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Current International Tax Issues

• Foreign Bank and Financial Account Report (FBAR) and Signature Authority
• Voluntary Disclosure Initiative

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Report of Foreign Bank and Financial Accounts (“FBAR”) is Due on June 30, 2011

The annual report of Foreign Bank and Financial Accounts is physically due to the Department of Treasury on June 30, 2011. Certain taxpayers with financial interests in or signature authority over bank or financial accounts exceeding an aggregate value of $10,000 must report such interests on TD Form 90-22.1, commonly referred to as an “FBAR.”

The FBAR is not an income tax filing. It is a separate informational return. Penalties and criminal sanctions for failing to file an FBAR apply to non-compliers. The civil penalty for a non-willful failure to file is $10,000. The civil penalty for a willful failure to file is the greater of $100,000 or 50% of the value of the foreign accounts.

Type of accounts subject to FBAR
Any type of account that holds liquid assets or marketable securities will be a "financial account" for purposes of the FBAR requirements. That means everything from a cash account to a foreign mutual fund, such as an exchange traded fund, is classified as a financial account. An interest in a foreign fund is itself a reportable foreign financial account only if the fund meets all three of the following requirements:

1. available to the general public,
2. determines net asset value regularly, and
3. offers regular redemption opportunities.

We believe based on this specification that interests in other private equity funds, hedge funds, and other “commingled funds” will not be subject to reporting.

Persons who hold securities through a U.S. global custodian will not be required to report any non-U.S. accounts held by the U.S. custodian unless they personally have direct access.

Only financial accounts actually located in a foreign jurisdiction are subject to FBAR reporting. For example, an investment account with a U.S. branch of a foreign financial institution or brokerage house would not require a FBAR but an account with such a financial entity's foreign offices would.

A foreign country includes all geographical areas outside the U.S., the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, and the territories and possessions of the U.S. (including Guam, American Samoa, and U.S. Virgin Islands).

Power of signature or other authority
The definition of reportable signature authority means the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds, or other assets held in financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained. The Amendment to the Bank Secrecy Act Regulations – Reports of Foreign Accounts notes that the test of whether an individual has signature or other authority over a financial account is whether the foreign financial institution will act upon a direct communication from that individual (either alone or among others when the foreign financial institution requires a communication by more than one) regarding the disposition of the assets in the financial account. Thus, one would not appear to have reportable signature authority over an account if one cannot give instructions with respect to the account that will be acted upon, but is merely in the chain of command over persons with such authority. The final regulations confirm the prior understanding that only individuals, and not entities, are capable of possessing “signature or other authority”.

An officer or employee of a domestic corporation whose equity securities are listed on a national securities exchange or which has assets exceeding $10 million and 500 or more shareholders of record, need not file a report that they have signature or other authority over a foreign financial account of the corporation, if they have NO personal financial interest in the account and they have been advised, in writing, by the chief financial officer of the corporation that the corporation has filed a current report, which includes that account. The new regulations note that this exemption no longer applies to accounts owned by non-U.S. members of the group, such as CFC subsidiaries.

The extension for filing signature authority forms which was put into place in the prior year will not be extended further, and reports with respect to signature authority will need to be prepared and filed for 2010 and 2009 prior to June 30, 2011. The mailbox rule does not apply. Therefore, all FBARs must be received by the Treasury prior to June 30, 2011.

Financial interest
The definition of what constitutes a financial interest for purposes of the FBAR is based on who owns the interest. Essentially, a U.S. person has a financial interest in every account for which the U.S. person is the owner of record or has legal title, whether the account is for the owner's benefit or for the benefit of another. Individuals serving as shareholders, partners, and trustees also may be deemed to hold a financial interest in an account if the account is owned by or the individual with legal title is any of the following:

• A person acting as an agent, nominee, attorney, or in some other capacity on behalf of the U.S. person
• A corporation in which the U.S. person owns more than 50% of the total stock either directly or indirectly
• A partnership in which the U.S. person owns an interest in more than 50% of the profits

Due date of FBAR filing
If a U.S. person has a foreign account that satisfies the FBAR requirements, the FBAR is due physically to the Department of Treasury on June 30 of the following year (with no extensions). It is not satisfactory to have it at the mailbox by this date.

The FBAR is not to be filed with the filer's federal tax return.
A foreign account that satisfies the FBAR requirements must be reported even if the account does not generate taxable income. Thus, a taxpayer who fails to file a FBAR because the account generates no taxable income will be subject to penalty. The IRS has six years within which to assess a civil penalty related to a FBAR violation. It is unclear, however, whether the statute will toll if the FBAR is not filed.

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Voluntary Disclosure Initiative regarding Unreported Offshore Accounts Ends August 31, 2011

The Internal Revenue Service (IRS) announced recently that taxpayers will have a second chance to voluntarily disclose their foreign holdings in order to become compliant with foreign reporting requirements. The first initiative which expired in October of 2009 allowed more than 15,000 taxpayers to become compliant with information reporting requirements for foreign bank accounts and offshore assets. The new initiative — called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) — includes some changes from the original 2009 Offshore Voluntary Disclosure Program (OVDP). The new penalty structure is higher than in the original program, providing no reward to those who waited to comply. There are, however, some additional favorable features in the new initiative.

There is a new penalty framework requiring payment of 25 percent of the amount in foreign bank accounts in the year with the highest aggregate account balance during the 2003 to 2010 time period covered under the voluntary disclosure. Some taxpayers may be eligible for a reduced 5 or 12.5 percent penalty. All participants must also pay back taxes and interest for up to eight years as well as any accuracy related or delinquency penalties. All original or amended tax returns and payment of all taxes, interest and accuracy related penalties must be remitted by the August 31, 2011 deadline.

A new penalty category of 12.5 percent will apply to smaller offshore accounts. Taxpayers with foreign accounts or assets not in excess of $75,000 in any year covered under the voluntary disclosure will qualify for the new lower penalty rate.

Potential Candidates

• U.S. citizens living or doing business abroad
• Closely held U.S. business with operations abroad
• Dual citizens of the United States and another country
• U.S. green card holders
• U.S. recipients of gifts and bequests from foreign persons
• U.S. beneficiaries of foreign trusts
• U.S. immigrants

Program for reported taxable income cases
The program also outlines opportunities for taxpayers which have reported the taxable income but have not filed the required forms for foreign reporting purposes.

U.S. persons (U.S. citizens and resident aliens as well as domestic partnerships and corporations) are required to file a Foreign Bank and Financial Account Report for any foreign account that holds liquid assets or marketable securities for which they have a financial interest or control. The report is filed on form TD F 90-22.1 and is due to the Department of Treasury by June 30th of each calendar year. There are substantial penalties for failure to comply with these rules.

U.S. persons are also required to file Forms 5471 for any year in which they are a U.S. shareholder in a controlled foreign corporation (which is a foreign corporation owned greater than 50% by U.S. shareholders). U.S. corporations are required to file form 5472 for any transactions they may have with a 25% foreign-owner. In additional form 8858 should be filed if a U.S. Person owns a foreign disregarded entity (which is 100% ownership in a foreign entity which separately from its owner for U.S. tax purposes is not recognized on its own). There are substantial penalties for failure to comply with these rules even if you are reporting the income on your U.S. tax returns.

Taxpayers who have not filed these forms for any of the past 8 years (2003-2010) may be able to avoid penalties and interest through this voluntary disclosure program. Under this program, the IRS permits filing amended returns for prior tax years which include the missing tax forms with an explanation as to why the forms have not been filed in the past. The voluntary disclosure filing is due into the IRS by August 31, 2011 to the addresses noted for the specific forms which are being filed. Please note that this form of the program applies to taxpayers who have reported required income in the U.S. tax returns.

Individuals or entities currently under examination will not be eligible to come under the 2011 voluntary disclosure initiative.

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