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Section 800
Miscellaneous Reporting Requirements

¶801 Foreign Bank Account Reporting

Many colleges and universities that conduct educational or other activities overseas also establish a bank account in the foreign country to facilitate the receipt of income and the payment of expenses. The bank account is created in the name of the institution, and one or more individual employees, by necessity, will have signature authority over the account. In addition to whatever foreign country reporting obligations may exist, the creation of a foreign bank account also raises reporting requirements with the Department of Treasury and the IRS to comply with 31 U.S.C. 5314 (Bank Secrecy Act) and the implementing regulations at 31 C.F.R. 103.24, 103.27, and 103.32.

PRACTICE TIP
Proposed Regulations

On February 26, 2010, the Financial Crimes Enforcement Network (FinCEN), which is a bureau in the Department of Treasury with enforcement authority over Bank Secrecy Act, proposed regulations governing the filing of the FBAR. See 75 Fed. Reg. 8844 (Feb. 26, 2010).

¶801.1 Report of Foreign Bank and Financial Accounts (FBAR)

Any “U.S. person” who has a financial interest in, or signature authority over, a foreign financial account or accounts with an aggregate value in excess of $10,000 at any time during a calendar year must file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly referred to as FBAR, regardless of whether the accounts generate taxable income.

It is important to note that this reporting obligation is imposed not only on the entity, such as a college or university, that has the “financial interest in” the foreign bank account, but also on the institution’s employees who have “signature authority over” the account. A U.S. person has account signature authority if that person can control the disposition of money or other property in the account by delivery of a document, such as a check, containing his signature to the bank or other person with whom the account is maintained.

Thus, for example, if University X establishes a bank account in Foreign Country Y, and University X’s treasurer has signature authority over the bank account, the Treasury Department reporting obligation is imposed on both University X and the treasurer.

Foreign financial accounts are accounts that are located outside of the United States and its territories and include the following:

• Bank accounts, such as savings accounts, checking accounts, and time deposits
• Securities accounts, such as mutual funds, brokerage accounts, and securities derivatives accounts.
• Accounts where the assets are held in a commingled fund and the account owner holds an equity interest in the fund
• Any other account(s) maintained in a foreign financial institution or with a person doing business as a financial institution

Some IRS officials have said that the third type of account, assets held in a commingled fund, includes offshore hedge funds, which is a departure from previous IRS practice. Although this interpretation does not appear in official guidance, it has created enough confusion to prompt IRS to issue some relief for persons who were not aware of requirements relating to foreign commingled funds. See ¶801.1.5.

Simplified reporting is available for institutions reporting on 25 or more foreign financial accounts. Specific information is not required on each account, but records must be maintained and available for disclosure to the Treasury Department upon request. See FBAR instructions, line 14.

There also is a reporting exception for officers and employees of U.S. corporations that either have securities listed on a national exchange or assets exceeding $10 million and 500 or more shareholders. But this “large corporation” exception does not apply to employees of large public or private colleges and universities because they are not listed on securities exchanges and do not have shareholders. (However, if finalized, the regulations proposed in February 2010 (see Practice Tip) would include a filing exemption for governmental entities, including public colleges and universities, and a retirement plan of a governmental entity.) Thus, U.S. citizen or resident employees of colleges and universities that have foreign bank accounts with aggregate balances in excess of $10,000 must file the Form TD F 90-22.1, regardless of the size of the institution.

¶801.1.1 What Is a 'U.S. Person'?

The IRS revised the definition of "U.S. person" in the October 2008 instructions to Form TD F 90-22.1. In the revised instructions, a U.S. person is defined as follows:

The term “United States person” means a citizen or resident of the United States, or a person in and doing business in the United States. ... A foreign subsidiary of a United States person is not required to file this report, although its United States parent corporation may be required to do so. A branch of a foreign entity that is doing business in the United States is required to file this report even if not separately incorporated under U.S. law.

Under the prior instructions, a United States person was defined as (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust.

Because the revised definition created confusion, IRS issued Announcement 2009-51 in which it allowed persons with a filing deadline of June 30, 2009, to rely on the definition of United States person in the July 2000 FBAR instructions, rather than the 2008 revision.

¶801.1.2 Filing Deadline

The form is due to the Department of Treasury on or before June 30 of the year following the reporting year. For example, if the filing is for 2009, it is due June 30, 2010, unless an extension is granted. See 31 C.F.R. §103.27 (c). The IRS has granted some relief from this filing deadline for certain persons. See ¶801.1.5.

¶801.1.3 Recordkeeping

FBAR records should be kept for five years from the due date of the report which is June 30 of the following calendar year. The records should contain the following:

• Name maintained on each account
• Number or other designation of the account
• Name and address of the foreign bank or other person with whom the account is maintained
• Type of account
• Maximum value of each account during the reporting period

See 31 C.F.R. §103.32.

¶801.1.4 Penalties

Civil penalties for noncompliance that is not willful can cost as much as $10,000 per violation; a willful violation can reach $100,000 or 50% of the amount in the account. The IRS also may seek criminal penalties, which carry prison time. Figure 801-1 sets out the penalties.

Figure 801–1 Penalties for FBAR Noncompliance

Violation	Civil Penalties	Criminal Penalties
Negligent Violation	Up to $500	N/A
Non-Willful Violation	Up to $10,000 for each negligent violation	N/A
Pattern of Negligent Activity	In addition to penalty under § 5321(a)(6)(A) with respect to any such violation, not more than $50,000	N/A
Willful - Failure to File FBAR or retain records of account	Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation.	Up to $250,000 or 5 years or both
Willful - Failure to File FBAR or retain records of account while violating certain other laws	Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation.	Up to $500,000 or 10 years or both
Knowingly and Willfully Filing False FBAR	Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation.	$10,000 or 5 years or both

¶801.1.5 Reporting Relief

Because of the revision to the FBAR instructions, as well as confusion as to what accounts must be reported, the IRS has provided relief for certain filers.

In Notice 2010-23, the IRS announced that it would interpret the term “commingled fund” to include only mutual funds for 2009 and prior years. The interpretation precludes foreign hedge funds and private equity funds, among others, from the FBAR filing requirement for 2009 and before.

In Announcement 2009-51, and again in Announcement 2010-16, the IRS suspended the filing requirements for the 2009 and all prior FBARS for persons who are not citizens, residents, or domestic entities. In addition, all persons may rely on the definition of U.S. person found in the prior instructions to the FBAR, dated July 2000 (see ¶801.1.1).

Because of the confusion over whether and what foreign commingled funds must be reported, the IRS also posted language on its Web site providing penalty relief until September 23, 2009, for filing organizations that need extra time to gather the information required to report on previously unreported offshore investment funds. This information was published as part of the Frequently Asked Questions (see Question 43) on the voluntary disclosure of unreported offshore bank accounts.

Then in Notice 2009-62, the Service extended the filing deadline until June 30, 2010, for 2008 and all earlier year FBARs for the following persons:

This extension does not apply to U.S. persons with a legal or beneficial ownership of a foreign bank, securities, securities derivatives, or other financial instruments accounts. Relief for these persons may be available until September 23, 2009, under the circumstances explained in Frequently Asked Questions.

To take advantage of the first extended deadline, institutions must have reported and paid tax on all 2008 taxable income and file the FBAR with a statement explaining why the report is late, as well as a copy of the institution’s 2008 tax return. (See FAQs #43 and 44.) Under these circumstances, the taxpayer will not be penalized for failure to file the FBAR. For prior year FBARs, institutions may follow a similar procedure without penalty, as long as they have reported and paid taxes on all taxable income. The IRS has not updated the Q&As yet to reflect the extension in Notice 2010-23, but presumably the conditions will be the same.

While it is clear under recent guidance that foreign hedge funds and private equity funds do not need to file the FBAR for 2009 and earlier years, if there is any uncertainty about whether to file, most tax and investment advisers have been urging taxpayers to file Forms TD F 90-22.1. Civil penalties for failure to file can go up to $10,000 per account, with much higher amounts for willful failure to file: $100,000 or 50% of the financial account balance, in addition to criminal penalties.

Note that the proposed regulations would not impose the filing requirement on private equity funds, hedge funds, and venture capital funds because of “pending legislative proposals” but did not rule out imposing the requirement in the future. 75 Fed. Reg. 8846.

Information related to FBAR reporting, including definitions, recordkeeping requirements, and the range of civil and criminal penalties can be found in the IRS Workbook on the Report of Foreign Bank Accounts.

¶801.2 IRS Reporting

For IRS purposes, institutions must report the existence of these foreign financial accounts on both the revised Form 990 and Form 990-T.

Part V, Line 4a of the revised Form 990 asks whether the institution had an interest in, or signature or other authority over, a financial account in a foreign country and whether the combined value of all such accounts was more than $10,000 at any time during the calendar year. If the response is “Yes,” the form instructs the filer to complete the FBAR.

Those institutions that receive unrelated business income during the year are required to file Form 990-T, and Part V, Line 1 of the form asks them to indicate whether at any time during the calendar year they had any interest in, or signature authority over, a foreign bank account.

As a general rule, an individual who must report his or her signature authority over a foreign bank account on Form TD F 90-22.1 also is required to report such signature authority to the IRS on the individual’s personal income tax return, specifically, Part III, Lines 7a and 7b of Schedule B, Form 1040. Line 7a asks the taxpayer to respond to the following question:

At any time during [the tax year for which the return is being filed], did you have an interest in or signature authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?

If the answer to this question is Yes, Line 7b asks the taxpayer to enter the name of the country where the bank account is located. Once again there is a “large corporation” exception, but it again will not apply to officers and employees of nonprofit public and private educational institutions.

However, the IRS has now instructed a taxpayer who qualifies for the extensions provided in Notice 2010-23 (e.g., with signature authority only) to respond “No” to all FBAR-related questions regarding a financial interest in, or signature authority over, a foreign financial account, on federal income tax forms for 2009 and earlier.