March 7, 2016 FinCEN proposes revising FBAR rules Executive summary On March 1, 2016, the Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking (NPRM) to revise certain provisions of the rules regarding the filing of Reports of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114. The proposed rules would expand and clarify the exemptions for certain US persons with signature or other authority (signature authority) over foreign financial accounts, remove the special rules permitting limited account information to be reported when a US person has a financial interest in or signature authority over 25 or more foreign financial accounts, and require institutions to maintain a list of all employees and officers with signature authority over foreign financial accounts, to be made available to FinCEN and law enforcement upon request for a period of five years. The proposed rules would also make several other changes, including a change to the filing date for FBAR reports due in 2017 and subsequent years, and a revision to reflect electronic filing of FBARs. FinCEN noted that the revisions would mainly apply to financial professionals who file FBARS due to their employment responsibilities, but they would also affect entity filings. The previously issued temporary notices of extensions issued by FinCEN concerning those filers covered by this NPRM remain unaffected at this time (see Tax Alert 2015-2345). Please note that these are only proposed rules and they do not change any of the current FinCEN FBAR filing rules until they are issued in final form, which is expected at some future date later this year or early next year. They will not affect any FBARs filed for the calendar year 2015, which are due on June 30, 2016. Detailed discussion In general, and subject to certain exceptions, persons with either a financial interest (as defined) or signature authority (as defined) over a foreign bank, brokerage or other financial account during a calendar year must report it to FinCEN (not the IRS) electronically using the BSA E-Filing System on FinCEN Form 114. The due date for this filing is June 30 of the following year for reporting for calendar years up to and including 2015; for reports for calendar year 2016 accounts due in 2017 and subsequent years, the due date will be April 15 — see Tax Alert 2015-1953. The current regulations provide several exemptions from the requirement to file reports with respect to signature authority, including signature authority held by officers and employees over accounts owned by publicly traded or certain widely held companies (e.g., reporting companies under the Securities Exchange Act of 1934) and their subsidiaries, and signature authority held by employees of SEC-regulated investment advisors over accounts owned by SEC-regulated investment companies (see Tax Alert 2011-395). Complaints arose that these exemptions were too narrow. First, they did not help officers or employees of publicly traded or widely held companies if an officer or employee of one group company held signature authority over an account owned by another group company, referred to by FinCEN in the NPRM as "over-lapping" signature authority. Furthermore, under the final regulations there was no relief for reporting signature authority over accounts owned by non-US members of the group, such as subsidiaries that are CFCs. Finally, the final regulations provided no relief for employees of regulated investment advisors with signature authority over accounts owned by customers other than regulated investment companies, such as hedge funds, venture capital funds and private equity funds. A series of Notices issued by FinCEN provided extensions to certain individuals meeting specified criteria. Officers and employees of any US publicly traded company or US or foreign subsidiary thereof with signature or other authority over accounts owned by such US or non-US member of the group during 2015 and prior years were granted extensions of time to file an FBAR. In addition, the due date was extended for reports of signature or other authority for 2015 and prior years for direct employees or officers of SEC-regulated investment advisors (but not employees or officers of other group entities) who had signature or other authority over accounts owned by customers other than regulated investment companies, such as hedge funds, venture capital funds and private equity funds. Under the guidance as currently in effect, and subject to the NRPM, FBARs falling within both of the above categories are now due April 15, 2017. P.L. 114-41, "The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015", has changed the filing date for FBAR, effective for reports for calendar year 2016 accounts that are due in 2017. The Act also provides for the possibility of penalty relief for first-time FBAR filers. In addition, the legislation provides authority to grant a six-month FBAR filing extension period ending on October 15. Such an extension had not previously been available. Proposed changes FinCEN proposes to modify the signature authority exemption by removing the current exemptions and adding a simplified and expanded exemption. Under the proposed exemption, officers, employees or agents of an entity would no longer be required to report their signature authority over a foreign financial account in which such entity, or another entity with whom such entity is permitted to file a consolidated FBAR, has a financial interest, when: (1) the individual employee, officer or agent has no financial interest in the account, and (2) the account is required to be reported under the FBAR rules by such entity or another entity with whom such entity is permitted to file a consolidated FBAR (referred to by FinCEN as an entity within the same corporate or other business structure). The entity would be required to identify the officers, employees and agents who have signature or other authority, maintain the information for five years1 and provide the information to FinCEN on request. As under current law, however, the proposed regulations would provide no relief for many individuals with signature authority over, but no financial interest in, foreign financial accounts during the course of their employment. Under the proposed regulations, as under current law, individuals with signature or other authority over accounts owned by non-US entities that are not more than 50% owned, directly or indirectly, by a US entity have no relief, because no US entity would be required to report its financial interest in the accounts. In those instances, the US person would be obligated to report his or her signature authority over such accounts. If the US person resides outside of the US, a simplified procedure may be available, as under current law. The US person will be required to report the entities that own the accounts over which the US person has signature authority, but the US person will not be required to list all such accounts. The exemption from reporting for employees of SEC-regulated investment advisors with signature authority over foreign accounts owned by SEC-regulated investment companies would continue. There would, however, be no relief for employees of such investment advisors with signature or other authority over foreign accounts owned by customers other than such investment companies, such as hedge funds and private equity funds. Questions on US federal income tax returns, such as Question 7a of the 2015 version of Form 1040, Schedule B, Part III, point to the requirements to file FBAR reports. As of yet, it is not known how the government expects people qualifying for an exemption from reporting signature authority under the proposed regulations to answer these questions. 2. Detailed account information for filers with 25 or more financial accounts Historically, a US person having a financial interest in or signature authority over fewer than 25 accounts was required to provide detailed information about each such account, but such a US person having a financial interest in or signature authority over 25 or more accounts was permitted to report only the number of such accounts, and keep detailed information on file for inspection later if requested. The proposed regulations would eliminate this distinction. All US persons would be required to report detailed information on all foreign financial accounts for which he or she has a financial interest or signature or other authority, regardless of the number of accounts. 3. Due date and extension The new rules reflect the accelerated filing date of April 15, effective for reports for 2016, filed in 2017. Although the statute provides for an extension of time to October 15, the proposed regulations do not discuss how to request this extension. The accelerated deadline will create some complications for FBAR filers, who will have less time to determine whether they have a filing requirement and are in need of an extension. 4. Request for comments FinCEN is asking for public comments on a number of topics, including whether expanding the signature authority exemption provision as proposed will reduce burden, and if so, by how much. FinCEN also requests comments as to whether it should allow entities and individuals to rely upon the provisions of the NPRM, if finalized, with regard to FBAR filings properly deferred under FinCEN Notices 2011-1; 2011-2; 2012-1; 2012-2; 2013-1; 2014-1; and 2015-1 (reporting for calendar years 2010 - 2015). Reliance on the provisions of the NPRM would not benefit all filers who benefitted from extensions afforded by the Notices. Although the Notices provided for extensions for filers who would be exempt under the proposed regulations, they also provided extensions for filers who would be required to file under both the current and proposed regulations. Comments are also requested regarding whether removing the special rules when reporting 25 or more foreign financial accounts will increase the burden on affected entities and individuals, and, if so, by how much, and whether there will be any technological costs to be incurred to implement systems to transfer account information to the BSA E-filing system. FinCEN also request comments on the estimated timeframe to implement those technology modifications, if any. ———————————————
——————————————— 1 The statute of limitations for assessing a penalty to file an FBAR report is six years, but the proposed regulations as issued only require such information to be retained for five years. It is not known whether the difference between the period of limitations and the period for retaining records is intentional or a drafting error. | |||||||||||||||||||
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