07 October 2009

FBAR filing requirement for non-profit directors

Richard Cassell
Of counsel | UK

US citizen or US resident directors with signature authority over the foreign financial accounts of any non-profit (whether US or foreign) must file Form TD F 90-22.1 (commonly referred to as an ‘FBAR’) each year to report those accounts. The IRS has extended the normal FBAR filing deadline (normally 30 June each year) to 30 June 2010 for US persons with only signature authority over a foreign financial account in tax years 2003-2008. In addition, US non-profits must file an FBAR to report financial interests in any foreign financial accounts for tax years 2003-2008 by 15 October 20091. US non-profits have until 30 June 2010 to report foreign financial accounts that are commingled funds (i.e., collective investment vehicles) for those same years.

All US persons with a financial interest in, or signature or other authority over, any foreign financial accounts, with an aggregate value exceeding $10,000 at any time during the calendar year, must report that relationship each calendar year. Serious penalties can apply if FBARs are not properly filed by 30 June each year, whether the failure to file is inadvertent or wilful. Normally, the reporting obligation is fulfilled by filing FBARs with the US Department of Treasury on or before 30 June of the succeeding year. US persons include citizens or residents of the United States and US domestic corporations, including exempt organizations. Financial accounts include any bank, securities, securities derivatives or other financial instruments accounts, including mutual funds and other commingled funds.

A US person has a financial interest in a foreign financial account if the US person is the owner of record or has legal title OR if the US person owns more than 50 percent of the total value of shares of a corporation that is the owner of record or has legal title over a foreign financial account. A US person has signature authority over an account if such person can control the disposition of assets by delivery of a document containing his or her signature to the bank or other person with whom the account is maintained. A US person has signature authority over a foreign financial account even if they require the signature of a co-signer or someone else can effectively block their signature. All US persons who meet the financial interest or signature authority test with respect to a foreign financial account must file even if the account appears on another person’s FBAR.

There is a harsh penalty regime for the failure to file FBARs. In the case of non-wilful failures to file, the penalty can be as high as $10,000 per account per year. This penalty is also applied per person in the case of multiple account holders on a single account. For instance, an unreported account jointly owned by three US persons with a maximum balance of $10,001 in a single tax year could lead to three separate $10,000 penalties, assuming the failure to file was non-wilful. In the case of wilful failures to file, a taxpayer can be liable to the greater of $100,000 or 50% of the maximum balance per unreported account per year. If the failure to file is found to be wilful, additional and separate criminal sanctions consisting in $250,000 in fines and/or five years in prison can also be imposed.

While there is normally no extension to file an FBAR, the IRS has extended the filing deadline until 15 October 2009 for taxpayers who reported and paid tax on all their taxable income for prior years but did not file FBARs. Those taxpayers should file the delinquent FBAR reports with the Department of Treasury Detroit address and attach a statement explaining why the FBARs are being filed late. In addition, those taxpayers should file copies of the delinquent FBARs, together with copies of tax returns for all relevant years (2003-2008) with the Internal Revenue Service Philadelphia address. The IRS has stated that it will not impose a penalty for the failure to file these FBARs. As noted, the IRS has announced that the FBAR filing deadline would be further extended to 30 June 2010 for (i) taxpayers who have signature authority over, but no financial interest in, a foreign financial account and (ii) taxpayers who have a financial interest in, or signature authority over, a foreign commingled fund (i.e., a foreign investment fund or foreign mutual fund) other than a bank account.

US persons who are also directors of US or foreign non-profits and have signature authority over the non-profit’s foreign financial accounts must file an FBAR, as well as report those foreign bank accounts on their personal tax returns (Form 1040 Schedule B). Such directors who have not previously filed FBARs to report signature authority over, but no financial interest in, a non-profit’s foreign financial accounts, can take advantage of the 30 June 2010 deadline to report those accounts for tax years 2003-2008.

US non-profits that wholly own UK or other foreign subsidiaries that maintain foreign financial accounts or investment account must file an FBAR as well as disclose on Form 990 its financial interest in the foreign subsidiary’s foreign financial accounts. This is in addition to any FBAR filing requirements the US non-profit may have with respect to other foreign financial accounts including foreign commingled accounts, such as foreign investment funds. If the US non-profit has a financial interest in 25 or more foreign financial accounts, it can simply enter the total number of foreign financial accounts for item 14 of Part 1 (page 1 of the FBAR form) and will not need to separately list the information for each account. US non-profits should follow the procedures to report foreign financial accounts in which it had a financial interest in 2008 and preceding tax years in order to file the outstanding FBARs by 15 October 2009 in order to avoid penalties. A statement explaining that the US non-profit only recently learned of its filing obligation must be attached to the FBARs. The US non-profit has until 30 June 2010 to report and file FBARs for any foreign financial accounts that are commingled funds. However, if including these funds would bring the US non-profit’s foreign financial account total to 25 or more, it would lessen the reporting burden to report all accounts on a single FBAR.

The IRS announced on 21 September 2009 that it would extend the Voluntary Disclosure deadline from 23 September 2009 to 15 October 2009 (IR-2009-84, http://www.irs.gov/newsroom/article/0,,id=213463,00.html). The IRS has since confirmed via email that the extension applies to information filing requirements as well, including FBAR filing.

Richard Cassell Of counsel | London

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