E-Filing and Signature Authority: What You Need to Know - See more at: http://www.hklaw.com/publications/fbar-update-01-28-2014/#sthash.TAdNpawd.dpuf
The Report of Foreign Bank and Financial Accounts (FBAR) can no longer be filed on TDF 90-22.1, and must be e-filed on Form 114.
This alert summarizes developments involving FBAR e-filing and signature authority. They are crucial to understand, since the penalties for failing to file an FBAR when required can be significant.
Much has been written about the IRS's dogged pursuit of taxpayers with unreported foreign accounts. These accounts are reported on the Report of Foreign Bank and Financial Accounts (FBAR) when a taxpayer has a financial interest in, signature authority or other authority over foreign financial accounts, if the aggregate value of those accounts exceeds $10,000 at any time during the year. The consequences for failing to file an FBAR when required can be drastic. As such, it is critical to understand the extent of the filing obligation, which has continued to evolve since at least 2008.
This alert addresses changes affecting the filing of the FBAR as well as news affecting those taxpayers who must report signature authority over a foreign account. (It does not, however, focus on the broad FBAR filing obligation, definition of financial interest, foreign account or other authority. Similarly, it does not discuss exceptions to the FBAR filing obligation.) For a history of and to understand the filing requirement, please see FBAR—Foreign Bank Account Reporting Obligations: A Primer for the Practitioner and Reporting Foreign Accounts: Treasury Applies the Carrot and the Stick.
On June 29, 2011, the Financial Crimes Enforcement Network (FinCen) announced that all FinCEN forms must be filed electronically with certain exceptions. FinCen granted a general exemption on February 24, 2012 from mandatory electronic filing through June 30, 2013. Notwithstanding, it was possible to electronically file an FBAR, Form 114, since July 2011, or submit the paper file TDF 90-22. However, the FinCen computer system did not permit third-party preparers to file FBARs on behalf of their clients.
Since July 1, 2013, all FBARs, Forms 114, have to be filed electronically; paper copies are not accepted. Any taxpayer filing a delinquent FBAR — as a participant in the voluntary disclosure program, or otherwise — must file the delinquent FBARs electronically. Also, in an effort to assist third-party preparers, on July 29, 2013, FinCEN released a new form, FinCen Form 114a, which permits third-party preparers to file FBARs on behalf of their clients. Form 114a, Record of Authorization to Electronically File FBARs, is not submitted or filed electronically. Rather, both the account owner and the authorized filer should keep a copy of Form 114aalong with the bank records in the event either FinCen or the IRS request to see them. Form 114a is also used by spouses filing a joint FBAR, and allows them to designate which spouse will file.
On September 30, 2013, FinCen announced that Form 114 had been revised to permit the filer the "the ability to select or enter a late filing reason" as well as to add "a new section to enter Third Party Preparer information."
According to its website, "FinCEN's mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities."
One way FinCen safeguards the financial system is by requiring FBARs to be reported. When required to be filed, FinCen must receive the FBAR by June 30. Historically, TDF 90-22.1 is the form that was used to file the FBAR, and it was mailed to FinCen. Thus, simply mailing the FBAR by June 30 was not sufficient, as it had to be received.
Prior to the introduction of the Proposed Regulations amending the rules under the Bank Secrecy Act that apply to the FBAR on February 26, 2010 (The Bank Secrecy Act is codified at 12 U.S.C. §§1951-1959 and 31 U.S.C. §§5311-5330), there was no concise definition for signature authority. Rather, if an individual could order the distribution or disbursement of funds or other property from the institution where the funds or property are maintained by signing a document providing such direction (or in conjunction with one other person signing the document), that individual had signature authority over the financial account.
On February 24, 2011 FinCen announced the introduction of final Regulations amending the rules under the Bank Secrecy Act provisions that apply to the FBAR. The changes were effective March 28, 2011, provided a much needed definition and applied to FBARs being filed for calendar year 2010. The final Regulations accepted the definition contained in the Proposed Regulations, which provided that signature and other authority would be defined to include persons who have authority "(alone or in conjunction with another), to control the disposition of money, funds, or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained." The obligation to file an FBAR will exist only for persons who have the authority to directly deliver instructions to the financial institution, and have the institution act on such directions.
Perhaps because of the draconian penalties that may be imposed on persons who fail to file FBARs when otherwise required to do, FinCen has issued a number of extensions permitting taxpayers to file delinquent FBARs reporting signature authority when such taxpayer does not have a financial interest in the account. Practically speaking, there is no justification for imposing a penalty on someone who did not file an FBAR to report signature authority when they do not have a financial interest in the account. This commonly occurs when such persons are employees of a domestic employer with foreign accounts or a domestic subsidiary of a foreign employer.
Historically, certain persons were exempt from filing an FBAR to report their signature or other authority provided: (1) the accounts belonged to an employer; (2) the employee did not have their own financial interest in a foreign account; and (3) the employee was advised that the employer had filed its own FBAR.
On August 7, 2009, the IRS issued Notice 2009-62, 2009-35 IRB 260 — which provided taxpayers with an obligation to report their signature authority over foreign accounts that were not otherwise exempt — until June 30, 2010 to file FBARs for calendar year 2009 and prior calendar years.
On February 26, 2010, the IRS released Notice 2010-23, 2010-11 I.R.B. 441, which further extended the deadline until June 30, 2011. Specifically, the Notice stated that "[p]ersons with signature authority over, but no financial interest in, a foreign financial account for which an FBAR would otherwise have been due on June 30, 2010, now have until June 30, 2011, to report those foreign financial accounts. The deadline of June 30, 2011, applies to FBARs reporting foreign financial accounts over which the person has signature authority, but no financial interest, for the 2010 and prior calendar years."
The Proposed Regulations also issued on February 26, 2010 included additional exclusions exempting certain individuals with signature authority from the FBAR filing obligation. These additional exemptions covered the following:
Officers and employees of financial institutions that have a federal functional regulator, and certain entities that are publicly traded, are exempt from filing an FBAR as long as the individual does not have a financial interest of their own.
Officers and employees of a bank that is examined by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the FDIC, the Office of Thrift Supervision or the National Credit Union Administration are exempt from filing an FBAR as long as the individual does not have a financial interest of their own.
Officers and employees of a financial institution that is registered with and examined by the Securities and Exchange Commission or Commodity Futures Trading Commission are exempt from filing an FBAR as long as the individual does not have a financial interest of their own. Similarly, the individual does not need to determine whether the employer has filed its own FBAR in order to qualify for the exception.
Officers and employees of banks that are examined by a federal banking agency are exempt from filing an FBAR as long as the individual does not have a financial interest of their own. Similarly, the individual does not need to determine whether the employer has filed its own FBAR in order to qualify for the exception.
Officers and employees of an Authorized Service Provider registered with the SEC are exempt from filing an FBAR as long as the individual does not have a financial interest of their own. This exception is designed to cover persons affiliated with mutual funds and employed by fund service providers.
Officers and employees of an entity with a class of equities or securities that is listed on any U.S. national securities exchange are exempt from filing an FBAR as long as the individual does not have a financial interest of their own. Similarly, the individual does not need to determine whether the employer has filed its own FBAR in order to qualify for the exception. However, if the employee or officer works for the U.S. subsidiary of such an entity, the exemption is not as broad. In such circumstances, the employee must make certain that the U.S. subsidiary is listed on a consolidated FBAR filed by its parent. If the parent does not file an FBAR, then the employee would have to file FBARs to report his or her signature authority over the parent’s foreign accounts. FinCen advises that these persons will have reduced filing obligations.
Officers and employees of domestic corporations are exempt from filing an FBAR as long as the individual does not have a financial interest of their own, and the corporation has more than $10 million in assets and more than 500 shareholders.
On May 31, 2011, FinCen issued Notice 2011-1 that extended by one year for certain taxpayers the June 30, 2011 deadline for taxpayers with signature authority that had previously been extended by Notice 2009-62 and Notice 2010-23. The extension through June 30, 2012 applied to the following individuals:
an employee or officer of a regulated entity (as specified in the FBAR regulations §1010.350(f)(2)(i)-(v)) who has signature or other authority over and no financial interest in a foreign financial account of another entity more than 50 percent owned, directly or indirectly, by the regulated entity (a “controlled person”)
an employee or officer of a controlled person of a regulated entity (as specified in the FBAR regulations — §1010.350(f)(2)(i)-(v)) who has signature or other authority over and no financial interest in a foreign financial account of the regulated entity or another controlled person of the regulated entity
For all other taxpayers with signature authority over previously unreported foreign accounts that met the filing threshold, and had no financial interest, the June 30, 2011 deadline applied to report FBARs for calendar years prior to 2010. However, on June 16, 2011, the IRS issued Notice 2011-54, which extended the June 30, 2011 deadline to November 1, 2011. Such taxpayers were obligated to timely file 2010 FBARs reporting their signature authority.
On June 17, 2011, FinCen Notice 2011-2 was issued. It extended the due date for filing calendar year 2010 and prior year FBARs for certain officers of employees of investment advisors registered with the Securities and Exchange Commission who have signature authority over, but no financial interest in, foreign financial accounts of their employer until to June 30, 2012.
On February 14, 2012, FinCen Notice 2012-1 was issued, which extended until June 30, 2013 the deadline for those persons identified in Notices 2011-1 and 2011-2. It is important to note that the relief provided by Notice 2011-54 was not extended beyond November 1, 2011.
On December 26, 2012, FinCen Notice 2012-2 was issued further extending the relief provided by FinCen Notice 2012-1 to June 30, 2014. Then on December 17, 2013, FinCen Notice 2013-1 was issued further extending the filing deadline to June 30, 2015. In the latest Notice, FinCen stated that it "continues to receive questions that require additional consideration with respect to the exceptions addressed in these Notices, therefore, FinCen is further extending the filing due date to June 30, 2015, for individuals whose filing due date for reporting signature authority was previously extended by Notice 2012-2. This extension applies to the reporting of signature authority held during the 2013 calendar year, as well as all reporting deadlines extended by previous Notices 2012-1 and 2012-2, along with Notices 2011-1 and 2011-2."
Who Benefits from Notice 2013-1 Relief?
The following taxpayers are able to benefit from the relief provided in Notice 2013-1:
an employee or officer of an investment adviser registered with the SEC who has signature or other authority over, but no financial interest in, a foreign financial account of persons that are not investment companies registered under the Investment Company Act of 1940
an employee or officer of a regulated entity (as specified §1010.350(f)(2)(i)-(v) who has signature or other authority over and no financial interest in a foreign financial account of another entity more than 50 percent owned, directly or indirectly, by the regulated entity (a “controlled person”)
an employee or officer of a controlled person of a regulated entity (as specified in §1010.350(f)(2)(i)-(v)) who has signature or other authority over and no financial interest in a foreign financial account of the regulated entity or another controlled person of the regulated entity
The extension does not apply to any other individual with signature authority. The relief provided by Notice 2011-54, which permitted such taxpayers to file FBARs for calendar years 2010 and earlier was not extended beyond November 1, 2011.
Notwithstanding, it would appear that taxpayers who are just now learning of their obligation to file an FBAR to report signature authority could benefit from the relief provided in the Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers #17, which was issued on June 26, 2012. FAQ#17 permits an individual who has properly reported all of his or her taxable income but only recently learned that FBARs should have been filed to report ownership of their personal foreign bank account or the fact that the taxpayer has signature authority over bank accounts owned by their employer to file delinquent FBARs and avoid penalty.
To ensure compliance with Treasury Regulations (31 CFR Part 10, §10.35), we inform you that any tax advice contained in this correspondence was not intended or written by us to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code.