The IRS has been aggressive recently in pursuing tax cheats who have hidden assets in offshore accounts. Penalties for not reporting the existence of foreign accounts are steep, which concerns even honest businesses and individuals that are unsure about their filing obligations.
Generally, U.S. taxpayers with a financial interest in foreign financial accounts are required to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (often referred to as the “FBAR”), when the aggregate value of those accounts exceeds $10,000 at any time during a calendar year. Such accounts include, but are not limited to, checking, savings, securities, brokerage, mutual fund and other pooled investment accounts held outside the United States. Individuals with signature authority over, but no financial interest in, one or more accounts with the same qualifications must file an FBAR as well. This latter requirement has caused much confusion and concern among executives with some level of discretion over their employers’ foreign financial accounts.
Last February the Treasury Department published final amendments to the FBAR regulations to clarify filing obligations. These regulations became effective on March 28 and apply to FBAR filings reporting foreign financial accounts maintained in calendar year 2010 and for all subsequent years.
These new regulations also specifically apply to people who only have signature authority over foreign financial accounts and who properly deferred their FBAR filing obligations for calendar years 2009 and earlier. The deadline for these individuals to file the FBAR was extended until Nov. 1, 2011.
The IRS also ended an offshore voluntary disclosure initiative as of Sept. 9. During this initiative, the IRS offered a uniform penalty structure for taxpayers who came forward to report previously undisclosed foreign accounts, as well as any unreported income generated or held in those accounts, during tax years 2003 through 2010. Even though the window to participate in the program has closed, the initiative’s FAQs make clear that those with only signature authority on foreign accounts should still file delinquent FBAR reports.
Signature Authority Exception
What does signature (or other) authority mean, as far as the IRS is concerned? The final regulations define signature or other authority as follows:
“Signature or other authority means the authority of an individual (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.”
According to this definition, executives and other employees aren’t necessarily required to file an FBAR simply because they have authority over their business’ foreign financial accounts. Under the final regulations, the Financial Crimes Enforcement Network (FinCEN) grants relief from the obligation to report signature or other authority over a foreign financial account to the officers and employees of five categories of entities that are subject to specific types of Federal regulation. Among these categories are publicly traded companies listed on a U.S. national securities exchange, and companies with more than 500 shareholders and more than $10 million in assets. For publicly traded companies, officers and employees of a U.S. subsidiary may not need to submit an FBAR either, as long as the U.S. parent corporation files a consolidated FBAR report that includes the subsidiary. These exceptions only apply when the employees or officers don’t have a financial interest in the accounts in question.
However, the regulations provide that the reporting exception is limited to foreign financial accounts directly owned by the entity that employs the officer or employee who has signature authority. The exception doesn’t apply if the individual is employed by the parent company, but has signature authority over the foreign account of the company’s domestic subsidiary. Further, foreign accounts owned by foreign subsidiaries of a U.S. corporation are not eligible for this reporting exception.
For example, if the Acme Corp. owns foreign financial accounts, the executives with signature authority over those accounts must also be employees of Acme Corp. in order to qualify for the exception. If a U.S. subsidiary of Acme Corp. owns those accounts, the executives with signature authority over the accounts must be employed by the subsidiary (not Acme Corp. directly), and Acme Corp. must file a consolidated FBAR that includes the subsidiary for the exception to apply.