files an FBAR); and (iv) investment advisers and their employees.
  • Pension plans (with certain exceptions) are required to file an FBAR with respect to their foreign financial accounts.
  • Foreign mutual funds (and similar funds offered to the general public) and annuities (or any other insurance policy having a cash surrender value, including variable annuities and whole life policies) that are issued outside the U.S. as a foreign financial account would be subject to the FBAR filing requirement.
  • Rabbi trusts may be subject to the FBAR requirement.

It should be noted that the regulations proposed by FinCEN are not yet effective, and there is no indication therein that they may be relied upon pending issuance of a final rule.