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Relief and voluntary disclosure opportunity for foreign filings

March 2011

In February of 2011, tax exempt entities welcomed guidance clarifying the requirements for filing the annual Report of Foreign Bank and Financial Accounts (“FBAR”) and the announcement of a voluntary disclosure initiative.

Final FBAR Regulations

On February 23, 2011, the Financial Crimes Enforcement Network (“FinCEN”) released final regulations that provide relief from filing FBARs for tax-exempt organizations that hold investments in certain foreign commingled funds.  

Background

In general, the FBAR is used by U.S. persons to report a financial interest in, or signature or other authority over, one or more financial accounts in a foreign country, including bank accounts, securities accounts, or other types of financial accounts.

Early in 2010, the IRS issued
Notice 2010-23 giving temporary relief for U.S. persons with certain alternative investments by excluding foreign hedge funds and private equity accounts from the financial accounts that needed to be reported on the FBAR. The notice applied only for years 2009 and prior.

Final Regulations

To address concerns that the term “mutual fund” might potentially cover hedge funds and private equity funds, the final FBAR regulations clarify the definition of a “mutual fund”.  The Preamble to the FBAR regulations states that the definition of mutual fund  includes a requirement that the shares be available  to the general public in addition to having a regular net asset value determination and regular redemption feature. Accordingly, hedge funds and private equity funds that do not meet this definition of “mutual fund” are not required to be reported on the FBAR.  The final regulations, however, provide that the treatment of investment companies other than mutual funds or similar pooled funds continue to be reserved. Thus, there is no requirement under the final regulations to report investments in foreign commingled funds if (i) the investment is not a mutual fund or similar pooled fund as defined in the final regulations; and (ii) the investment is not an otherwise reportable foreign financial account under the final regulations.

The final regulations apply to FBARs required to be filed by June 30, 2011 with respect to foreign financial accounts maintained in calendar year 2010 and for reports to be filed with respect to all subsequent calendar years.

2011 Offshore Voluntary Disclosure Initiative

On Feb. 8, 2011, the IRS announced a new initiative - the 2011 Offshore Voluntary Disclosure Initiative ("2011 OVDI"). Although the 2011 OVDI is designed to bring offshore money back into the U.S. tax system and help taxpayers with undisclosed income from hidden offshore accounts get current with their taxes, it also presents an excellent opportunity for tax-exempt organizations that have international activities or that have alternative investments with foreign holdings to address offshore tax compliance issues.

The 2011 OVDI will be available through Aug. 31, 2011.

The tax compliance issues include those relating to offshore assets and accounts, FBAR filings and other foreign information reporting requirements. According to the FY 2011 Internal Revenue Service’s Exempt Organization Work Plan, international tax enforcement is an ongoing priority for the IRS. Therefore, organizations will want to take advantage of the 2011 OVDI by the deadline of Aug. 31, 2011.

Additional details related to the 2011 OVDI can be found in the
IRS’s Frequently Asked Questions (“FAQs”). 

The FAQs also list the civil penalties that can apply for taxpayers who do not come under the 2011 OVDI. These include, but are not limited to, penalties related to the following foreign informational filings:

• FBAR – Form TDF 90.22-1
• Form 5471 – Information Return of U.S. Persons With Respect to Certain Foreign Corporations
• Form 926 – Return by a U.S. Transferor of Property to a Foreign Corporation
• Form 8865 – Return of U.S. Persons With Respect to Certain Foreign Partnerships

See
FAQ 5 for details on the possible civil penalties that can apply if a taxpayer does not come in under the 2011 OVDI.

Taxpayers who have reported and paid tax on all of their taxable income for prior years can be eligible to submit delinquent FBARs and certain foreign information returns (e.g. Form 5471) with no penalties imposed by the IRS. See
FAQ 17 and 18 for details.

Executives who may have signature authority over bank accounts owned by the tax-exempt organization and have not filed the FBAR personally, should see
FAQ No. 17 for guidance. It says that the IRS will not impose a penalty for failure to file the delinquent FBARs if you have no underreported or underpaid tax liabilities, if you attach a statement explaining why the reports are filed late, and if you file the forms by August 31, 2011. However, FBARs for 2010 are due on June 30, 2011 and must be filed by that date.

Questions?

For questions or more information, contact a Grant Thornton professional listed in this alert.

 

For more information

Laura Kenney
Executive Director, Not-for-Profit Tax Services
T 617.848.4985

Daniel Romano
Partner-in-charge, National Not-for-Profit Tax Practice
T 212.542.9609

 

 
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