June 12, 2011
Karen A. Monroe
U.S. Persons (U.S. Citizens, U.S. residents, and persons subject to the jurisdiction of the U.S. including individuals, all forms of business entities, trusts, certain trust beneficiaries and estates) with signature authority over or a financial interest (direct or indirect) in any foreign financial account are required to file Form TD F 90-22.1 “Report of Foreign Bank and Financial Accounts” (“FBAR”) by June 30 of each year if the aggregate value of all such accounts exceeded $10,000 at any time in the prior year. The form must be received by the US Treasury by the June 30 deadline and NO extension of time to file is allowed.
Accounts include savings, checking and escrow accounts, time deposits, debit and pre-paid credit cards, mutual funds, securities, derivative securities and other investment accounts. In particular, as explained in more detail below, this requirement may apply to an officer or employee (in addition to the employer) who has signature authority over, but no financial interest in, a foreign financial account of
- a foreign subsidiary
- any subsidiary of a US entity not traded on an exchange that has assets of over $10 million and at least 500 shareholders, or
- an entity that is not the employer of the officer or employee
Insurance and annuity policies with a cash value fall within the definition of accounts and, as such, any party with signature authority over (which would ordinarily be the case for policy holder) or a financial interest in such a policy would be required to report, however in the case of a life insurance policy, only the holder (and not the beneficiary) must report. Some limited exceptions exist; however, we advise obtaining professional assistance to determine the applicability of such exceptions to a specific case. The penalty for failure to file is up to 50% of the value of the account for willful failures and $10,000 per account for non-willful failures.
The obligation to report has existed for quite some time, however, enforcement of compliance has increased significantly and is rigorous. The Financial Crimes Enforcement Network (FinCEN) has issued a new rule clarifying certain issues concerning reports of foreign financial accounts and the IRS has amended the FBAR form and instructions. The new form is now obligatory.
The new rule clarifies which accounts are reportable; revises the definition of signature or other authority to more clearly apply to individuals who have the authority to control the disposition of assets in the account by direct communication (whether in writing or otherwise) to the foreign financial institution; provides filing relief in the form of exemptions for certain persons with signature or other authority over foreign financial accounts; and clarifies that officers or employees who file an FBAR because of signature or other authority over the foreign financial account of their employers are not expected to personally maintain the records of the foreign financial accounts of their employers. We highlight some of these clarifications below.
Which accounts are reportable
The geographical location of the institution at which the account is maintained determines whether the account is foreign. The mere fact that a securities account, pension fund account, or covered life insurance policy or annuity may contain holdings or assets of foreign entities does not render the account “foreign” for purposes of the FBAR. Nor will the fact that a US bank holds pooled client assets in a foreign global custodial account. If, however, the specific custodial arrangement permits a United States person to directly access his, her or its foreign holdings maintained at the foreign institution, the United States person would have a reportable foreign financial account.
Who must file
As stated above, U.S. Persons, including business entities and trusts, with signature authority over or a direct or indirect financial interest in any foreign financial account are required to file. Certain trust beneficiaries, however, are not required to report the trust’s foreign financial accounts if the trust, trustee of the trust, or agent of the trust is a United States person that files an FBAR disclosing the trust’s foreign financial accounts and provides any additional information as required by the report.
An exemption is provided for officers and employees of a U.S. subsidiary when the U.S. parent is a listed company regulated by the SEC that files a consolidated FBAR. This exemption will not apply in the case of a U.S. subsidiary with a foreign parent listed on a U.S. national securities exchange since the parent has no legal obligation to file the FBAR, and the subsidiary is not required to file the same reports with the SEC as the U.S. listed parent. For similar reasons, FinCEN has decided not to extend the exception to U.S. subsidiaries of foreign parents listed on foreign exchanges. Furthermore, because the FBAR rules apply only to United States persons, FinCEN will not permit voluntary filing by the foreign parent to satisfy the filing obligations of the officers and employees of U.S. subsidiaries.
For your convenience, we attach a copy of the form and instructions to this notice.