US foreign bank account reporting rules: Update

The US Government has required its citizens to report on their foreign bank accounts since 1970; however, its controversial revisions of October 2008 continue to cause tax practitioners, citizens and persons doing business in the US headaches.  We expect the US Government to aggressively enforce these reporting requirements since they assist the US Government in identifying abusive offshore accounts such as the UBS accounts (discussed in our blogs on September 8, 2009 and February 10, 2010).

The foreign bank account reporting requirements are promulgated under the Bank Secrecy Act,¹ not the Internal Revenue Code (“IRC”).  If a US person has a financial interest in or signature authority over financial accounts in a foreign country where the aggregate value exceeds $10,000, that US person is required to file a Report of Foreign Bank and Financial Accounts (“FBAR,” Form TD F 90-22.1) on or before June 30 of the succeeding year.  The potential penalty for an inadvertent failure to file is $10,000; a wilful failure could cost as much as $100,000.  In the 2000 version of the FBAR form, the term “United States person” was defined in manner similar to that in the IRC:

“United States Person.  The term “United States person” means (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust.”²

In October of 2008, the IRS released a revised FBAR form and accompanying instructions. In the 2008 version, the definition of US persons was expanded to include foreign persons who were doing business in the US.  For example, under that definition, a Canadian salesperson from Calgary who goes to Texas once a month to, say, sell oil pumps, would probably be required to report each of his/her personal Canadian bank accounts to the US government.  This revised definition caused panic for some Canadians.

On June 5, 2009, the IRS admitted that it “received a number of questions and comments from the public concerning the new filing requirement.”³ It temporarily suspended reporting requirements for those persons who were not US citizens, residents, or domestic entities for the FBARs due on June 30, 2009, and directed the public to rely on the prior (2000) FBAR definition of a US person.  Now, the Canadian salesperson in the previous example had a reprieve from the FBAR reporting, but only for the 2008 reporting year.

On February 28, 2010, the IRS published two documents that attempted to further clarify the confusion over its 2008 FBAR form.  First, in IRS Announcement 2010-16 (Feb. 28, 2010), it continued its suspension of a filing requirement for non-US citizens, residents or entities, and expanded the suspension to FBARs which would otherwise have been required to be filed for the 2009 and earlier years.  Second, the IRS published IRS Notice 2010-23 (Feb. 28, 2010) that changed its rules for some filers with signatory authority and some people with foreign hedge funds or private equity funds.  The Notice temporarily suspended reporting requirements for persons who have signature authority over, but no financial interest in, foreign accounts until June 30, 2011. Note that the temporary suspension for the signature authority only covers those persons who do not have any other interest in foreign accounts. The Notice also provided relief for persons with an interest in or signature authority over foreign hedge funds or private equity funds.  Relief was not extended to persons with interests in foreign mutual funds.

The end result of this additional IRS guidance issued in 2010 is that foreign persons who are not US citizens residents or domestic entities are generally not required to file an FBAR form.  This is generally great news for Canadians!  Additionally, US persons with interests in foreign hedge funds or foreign private equity funds are not required to report such interests to the US Government.  US persons who hold separate interests, joint interests or signature authority over foreign financial accounts (so long as that is not their only foreign account) are still required to deliver Form TD F 90-22.1 to the US Treasury by June 30, 2010.  To determine whether you have a reporting requirement under FBAR, feel free to contact our US Tax Group.