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Treasury and the IRS have greatly stepped up enforcement of the filing requirements for Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR”). Penalties for non-compliance are steep: $10,000 per occurrence. There is generally a filing requirement for organizations with such accounts and for individuals with signature authority (but no financial interest in) a foreign financial account. The FBAR report is filed on a calendar year basis and is due annually on June 30.

Foreign Account and Signature Authority: Clarification

There is some confusion on what constitutes a foreign account, and there has been a lack of compliance especially on the part of those with signature authority. The rules are the same for both for-profit entities and non-profit organizations. In August 2009, the IRS issued Notice 2009-62 which extended until June 30, 2010 the filing due date for individuals with signature authority (but not a financial interest) in a foreign financial account or with signature authority or a financial interest in a foreign commingled fund. Many comments were received after this notice was issued, and the IRS released additional guidance this February in Notice 2010-23.

Notice 2010-23 provides relief in several key areas: First, it extends the filing date for persons with signature authority over (but not a financial interest in) a foreign financial account until June 30, 2011.This applies to calendar year 2010 and all prior years. Thus, individuals who may not have been aware of an individual FBAR filing requirement, have an opportunity to catch up without penalty.

Secondly, this notice modifies the guidance from Notice 2009-62 for persons (including organizations) with either a financial interest or signature authority over a foreign comingled fund that is a mutual fund. The date for filing these FBAR returns is June 30, 2010 for 2009 and prior years. However, the IRS made it clear in the new guidance that it will not require other types of commingled funds including foreign hedge funds or private equity funds to file the FBAR. This clears up a significant area of uncertainty that caused many organizations to protectively file FBAR’s for hedge funds and private equity funds in the prior year. Thus, there is a penalty-free catch up period for filing FBARs for foreign mutual funds for both organizations and those with signature authority, and clear guidance that other types of funds do not require filing. However, this notice does not address whether passive foreign investment companies (PFICs) are covered by the FBAR rules.

Lastly, Notice 2010-23 says that organizations or individuals who qualify for relief under this notice may answer “no” to the question on their tax return (990 for nonprofits or 1040 for individuals) about existence of foreign interests or signature authority if their only interests are accounts that have been granted relief. This is important as it tells the IRS not to be looking for an FBAR is these situations.

U.S. Persons

Announcement 2010-16 extends an earlier Announcement (2009-51), which provided that only “United States persons” as defined in the FBAR instructions are required to file FBAR. The FBAR instructions state that US persons are (1) citizens or residents of the US, (2) domestic partnerships, (3) domestic corporations, or (4) domestic estates or trusts.

Proposed Regulations for FBAR reporting rules were issued by the Treasury Department on February 25, 2010. Although the IRS administers the FBAR rules, the rules actually come under Title 31 of the US Code as part of federal banking law. The proposed regulations (1) clarify who is a required filer (defining who is a US person) and which types of accounts are reportable, (2) exempt certain taxpayers with only signature authority from filing, and (3) provide rules intended to prevent US persons from avoiding the filing requirements. It is important to note that these are only proposed regulations at this time and do not carry the authority of law.

Conclusion: While the new guidance does not totally resolve all the issues with FBAR reporting, it does go a long way towards clarification in some important areas, most significantly with regards to foreign hedge and private equity funds , which are clearly now excluded from the FBAR reporting requirements. Organizations should take a fresh look, with assistance from their financial advisors, at all foreign holdings to determine which will require reporting either by the organization itself or by organization managers with signature authority. It is extremely important for any individual in an organization with signature authority over a foreign account to be aware of the rules and to take care of their individual filing requirements by the extended “grace periods” allowed by the IRS. For these individuals, this is an opportunity to voluntarily comply for prior years without penalty.

There clearly will be further developments in this area, so organizations are urged to stay tuned on this topic.

Please contact a Smith & Howard non-profit team member for more information before taking any action.