By Joan C. Arnold
By June 30, 2011, every U.S. person who owns or has signatory authority over a foreign financial account must report those accounts to the IRS on form TD 90.22-1, (the FBAR form) if the value of the accounts totaled more than $10,000 at any time during calendar year 2010. Through new regulations issued earlier this year, significant changes have been made to the rules that define who is required to file, with the most significant changes impacting individuals who have signature authority over accounts owned by their employers. The new rules are applicable for the 2010 year and for any prior years for which reporting was deferred for accounts in which an individual had signing authority but no financial interest.
For prior years, if a U.S. citizen or resident had signing authority over a foreign financial account owned by her employer, or a subsidiary of the employer, and the employer met certain size or trading requirements, the individual was excused from filing the FBAR form so long as the employer provided her with a certification that it had complied with its own FBAR requirements for the accounts it owns. That certification process has now been radically changed, and the employee may have significantly increased reporting obligations.
The definition of a foreign financial account can be found in Pepper Hamilton's April 22, 2011 Tax Alert, "Preparing to File Report of Foreign Financial Accounts by June 30, 2011."
An employee has signing authority over an account if she (or she in conjunction with others if more than one signature is required) can control the funds in the account through direct communications with the account holder. The baseline rule is that an employee with such power over a foreign financial account must file the FBAR with respect to all such accounts if in the aggregate the value is more than $10,000 at any point in the year.
There are limited employment-related exemptions remaining for 2010:
These results were known to the drafters of the regulations and they made a conscious decision to adopt them as-is. They have been adopted in the instructions for the FBAR form as of March 2011.
Companies have some interesting collateral concerns if they decide to prepare the returns for their employee. Because they are returns of the employee and not of the company, if the company prepares them, the company may become a tax preparer for purposes of Circular 230, which means it becomes subject to the potential oversight of the Office of Professional Responsibility. If the company pays to have the returns prepared, there is an issue of whether that is compensation to the employee.
The change in the regulations may produce a significantly increased compliance burden on the employees, and, as discussed above, trying to fix it for the employees raises collateral questions that can be of concern.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.
This article is republished with permission of Pepper Hamilton LLP. Further duplication without the permission of Pepper Hamilton LLP is prohibited. All rights reserved.
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