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Time-Sensitive FBAR Requirements

Recently, there has been a lot of discussion regarding foreign bank financial account reporting requirements (FBAR) and in what situations taxpayers are required to file Form TDF 90-22.1 (the FBAR form). The FBAR form is required to be filed with the IRS by June 30 (i.e., received by, not simply mailed by, June 30). The IRS, in a conference call with the American Bar Association in mid-June, has raised concerns about specific situations that might affect the reporting requirements for many taxpayers. The IRS has not given much guidance on these recent verbal explanations of the rules. However, there appears to be certain situations that require immediate attention.

Please note: The U.S. Treasury Department requires any U.S. person or entity that has a financial interest, signatory authority over or other authority over a foreign bank account with a value over $10,000 at any time during the year to file the FBAR form. Although the actual form has changed for 2008, most reporting requirements have stayed the same as in the past for these situations. If you were required to file this form in the past, you are still required to file the form. One major change is that the form now requires the reporting of the highest dollar amount held in 2008. Prior year forms only required a check mark next to the range of values.

Recent correspondence is now suggesting that a U.S. individual or entity that owns other types of offshore investments (mainly PFIC and offshore hedge funds) is required to file an FBAR form. We have identified several situations where we feel certain taxpayers could be required to report and file including the following:

1. Entities that have made a direct investment in an offshore fund or PFIC. For investment partnerships or other entities that have made direct investments in either PFICs, an offshore hedge fund(s)/offshore or master/feeder fund(s), an FBAR form appears to be required to be filed at the partnership level.
2. Individuals who make direct investments in offshore funds. Individual taxpayers may invest directly in an offshore fund. If you are a direct investor in PFICs or offshore hedge funds, you are now required to file the FBAR form. This is a change in the interpretation of the law from prior years and requires immediate attention.
   
   Many U.S. individuals, trusts and family partnerships will invest directly in the U.S. fund, which then in turn makes the investment in the offshore entity. In this situation, it appears that the individual investor is not required to file an FBAR form for 2008. It is our understanding that the partnership/U.S. fund is responsible for the FBAR filing (similar to number one above). However, if an individual owns more than 50% of another entity, the individual might be deemed to have a reportable financial interest in the other entity’s foreign financial account (e.g., an individual who owns greater than 50% of a partnership that has made a direct investment in an offshore fund would be required to file the FBAR form).
    
3. Foundations and IRAs. It is quite common for foundations and taxpayers with large IRA portfolios to invest in hedge funds. Oftentimes, these entities will invest directly in an offshore hedge fund due to UBIT issues. It appears that tax-exempt entities with a direct investment in an offshore fund are now required to file the FBAR form. Also, the owner/beneficiary of the IRA fund might also have a reporting requirement. We are still examining this issue.
4. Foreign Trusts. It appears that in certain situations, the beneficiaries of foreign trusts might have an FBAR reporting requirement. We are awaiting further guidance on this issue.

Penalties
The penalties for not properly reporting a foreign bank account can be very significant (the greater of 50% of the account balance or $10,000 in most cases). On June 24, the IRS issued guidance regarding an extended due date for certain situations where a taxpayer was unaware of the foreign bank account and the FBAR reporting requirements. However, if at all possible, we strongly recommend that the FBAR forms be filed and received by the IRS by June 30.

If you have any questions, please contact Brian Carter at 312-980-2994 or your Blackman Kallick representative. 
 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.