In our Tax Alert of June 26, 2009, "The IRS Extends the Due Date for Some Filers of Foreign Bank Account and Financial Account Reports to September 23, 2009," we reported on informal guidance from several Internal Revenue Service ("IRS") lawyers on guidelines for filing Treasury Form TD F 90-22.1 (Report on Foreign Bank and Financial Accounts ("FBAR"). The IRS has reversed course on this issue and proposes to relieve many taxpayers from having to file the form with respect to foreign investment companies. However, this recent guidance may be overtaken by events in Congress.
Released on February 26, 2010, the Notice of Proposed Rulemaking (the "Notice") the Treasury's Financial Crimes Enforcement Network ("FinCEN") proposes to revamp the regulations governing the FBAR regime, and to issue revised instructions for completing the form. For Foreign Private Funds, we quote the applicable section of the Notice:
"FinCEN recognizes that outside of mutual funds and similar pooled funds, individuals may invest in other types of pooled investment companies, such as private equity funds, venture capital funds and hedge funds. Because these kinds of funds are privately offered funds, their characteristics vary greatly. In addition, the lack of functional regulation over these kinds of funds makes it difficult to define and distinguish certain types of these funds from others. FinCEN is aware, however, of pending legislative proposals that would apply additional regulation and oversight over the operations of some of these investment companies.
Accordingly, FinCEN has determined that, at this time, the proposal should reserve the treatment of investment companies other than mutual funds or similar pooled funds. Treasury remains concerned about the use of, for example, hedge funds to evade taxes and FinCEN will continue to study this issue."
Issuance of the Notice as final rules would resolve the uncertain issue of whether reporting of interests in foreign investment companies, whether public or private is required.
Further Developments
It is possible that the legislation pending in Congress regarding foreign financial assets of U.S. persons will be enacted, in which the legislation will govern the category of filers, foreign assets, timing, and other procedural matters. The content and deadlines for filing the FBAR remain unclear. The Notice is only a proposed amendment to the rules and does not explicitly reject the IRS lawyers' assertions that an interest in a foreign investment company is a covered "financial account." Therefore, we caution readers to monitor FBAR developments and to consult with your accountants as to the preparation of the forms.
If you have any questions concerning any tax matters, please contact Steven M. Etkind, 212-573-8412 (setkind@sglawyers.com) or Roger D. Lorence, 212-573-8413 (rlorence@sglawyers.com). We welcome your input.