Pulling a Fast one on Your Financial Freedoms

Mark Nestmann (March 18, 2010)

Earlier this month, the U.S. Treasury finally clarified exactly what it expects U.S. taxpayers to disclose about their offshore holdings.
And—no surprise here—they want to know lots more about what you own offshore. Beginning last year, in 2009. And, if you fail to comply, you could face a $10,000 fine and even prison…

FBAR…or FUBAR??

In an announcement in the Federal Register, the Financial Crimes Enforcement Network (FinCEN), the Treasury Department’s “financial intelligence unit,” issued proposed regulations to become effective in the next two months. That’s well before the June 30, 2010 filing deadline for Treasury Form TD F 90-22.1, the “foreign bank account reporting” form, or FBAR.

That means they would apply retroactively to 2009.

FinCEN’s proposed rules present a worst-case scenario for any U.S. citizen or permanent resident seeking offshore privacy. They greatly expand the types of offshore financial relationships that you need to acknowledge.

Moreover, the FBAR isn’t considered a “tax return.” That means that Barney Fife or any other law enforcement officer in the United States can browse through FBAR filings. So can law enforcement officials in many other countries.

If you’ve filed FBARs before, you know that the law requires U.S. persons “having a financial interest in, or signature or other authority over, a bank, securities, or other financial accounts” with an aggregate value of $10,000 or more to report such accounts annually. It’s relatively clear what constitutes a foreign “bank account” or “securities account.” But, what’s an “other financial account?”

With these proposed regulations, FinCEN has finally answered that question. Not bad, guys—it’s only been 40 years since Congress enacted the ironically named “Bank Secrecy Act,” the law requiring U.S. persons to submit FBARs.

FinCEN now demands that U.S. persons report retroactively to 2009 and in the future:

• All foreign insurance policies with cash value
• All foreign annuity policies
• All foreign accounts with brokers or dealers for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association
• All foreign accounts with mutual funds or similar pooled funds that issues shares available to the general public with a regular net asset value determination and regular redemptions.

FinCEN also says it wants U.S. persons to report “an account with a person that is in the business of accepting deposits as a financial agency.” A “financial agency” is “a person acting for a person as a financial institution bailee, depository trustee or agent, or acting in a similar way related to money, credit, securities, gold, or in a transaction in money, credit, securities or gold.” Basically, what this means is that if you entrust a person outside the USA with your money, securities, or gold, FinCEN wants to know about it.

The example FinCEN gives of a “financial agency” is an escrow account at a foreign financial institution, but the definition is potentially much broader. For instance, if you buy gold overseas and pay a custodian for safekeeping, that custodian is probably acting as a financial agency. On the other hand, if you keep the gold in a safety deposit box at a bank or private vault facility to which only you have access, the bank or vault probably isn’t acting as financial agency. The final rules may clarify these requirements.

It’s almost inconceivable that these rules won’t become effective, although FinCEN may not succeed in making them retroactive to 2009. Indeed, the Obama administration is working on at least three fronts simultaneously to expand offshore reporting requirements:

1. The proposed FinCEN rules.
2. The proposed FATCAT law that contains many of these same provisions is working its way through the U.S. Senate
3. Proposals in the 2010 and 2011 Treasury Green Book submitted to Congress by the Obama administration

I summarized the proposals in FATCAT and the 2010 Green Book a few weeks ago here.

Another aspect of these rules will no doubt disturb foreign persons investing offshore through a U.S. corporation, partnership, or limited liability company.

Anyone, U.S. or foreign, who owns 50% or greater interest in a U.S. corporation, partnership, or limited liability company, must already file the FBAR. The proposed rules extend this obligation to a foreign investor holding non-U.S. assets through a U.S. “disregarded entity.” This is true even if the disregarded entity holds no U.S. investments.

Simply the fact that the entity was formed under the laws of a U.S. state triggers reporting.

The Silver Lining…

There’s a silver lining in the proposed rules, however, for some offshore investors.

The most important is that if you have offshore investments in your retirement plan (including your IRA), the FinCEN announcement would exempt you from filing the FBAR. However, your retirement plan or IRA custodian still needs to file the form. Moreover, if the IRA formed a foreign entity (such as a LLC), you may need to file the FBAR for any accounts the LLC holds.

In a separate ruling, the IRS announced that foreign persons “in or doing business” in the United States don’t need to file a FBAR for 2009. This is welcome news for investors from countries with less than stellar records on human rights or corruption. The Treasury Department shares FBAR information with foreign governments, so foreign investors won’t need to worry about this data getting into the wrong hands—at least temporarily.

In yet another surprise announcement, the IRS backed away from its insistence that anyone who merely signs checks or authorizes payments from a foreign account, but has no financial interest in it, file a FBAR. The IRS has delayed the effective date of this requirement until June 30, 2011. This means that if you had such authority in 2009, you don’t need to file FBAR for 2009. However, you will need to file it for 2010, unless the IRS extends the deadline once again.

The same announcement also delays the effective date that U.S. investors in private equity or hedge funds need to report their interests in such funds. U.S. hedge fund investors won’t need to file a FBAR for such holdings for 2009.

If you own an interest in hedge funds in 2010, you’ll need to acknowledge that interest by June 30, 2011. Again, this deadline may well be extended. However, you must still report other offshore funds on the FBAR.

These silver linings don’t change the fact that if you’re a U.S. taxpayer, the government wants to know the details of virtually everything you own offshore.

What’s more, it’s moving forward on at least three simultaneously to force you to submit this information, as I described above. That makes it almost inconceivable the expanded reporting rules won’t eventually become effective, although FinCEN may not succeed in making them retroactive to 2009.

Sincerely,

Mark Nestmann

Wealth Preservation & Privacy Expert

P.S. Does it all sound confusing? These are exactly the types of issues that our Council of Experts will be explaining—and helping attendees solve personally—at this year’s Total Wealth Symposium in Montreal. Click here for all the details…

Tags: offshore