• Recently Announced FBAR Reporting Requirements for Hedge Fund and Similar Investments -- Due June 30, 2009
  • July 7, 2009 | Authors: Jeffrey T. Skinner; Sarah N. Lowe; John P. MacMaster; Matthew S. Chambers; R. Sterling Perkinson
  • Law Firms: Kilpatrick Stockton LLP - Winston-Salem Office ; Kilpatrick Stockton LLP - Atlanta Office ; Kilpatrick Stockton LLP - Winston-Salem Office ; Kilpatrick Stockton LLP - Raleigh Office
  • UPDATE: IRS Modifies FBAR Reporting Requirements for Hedge Fund and Similar
    June 25, 2009 

    On June 25, the IRS updated its administrative guidelines for certain taxpayers who fail to file FBAR reports for 2008 by the June 30, 2009 deadline. Under the updated guidelines, taxpayers who reported and paid tax on all their 2008 taxable income, but only recently learned of their FBAR filing obligation and have insufficient time to gather the necessary information to complete the FBAR, may file a delinquent FBAR report by September 23, 2009, together with a copy of their 2008 tax return and a statement explaining why the report is filed late.

    As we reported in our June 24 legal alert, the IRS has adopted an expansive view of what may constitute a financial account subject to FBAR reporting obligations. U.S. persons should be aware that those duties extend not only to persons with beneficial interests in such accounts but also those who have signature authority over the accounts (e.g., individual officers with signature authority over any foreign financial accounts).

    The Investment Management and Employee Benefits practice groups will monitor sources for FBAR developments and will inform you of updates accordingly.

    June 24, 2009

    The Report of Foreign Bank and Financial Accounts (an “FBAR”) is a form used to report foreign financial accounts held by U.S. persons to the Internal Revenue Service (IRS). Generally, U.S. persons with combined financial interests exceeding $10,000 in foreign accounts must file FBAR by June 30 each year. However, changes made to the FBAR in 2008 may now also require that U.S. investors, fund managers and pension plans with financial interests in offshore funds file an FBAR for the 2008 calendar year and, if applicable, the previous five calendar years.

    In October 2008, the IRS changed FBAR by, among other things, expanding the definition of “financial account.” Previously, a financial account was defined in the FBAR instructions to include “any bank, securities, securities derivatives or other financial instruments accounts”. Under the October changes, the definition was expanded to also include “any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund (including mutual funds).”

    In a June 12, 2009 panel discussion addressing open questions regarding FBAR for calendar year 2008, IRS representatives publicly stated that under the new definition, an offshore hedge fund is a “foreign financial account” for FBAR purposes. Accordingly, they indicated that every U.S. investor in such a fund must file an FBAR, whether or not the fund itself has any offshore bank or securities accounts. These statements, which have been widely reported but have not yet been published by the IRS, came as a surprise to the industry, since (i) the IRS had not previously indicated that the new term “commingled fund” was intended to include hedge funds or other privately-offered vehicles, and (ii) the panel’s comments seem inconsistent with previous comments by IRS representatives published subsequent to an IRS 2007 National Phone Forum.

    We are reaching out to our industry and IRS contacts for further clarification of these issues. However, until further guidance is provided, it is not clear whether the panelists’ interpretation is correct, or whether it applies only to hedge funds or also to private equity and other funds. If broadly applied, the following “U.S. persons” are among those who may need to file an FBAR:

    • A U.S. investor in an offshore investment fund (or in an offshore feeder fund in a master/feeder fund structure), including U.S. tax-exempt investors (there are indications that this includes a trustee or investment fiduciary of a pension fund or custodian of an IRA account);
    • A U.S. investor that owns more than 50% of a U.S. or foreign entity which is a direct investor in an offshore investment fund;
    • A U.S. investor in a foreign blocker or other foreign corporation which itself may be considered a commingled fund;
    • A U.S. fund of funds, or U.S. feeder fund, that invests in an offshore investment fund;
    • A U.S. investment manager with a financial interest (for example, a carried interest) in an offshore investment fund; and
    • A U.S. individual with signature or other authority to bind an offshore investment fund, or to bind the general partner or managing member of such a fund (in addition to the general partner or managing member itself if it is a U.S. entity).

    Additionally, the IRS representatives indicated that taxpayers who failed to file the FBAR for prior years and paid tax on all taxable income should submit an FBAR for each of the prior six years by September 23, 2009, with an explanation of why the FBARs were not timely filed.

    At this point, the IRS has not provided written confirmation of the June 12 panel comments. However, it appears that until such guidance is available, the only way to be certain of avoiding potentially severe penalties ($10,000 or, in willful cases, up to 1/2 of the value of the account) is to file for all such entities. Please be advised that, unlike most IRS forms, the FBAR for calendar year 2008 must be received by the IRS, not merely postmarked, by June 30.