Window Of Opportunity Is Closing For Taxpayers With Unreported Foreign Financial Accounts To Take Advantage Of Favorable IRS Guidance

Originally published August 31, 2009

Each taxpayer who has a financial interest in or signature

authority over a foreign financial account generally is required to

file the Report on Foreign Bank and Financial Accounts (FBAR) by

June 30 for the previous year. For the 2008 tax year, the IRS

recently announced that it will accept, without penalty, late

filing of an FBAR for those taxpayers that recently learned of

their obligation to file and that reported all of their 2008 income

on their tax returns. For most taxpayers, the filing deadline has

been extended until September 23, 2009. Individuals who have

signature authority over, but no financial interest in, a foreign

financial account or commingled fund may file until June 30,

2010.

Investments In Foreign Hedge Funds, Private Equity Funds, And

Private Investment Funds Now Reportable On FBAR

These filing extensions followed changes to the FBAR and its

instructions, and an announcement in mid-June that the IRS expects

taxpayers holding investments in foreign hedge funds or foreign

private equity funds to report these interests as foreign accounts.

Prior to this announcement, few taxpayers or tax professionals

believed that these investments were subject to FBAR reporting

requirements. Because of the confusion following the June

announcement, the IRS announced that it will not impose civil and

criminal penalties on certain taxpayers that file an FBAR by the

appropriate extended deadline.

During a June teleconference with the American Bar Association

and the American Institute of Certified Public Accountants, IRS

representatives stated that investors that hold an equity interest

in a foreign hedge fund must report this interest by filing an

FBAR, also known as Form TD F 90-22.1. This announcement surprised

most tax professionals, but an IRS spokesperson later confirmed the

new interpretation. According to the IRS, these and other offshore

private investment funds qualify as "foreign accounts"

for FBAR reporting purposes. The IRS has provided little other

guidance on this matter, except to say that any interest in a

foreign partnership or corporation used by investors to commingle

funds must also be reported.

Previous Assumptions About "Foreign Accounts" For

FBAR Reporting Purposes

Prior to this announcement, most taxpayers assumed that these

types of private investments did not qualify as "foreign

accounts" for FBAR purposes. The IRS does not consider certain

other types of investments in...

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