Reporting Requirements for Foreign Financial Accounts Including Foreign Hedge Funds and Private Equity Funds

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1 Reporting Requirements for Foreign Financial Accounts Including Foreign Hedge Funds and Private IRS Releases Guidance Allowing Taxpayers Recently Learning of Filing Obligations Until September 23, 2009 to File 2008 FBARs Without Penalty Where Tax Consequences Properly Reported SUMMARY As reported in our previous Memorandum dated June 23, 2009, the IRS announced in a Frequently Asked Questions release regarding its voluntary disclosure program for unreported foreign financial accounts (the FAQ ) that the IRS will not impose penalties for certain late filings of the Report of Foreign Bank and Financial Accounts (the FBAR ) for the 2008 calendar year, generally required to be filed with respect to foreign financial accounts, if (1) taxable income has been properly reported and (2) the FBAR is filed by September 23, In addition, the IRS clarified that if a taxpayer has failed to file other information returns, such as Form 5471 or Form 3520, but has properly reported taxable income, no penalties will be asserted if the information returns are filed by September 23, The FAQ also provides that for taxpayers who voluntarily disclose tax noncompliance under the IRS reduced penalty framework, (1) if the taxpayer has failed to file an FBAR with respect to a foreign financial account over which the taxpayer has signatory authority but no financial interest, and there is no unreported income with respect to the account, the IRS will treat this account as unrelated to any tax noncompliance that the taxpayer is voluntarily disclosing, and will not impose penalties with respect to the account, and (2) if a taxpayer has failed to file an FBAR with respect to a foreign financial account in which the taxpayer has a financial interest, and there is no unreported income with respect to the account, the IRS will treat this account as unrelated to the taxpayer s other tax noncompliance that the taxpayer is voluntarily disclosing, and will not impose penalties with respect to the account. New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

2 BACKGROUND The FBAR is used to report a financial interest in, or signature or other authority over, one or more financial accounts in foreign countries, as described in the FBAR Instructions (the FBAR Instructions ). 2 The FBAR must be filed with respect to each calendar year for any financial accounts covered under the FBAR Instructions, and must be received by the Department of the Treasury on or before June 30th of the succeeding year. A revised FBAR was issued by the IRS for the 2008 calendar year filings, making certain changes to and clarifying the FBAR Instructions. However, many uncertainties remain, including the scope of the filing requirements as they may apply to foreign hedge funds and foreign private equity funds, and IRS personnel responsible for the technical guidance on this issue have recently indicated their belief that an FBAR filing is required for such funds. 3 The IRS at this time has offered only limited informal guidance in this area, and we have been told by IRS personnel that further guidance is not likely to be forthcoming with respect to foreign hedge funds and foreign private equity funds prior to the September 23 deadline for late filings for The extended deadline described below allows taxpayers an additional period of time in which to gather necessary information, consult with their advisors and consider whether an FBAR filing should be made with respect to foreign hedge fund and foreign private equity fund investments for 2008 and for prior years. The FAQ, revised as of June 24, 2009, primarily addresses questions with respect to the voluntary disclosure program introduced by the IRS for taxpayers with unreported foreign financial accounts and related income tax noncompliance. However, as described below, certain questions addressed by the FAQ also apply with respect to U.S. persons required to file the FBAR who have properly reported for income tax purposes. EXTENDED DEADLINE FOR DELINQUENT INFORMATION REPORTING INCLUDING FBAR In the previously released version of the FAQ, the IRS has stated that penalties will not be imposed for FBARs with respect to years prior to 2008 if income has been properly reported and the delinquent FBARs are filed, with copies of the relevant tax returns and a statement explaining why the reports are filed late, by September 23, The revised FAQ extends the same relief to FBAR filers for the 2008 calendar year. The FAQ provides that if a taxpayer or U.S. person has recently learned of a requirement to file an FBAR but does not have sufficient time to gather the information necessary to properly file by June 30, 2009, no penalties will be asserted with respect to late 2008 calendar year FBARs, if: -2-

3 The taxpayer or U.S. person files the late FBAR by September 23, 2009, along with a copy of the 2008 tax return (if the return is due on or before September 23, 2009), and a statement explaining why the report is filed late, 5 and The taxpayer properly reports and pays tax on all their 2008 taxable income. The FAQ similarly provides that if a taxpayer has failed to file tax information returns, such as Form 5471 (with respect to controlled foreign corporations) or Form 3520 (with respect to foreign trusts), but has properly reported income, no penalties will be asserted if the taxpayer files the information returns as follows: The taxpayer must file the delinquent returns at the address specified on the return, along with a statement explaining why the information returns are filed late, and Copies of the returns must be submitted by September 23, 2009, with copies of tax returns for all relevant years, to the Philadelphia Offshore Identification Unit. In addition, the IRS stated in the FAQ that if a taxpayer is submitting information under the voluntary disclosure program outlined by the IRS for foreign accounts with associated tax noncompliance, but also has failed to file an FBAR to report an account over which the taxpayer has only signature authority, but no financial interest (e.g., an account owned by the taxpayer s employer), that foreign account will not be included in the calculation of the penalty under the voluntary disclosure program, but will be treated separately as an unrelated filing requirement. In this case, no penalty will be imposed with respect to the FBAR delinquency for the account over which the taxpayer has signatory authority, but which the taxpayer does not own, if the taxpayer files the FBAR with an explanatory statement by September 23, Similarly, if a taxpayer participating in the voluntary disclosure program due to tax noncompliance has failed to make an FBAR filing with respect to a second foreign financial account for which all income has been properly reported, the FAQ advises the taxpayer to include this unrelated account on the delinquent FBAR filing (voluntarily disclosed by September 23, 2009), and states that no penalty will be imposed with respect to the unrelated account. * * * ENDNOTES Internal Revenue Service, Frequently Asked Questions (June 24, 2009), available at and at the Voluntary Disclosure page at the IRS website ( IRS Form TD F The FBAR is due June 30, 2009 (except as discussed in this Memorandum) with respect to the 2008 calendar year. For additional information with respect to this issue, please see our Memorandum dated June 16, 2009, available at or as indicated below. See FAQ 9. The June 24, 2009 revised version of the FAQ includes answers previously released May 6, Copyright Sullivan & Cromwell LLP

4 ENDNOTES Continued 5 6 The late FBARs must be filed with the Philadelphia Offshore Identification Unit at the address specified in the FAQ, not at the regular address for timely FBAR filings. This filing must similarly be made with the Philadelphia Offshore Identification Unit. The FAQ notes that in cases where the account is related in some way to the taxpayer s tax noncompliance, this policy will not apply and penalties may be asserted. -4-

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