Executive summary

On December 22, 2017, the Financial Crimes Enforcement Network (FinCEN) issued Notice 2017-1, which further extends the filing deadline for certain individuals who previously qualified for an extension of time for certain persons to file a Report of Foreign Bank and Financial Accounts (FBAR) with respect to signature authority over foreign financial accounts. This Notice is only relevant for reports of: (i) certain officers and employees of publicly traded or widely held companies with signature authority over foreign financial accounts held by group members and (ii) employees of SEC-registered investment advisors with signature authority over foreign financial accounts owned by customers that are not regulated investment companies, such as hedge funds, venture capital funds and private equity funds. In other words, this Notice is only relevant for persons who were previously granted extensions of time to report signature authority under Notice 2016-1 and preceding guidance (see Tax Alert 2016-2194). Before issuance of this current Notice, these persons had been given an extension of time to file with respect to signature authority for 2016 and prior years until 2018. Notice 2017-1 grants them a further extension of time to file with respect to signature authority for 2017 and prior years until 2019.

Neither Notice 2017-1 nor its predecessor guidance provides additional time to report financial interests in foreign financial accounts. Nor do they provide additional time to report signature authority over accounts owned by either closely held groups that are not financial institutions or foreign-listed publicly traded groups. They also provide no relief for signature authority over customer accounts held by third parties other than employees of registered investment advisors.

The due date to file a report for any year nominally is April 15 of the following year. As discussed in Tax Alert 2016-2194, however, FinCEN has granted an automatic extension, until October 15 of the following year. Thus, assuming that the automatic extension of time policy remains in effect, the extension of time for 2017 and prior years runs until October 15, 2019.

Detailed discussion

Background

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 (which has superseded the prior Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts). Questions on federal income tax returns are designed to remind taxpayers of this requirement. This requirement is separate from the requirement to report ownership of foreign financial assets on Form 8938, Statement of Specified Foreign Financial Assets, filed with the IRS.

Since inception, FBAR reporting was done on a calendar-year basis for all filers regardless of their tax year. Historically, reports for each year were due on June 30 of the following year, with no provision for individual extension. Now, the due date is April 15 of the following year, and FinCEN has granted an automatic extension of time to all filers until October 15 of the following year.

Final regulations issued by FinCEN on February 24, 2011, effective for 2010 and subsequent years, provide various 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 signature authority held by employees of SEC-registered investment advisors over accounts owned by regulated investment companies. 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. For example, suppose P was a US publicly traded company with US subsidiaries C and D. If individual A was an officer of group member C, but not group member D, then individual A was exempt from reporting signature authority over accounts owned by C, but not D, since individual A was not an officer of D. Furthermore, under the final regulations, there was no relief for 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 persons with signature authority over accounts owned by funds other than regulated investment companies, such as hedge funds, venture capital funds and private equity funds.

Notice 2011-1 granted an extension of time until June 30, 2012, for filing FBARs reporting signature authority for 2010 for officers and employees of any US publicly traded company or US or foreign subsidiary thereof over accounts owned by any US or non-US member of the group. The same applies for groups headed by any widely held US company that was a reporting company under the Securities Exchange Act of 1934. Thus, it provided relief for when the individual was an officer or employee of a non-US group member, or the individual had signature authority over an account owned by another group member. In addition, Notice 2011-2¹ provided an extension of time to file until June 30, 2012, for reports of signature authority for 2010 for direct employees or officers of SEC-registered 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. In both cases, relief had not been available if the person with signature authority also had a financial interest (as defined) in the account.

Subsequent FinCEN Notices extended the relief available under these two Notices one year at a time. The most recent extension of time, granted by FinCEN Notice 2016-1, granted an extension of time until April 15, 2018 (automatically extended to October 15, 2018), to file reports for situations governed by the two Notices.

Notice 2017-1

Notice 2017-1 extends the filing deadline to April 15, 2019, (automatically extended to October 15, 2019) for reports of signature authority for 2017 and prior years in the situations governed by Notices 2011-1 and 2011-2.

Example: P is a US publicly traded company owning two US subsidiaries, C and D. C owns a foreign subsidiary, CFC. A is an employee of C, and has signature authority over (but no financial interest in) bank accounts owned by P, C, D and CFC. Under the final regulations, A was exempt from reporting signature authority over accounts owned by C, but not P, D or CFC. Notice 2011-1, as most recently extended by Notice 2017-1, provides that A now has until October 15, 2019, (taking into account the automatic extension) to file reports of signature authority over the accounts owned by P, D, and CFC for 2017 and prior years.

The IRS has not yet issued written guidance confirming how persons benefitting from Notice 2017-1 should answer FBAR-related questions on their 2017 tax returns, or whether they should continue to follow the prior informal guidance on this issue (if their only FBAR filing requirement is extended by the Notices). It has informally confirmed, however, that persons benefitting from Notice 2017-1 should generally answer "Yes" to having signature authority over a foreign account and "No", to whether an FBAR filing requirement exists. For example, based on the prior informal guidance, on the 2017 version of Form 1040, Schedule B, one would answer "Yes" to the first part of question 7a, does one have signature authority over a foreign financial account, "No" to the second part of question 7a, is one required to file Form 114, and not answer question 7b, country where the account is located.

Filing considerations

Although the relief provided by FinCEN Notice 2017-1 is beneficial on its face, one must consider the possibility of proposed changes to the reporting rules before deciding whether to file promptly. On March 1, 2016, FinCEN issued a Notice of Proposed Rulemaking (NPRM) proposing various changes to the signature authority rules (see Tax Alert 2016-455). Although the public comment period has closed, it is not known whether the proposed regulations may be finalized or whether there will be any changes from the current proposed regulations. If the proposed regulations are issued in final form in much the same way as they were drafted, they will benefit some categories of filers and not others. Thus, although in all events one must file for 2017 by October 15, 2019, filers still face a choice. Should one file now under the current regulations if one perceives them as more beneficial than the proposed regulations? Or should one delay as much as possible in the hope that the proposed regulations will be issued in final form and one will be able to file under them?

1. Filers with 25 or more reportable foreign financial accounts

Under the current regulations, US persons with 25 or more reportable accounts report only the number of such accounts and keep detailed information on file for inspection later, if requested. The proposed regulations, if enacted in their current form, would require details of all accounts to be provided, regardless of how many accounts one is reporting. Thus, US persons benefitting from the current regulations should consider submitting filings while the current regulations are in effect (before issuance of new regulations).

2. Reporting exemption for certain officers, employees, and agents with signature or other authority

The proposed regulations would replace the exemptions for reporting signature authority contained in FinCEN Notices 2011-1 and 2011-2 with new rules. The proposed regulations provide a reporting exemption for certain individual officers, employees and agents with signature or other authority over (but no financial interest in) the foreign financial account of an entity when the entity, or another group member, must report its financial interest in the foreign financial account. These changes will benefits some filers, such as employees of US-headed groups that are neither publicly traded nor widely held, but withdraw relief from others, such as employees of regulated investment advisors with signature authority over accounts owned by non-US investment funds. It is possible that, if the new regulations are issued before October 15, 2019, they would only apply to reports filed after the date the new regulations are issued.

Thus, for example, entities that assist their officers, employees and agents with their personal FBAR responsibilities as related to the entity's accounts may consider whether to defer filing in hopes that FinCEN issues new regulations containing this exemption, that apply to calendar-year 2017 filings, before the October 15 filing deadline for 2017 FBARs. Additional factors affecting this consideration include: (1) employees would presumably like to know how to respond to the FBAR-related questions on their federal income tax return, (2) entities with 25 or more reportable accounts might be uncomfortable filing under the current regulations while advising officers, employees, or agents to file under new regulations (if any), (3) new regulations may not be issued enough in advance of October 15 to allow for timely filing, and (4) there is no guarantee that new regulations will apply to 2017 reporting.

Regardless of approach, US persons should not delay data gathering as the information needed is generally the same under either scenario to determine filing requirements, apply exceptions and satisfy the record-retention requirement.

———————————————

———————————————
ENDNOTES

¹ Notice 2011-2 also applies to calendar year 2009 or earlier calendar years for which the filing deadline was properly deferred under Notice 2009-62, 2009-35, IRB 260, or Notice 2010-23, 2010-11 IRB 441.