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[Editor's Note: This narrative is derived from Taxation of Financial Institutions § 26.04 (Matthew Bender).]
Under the Bank Secrecy Act, financial institutions must report and maintain records for transactions in cash or currency that exceed $10,000. [31 USC § 5313.] The Bank Secrecy Act is administered by the Financial Crimes Enforcement Network (FinCEN), which is an agency within the Department of Treasury. [31 CFR § 103.11(qq).] Transactions are reported on FinCEN Form 104, Currency Transaction Report. In addition, the Internal Revenue Code contains its own reporting requirement for cash transactions that exceed $10,000, but note that this requirement does not apply to financial institutions. [IRC § 6050I.]
Under the Bank Secrecy Act, U.S. persons (U.S. citizens. U.S. residents, and domestic entities, including a disregarded entity) that have a financial interest in, or signature or other authority over, foreign financial accounts that have an aggregate value exceeding $10,000 at any time during the calendar year must file a report with the U.S. Treasury by June 30 of the following year. Taxpayers comply with this law by noting the account on their tax returns (generally by responding to a question posed on their income tax returns) and by filing Form 90-22.1, the Foreign Bank and Financial Account Report (known as the "FBAR"). Willfully failing to file an FBAR report can be punished under both civil and criminal law.
On February 24, 2011, FICEN published final regulations under the Bank Secrecy Act with respect to FBAR reporting. [RIN 1506-AB08, 76 FR 10245 (Feb. 24, 2011).] The final regulations are effective for FBARs required to be filed for calendar year 2010 and subsequent calendar years.
The final regulations clarify:
Under the final regulations, reportable accounts for FBAR purposes include bank, securities, and other financial accounts in a foreign country, including an insurance or annuity policy with a cash value, and a mutual fund or similar pooled fund that issues shares available to the general public with regular net asset value determinations and regular redemptions. The issue regarding whether hedge funds or similar investment funds would be treated as financial accounts for FBAR reporting purposes was "reserved" by Treasury. [With regard to calendar years prior to the effective date of the final regulations, IRS Notice 2010-23, 2010-1 CB 327 specifically provides that the IRS will not apply its enforcement authority adversely in the case of persons with a financial interest in, or signature authority over, any foreign hedge fund or private equity fund for calendar year 2009 or earlier years.] Although no specific rule is currently provided for hedge funds or private equity funds, the requirement that a "reportable" fund must offer shares to the general public would generally exclude such funds from the reporting requirement. The preamble to the final regulations specifically notes that an account containing foreign securities or assets maintained with a financial institution located in the United States is not a foreign account subject to reporting. Clarification was also provided in the preamble as to certain custodial arrangements. When a U.S. bank acts as a custodian and holds a U.S. person's assets outside the U.S. in a pooled account (commonly called an omnibus account), with the account in the name of the bank as global custodian, the U.S. customer would not have a foreign financial account subject to FBAR reporting. In this situation, the U.S. customer is viewed as maintaining an account with a U.S. bank. However, if the custodial arrangement permits the U.S. customer to directly access foreign holdings maintained at the foreign institution, then the U.S. customer would have a reportable foreign financial account.
The final regulations provide that U.S. persons have a financial interest in each bank, securities, or other financial account in a foreign country for which they are owner of record or hold legal title, regardless of whether the account is maintained for their own benefit or for the benefit of others. If an account is maintained in the name of more than one person, each United States person in whose name the account is maintained is deemed to have a financial interest in that account. In addition, a U.S. person is treated as having a financial interest in a foreign financial account when the owner of record or holder of legal title is an entity in which the U.S. person has a more than 50% ownership interest (directly or indirectly).
FBAR reporting is also required by a U.S. person with signature or other authority over financial accounts in a foreign country. The preamble to the final regulations clarifies that an officer or employee that has supervisory control over a foreign financial account (i.e., can instruct others within the company to transfer or withdraw funds) is not required to report such an account on an FBAR, because reporting is limited to those persons who have control over the account through direct communication to the person with whom the financial account is maintained. Also clarified is the fact that only an individual (and not an entity) can have signature or other authority over an account.
Under the final rules, certain exceptions from the FBAR requirements are provided for United States persons having signature or other authority over reportable accounts. These exceptions generally apply to officers and employees of financial institutions that have a federal functional regulator (e.g., a bank that is examined by the Comptroller of the Currency) and certain entities that are publicly traded on a U.S. national securities exchange or must otherwise register with the SEC. Also, an exception is provided for an officer or employee of an Authorized Service Provider [an Authorized Service Provider is defined as an entity that is registered with and examined by the SEC and that provides services to an investment company registered under the Investment Company Act of 1940] with respect to a foreign financial account owned or maintained by an investment company (mutual fund) registered with the SEC. These exceptions only apply when the officer or employee has no financial interest in the reportable accounts. In addition, the reporting exceptions are not available if the direct owner of a foreign financial account is a foreign subsidiary (despite the fact that the U.S. company must report the foreign financial account on its FBAR based on its more than 50% ownership interest in the subsidiary).
U.S. officers and employees that do not qualify for the reporting exemptions may be entitled to an extension of time to June 30, 2012 to file FBARs for 2010 and prior calendar years, pursuant to FinCEN Notices 2011-1 and 2011-2. Relief is available to a broader group of U.S. individuals with signature authority as IRS Notice 2011-54 provides an extension to November 1, 2011, for filing FBARs related to 2009 and earlier calendar years.
RELATED LINKS: For further analysis, see:
Taxation of Financial Institutions § 26.04 - Bank Secrecy Act
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