21st Annual Health Sciences Tax Conference€¦ · · 2015-07-232011-06-30 · 21st Annual Health Sciences Tax Conference ... Practical application of the “financial interest

21st Annual Health Sciences Tax Conference FBAR breakfast forum 6 December 2011

FBAR breakfast forum Page 2

► Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

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Presenters

► Polly Mihalkovic Tax Director Sentara Healthcare Norfolk, Virginia

► Frank D. Cannetti Executive Director Ernst & Young LLP 2100 One PPG Place Pittsburgh, Pennsylvania 15222 +1 412 818 6062 [email protected]

► Robert Vuillemot Senior Manager Ernst & Young LLP 2100 One PPG Place Pittsburgh, Pennsylvania 15222 +1 412 644 5313 [email protected]

Page 5

FBAR technical dive


► Introduction to foreign bank account reporting (FBAR)

► Overview of key FBAR terminology

► Practical application of the “financial interest in” rules

► Practical application of the “signature authority over” rules

► FBAR filing mechanics

► Prior-year FBAR filing issues and common mistakes

► Other matters

Technical dive agenda


Introduction to FBAR

► Anti-money laundering rules (31 U.S. Code §5314) give the US Treasury power to require reporting of transactions or relationships with foreign financial agencies.

► Not part of the Internal Revenue Code and most tax rules do not apply, but in some instances a few rules apply ► No mailbox rule, no family attribution rules, definition of the US is

different, no disregarded entities, etc. ► IRS substantial presence test is followed but no reliance on any

tax treaty relief ► Historically administered by another branch of Treasury

(Financial Crimes Enforcement Network (FinCEN)) ► Administration/enforcement transferred to IRS in 2003 (SBSE)

Bank Secrecy Act and Fraud Division, but FinCEN still heavily involved in guidance process








► Other matters



Key FBAR terminology

► Who must file an FBAR (Form TD F 90-22.1)?

► A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeded $10,000 at any time during the calendar year

► What is the United States?

► For FBAR purposes, the United States includes the states, the District of Columbia, all United States territories and island possessions.

► A broader definition than in the Internal Revenue Code


► Who is a United States person? ► United States citizens ► United States residents ► Persons meeting the IRC Section 7701(b) substantial

presence test ► Entities created or organized in the US or under the laws

of the US and trusts or estates formed under the laws of the US ► The federal tax treatment of an entity is not relevant in

determining whether the entity has an FBAR filing requirement – for example, an entity that is “disregarded” for tax purposes must file an FBAR if otherwise required to do so.



► What is a financial account? ► A financial account includes, but is not limited to, a

securities, brokerage, savings, demand, checking, deposit or other account maintained with a financial institution or other person performing the services of a financial institution.

► A financial account also includes: ► Commodity, futures and options accounts ► Insurance or annuity policies with cash value ► Shares in a mutual fund or similar pooled fund, but only if

the fund: ► Is available to the general public ► Has a regular net asset value determination ► Offers regular redemption opportunities



► What is a foreign financial account? ► A financial account located outside of the United States

► Examples:

► An account maintained with a branch of a US bank that is physically located outside of the United States is a foreign financial account

► An account maintained with a branch of a foreign bank that is physically located in the United States is not a foreign financial account

► Physical location is the key determining factor

Key FBAR terminology (cont.)


► $10,000 aggregate value ► Determined by aggregating the highest value at any time

during the year of each foreign financial account ► Includes the total value of accounts in which the filer holds:

► A financial interest Or

► Signature or other authority over the account

► If the account is not maintained in US dollars, convert the aggregate maximum value of the foreign currency by using the Treasury’s Financial Management Service rate from the last day of the calendar year.

► If the aggregate of the maximum account values exceeds $10,000, an FBAR must be filed.



► “Financial interest in” or “signature or other authority over” foreign financial accounts

► “Financial interest in” includes direct and indirect ownership as well as accounts held on behalf of the account owner.

► “Signature or other authority” only applies to individuals.

► Exceptions may apply.

► No legal entities can ever have signature authority and will never complete Part IV of Form TD F 90-22.1.








► Prior year FBAR filing issues and common mistakes

► Other matters



Financial interest in an account

► Includes accounts owned by a nominee/agent (“held on behalf of” rules)

► Includes indirect ownership of foreign financial accounts owned by: ► Any corporation in which the US person owns >50% by vote or

value, or ► Any partnership in which the US person owns >50% of profits

(taking into account any special allocation agreement) or >50% of capital

► Grantor trusts of which the US person is the grantor; trusts in which a US person has a greater than 50% present beneficial interest in trust assets or income for the calendar year

► Any other entity in which the US person owns >50% by vote or value


Financial interest in an account (cont.)

► If a US person has a financial interest in 25 or more accounts: ► Report the number of such accounts in Part I of the FBAR

► If consolidated filing, complete Part V to report the names of the account owners

► Keep a detailed list available for inspection upon request


Consolidated reports of financial interests Broader definition of groups eligible

► Old rule: A US corporation could file a consolidated report of financial interests on behalf of itself and other entities of which it owned more than 50%, directly or indirectly.

► New rule: Any US entity can file a consolidated report of financial interests on behalf of itself and other entities of which it owns more than 50%, directly or indirectly.

► Head of group no longer required to be a corporation

► No individual can be a member of a consolidated FBAR filing and no individual will ever complete Part V of the FBAR.








► Other matters



Signature authority as clarified by regulations ► Signature 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 communications (whether in writing or otherwise) to the person with whom the financial account is maintained. ► Only individuals, not entities, are capable of possessing

“signature or other authority.”

► Only individuals who can give instructions directly to the financial institution (by themselves or jointly) have signature authority. ► Merely being in the chain of command is not signature authority.


Regulations end signature authority moratorium; notices extend deadlines ► Notice 2009-62 and Notice 2010-23 provided that all filings

reporting only signature authority for 2008 and 2009 (and prior years) would not be due before 30 June 2011. ► Originally this moratorium was to give the government time to

reconsider the definition of “signature authority” as regulations were being drafted.

► February 2011 regulations require that signature authority only filings for 2010 and, if required, prior years, be made by 30 June 2011. ► A US person may use the new definition of signature authority in

filing reports for the back years, if required.

► FinCEN and IRS notices issued later extended certain filing deadlines for signature authority filings.


Regulations end signature authority moratorium; notices extend deadlines (cont.) ► FinCEN Notices 2011-1 and 2011-2 extend signature

authority only filings due 30 June 2011 to 30 June 2012 for officers and employees of: ► Publicly traded, widely held companies or regulated financial

institutions (or controlled entities of any of these) as to:

► Foreign financial accounts of foreign controlled entities

Or

► Foreign financial accounts of affiliates of which the individual is not an officer or employee

► Notice 2011-54 extended signature authority only filings for 2009 and prior years to 1 November 2011.


Historic relief from signature authority filings for widely held and publicly traded groups ► There have always been filing exceptions for officers and

employees of domestic corporations (including their subsidiaries) that have: ► Stock listed on a US national securities exchange Or ► Both assets >$10 million and 500 or more shareholders of record (i.e.,

reporting companies under the Securities Exchange Act of 1934)

► Historically, CFO notification letter was required for 2009 and prior calendar years (as well as the accounts being reported on a consolidated FBAR of the entity).

► For 2009 and prior calendar years, the filing exceptions also covered officers and employees of foreign subsidiaries if the US parent corporation included the accounts on its consolidated FBAR.


New regulations limit relief for officers and employees ► Old law: Officer/employee of any group member was

exempt from reporting signature authority over foreign financial accounts owned by any group member, including foreign subsidiaries.

► New law: Officer/employee of a domestic group member is only exempt from reporting signature authority over financial accounts owned by group member of which he or she is an officer or employee.

► All relief for employees with signature authority over accounts of foreign subsidiaries has been eliminated.


Limited relief

► Relief only available to officers and employees of: ► US publicly traded companies and their US subsidiaries

included in parent’s consolidated FBAR

► Widely held companies, but not subsidiaries of widely held companies

► CFO letter is no longer required as of 2010.

► Filers generally must keep records concerning the accounts with respect to which they file. ► Officers and employees filing to report only signature

authority do not need to keep records of employer accounts (the employer must keep account records).


Officer/employee relief Example

► Old rule: Maria is exempt from FBAR filing for C, D and CFC (CFO letter required for all entities).

► New rule: Maria is exempt from filing an FBAR for C’s accounts (no CFO letter needed) but must file an FBAR to report D’s and CFC’s accounts.

(Publicly traded) Maria is an employee of C and has signature authority over foreign financial accounts of C, D and CFC (she does not have a financial interest in any of the accounts).

P

C D

CFC


Officer/employee relief Example (cont.)

► Old law: Maria is exempt from FBAR filing for C, D and CFC (CFO letter required for all entities).

► Final reg.: Maria has an FBAR filing obligation on C’s, D’s and CFC’s accounts. (If Maria were an employee of P, she would be exempt from FBAR filing for a foreign financial account of P).

(Not publicly traded, but widely held, e.g., SEC-registered)

Maria is an employee of C and has signature authority over foreign financial bank accounts of C, D, and CFC (she does not have a financial interest in any of the accounts)

P

C D

CFC


Regulated entities and signature authority

► Continued exception: Officers/employees of a federally regulated bank, thrift or credit union are exempt from reporting signature authority over accounts owned by the institution.

► Additional new exceptions: ► Officers/employees of brokerages registered with and examined

by the SEC and futures commission merchants regulated and examined by the Commodities Futures Trading Commission (CFTC) are exempt from reporting signature authority over accounts owned by the institution.

► Officers/employees of regulated investment advisors that advise a 1940 Act regulated mutual fund are exempt from reporting signature authority over accounts owned by the fund.








► Other matters



FBAR filing mechanics

► New version of Form TD F 90-22.1 released in March 2011 made all prior versions obsolete.

► Simplified procedures apply for: ► Persons with signature authority, but no financial interest in, 25 or

more accounts, and ► US persons residing outside the United States with signature

authority over accounts of non-US employer ► Delivery of a report to an IRS office, or to a Treasury attaché abroad,

no longer constitutes filing until report is received by the Detroit Data Center.

► Electronic filing may be mandatory for 30 June 2012 FBAR filings. ► One person cannot file two original reports; to report additional

accounts, amend the original report (IRS informal advice).


► Reports must be received by Detroit Data Center by 30 June.

► No individual extensions possible – only extensions available are by IRS or FinCEN notices

► Questions on returns (Form 1040 Schedule B, Part III; Form 990, Part V, Question 4; Form 1120 Schedule N, Question 6) ask whether filer has a financial interest in, or signature authority over, a foreign financial account – expect a cross-reference to be made at some future date.

FBAR filing mechanics (cont.)


► Penalties for failing to file a proper FBAR: ► Non-willful civil penalty up to $10,000 per account per year ► Willful civil penalty – minimum of $100,000 or 50% of the balance

in each account at the time of the violation ► Willful violations may result in criminal penalties:

► Civil FBAR statute of limitations is six years. ► Criminal FBAR statute of limitations is five years.

► For unfiled FBARs for years prior to 2010, the IRS did not assess penalties for delinquent filings if all income was properly reported on taxpayer’s tax return and delinquent forms were filed by 9 September 2011. ► FAQ 17 of 2011 Offshore Voluntary Disclosure Initiative (OVDI) –

important to note the criteria for no application of FBAR penalties ► Notices had extended signature authority filing deadlines.

FBAR filing mechanics (cont.)








► Other matters



2010 and 2011 FBAR guidance

► “Foreign financial account reporting” rules enacted as Section 6038D of the Code only apply to tax years beginning after 12 March 2010. ► Draft Form 8938 and instructions have been issued and

regulations expected by year-end – more information to be covered in the “other matters” section.

► Final FinCEN regulations were released 24 February 2011. ► Regulations became effective 28 March 2011.

► New version of Form TD F 90-22.1 (FBAR Reporting) was released on 26 March 2011.

► Notice 2011-31 issued on 30 March 2011 provides guidance to taxpayers regarding responding to foreign financial account questions on their income tax returns.


2011 FBAR guidance

► Certain extensions (issued in Notices) apply to signature authority filings:

► Officers and employees of certain regulated entities have until 30 June 2012 to file FBARs due 30 June 2011 (FinCEN Notices 2011-1 and 2).

► Others had until 1 November 2011, per IRS Notice 2011-54, to file FBARs for calendar years 2005–2009.

► On 13 September 2011, FinCEN announced it is proposing to require electronic filing of certain Bank Secrecy Act (BSA) reports (including FBARs) not later than 30 June 2012.


2011 FBAR guidance (cont.)

► On 11 October 2011, FinCEN announced that former employees/officers must still file FBARs to report their signature authority but may file with limited information in Part IV of the FBAR (same as if they had signature authority over more than 25 accounts).

► Complete only Items 34-43 – the account owner information and the individual’s former title with the account owner.


Prior-year FBAR issues and common mistakes

► Reporting financial interests ► Failure to report all foreign financial accounts owned directly

or indirectly (greater than 50% ownership/control)

► Failure to complete Form TD F 90-22.1 Part V (consolidated reporting) properly or failure to complete Part V at all when consolidated filing was intended

► Failure to maintain or retain records that contain all of the required information, especially for those filers with more than 25 foreign financial accounts where FBAR form does not contain all of the account details

► Filing of the FBAR as part of the income tax return – it is not part of the return and must be filed separately


Prior-year FBAR issues and common mistakes (cont.) ► Signature authority

► No CFO letter issued (2009 and prior calendar years) where a filing exception was available

► Failure by individuals to report all accounts not subject to a specific filing exception

► For example, accounts over which an employee of a publicly traded group has signature authority where his US employer/parent cannot report on his behalf because the group does not have an ownership interest of greater than 50% in the entity that owns the account.

► Failure by US persons residing in a foreign country to report either their own foreign financial interest in a personal account or their signature authority over the foreign financial accounts of their employer on the same FBAR, where the value of the accounts in the aggregate exceeds $10,000


► Amended returns – e.g., to include an unreported account or correct filing errors – can be filed at any time within the six-year FBAR statute of limitations and should be filed as soon as any unreported accounts are identified. ► Any amended returns must be filed on a 2011 version of the FBAR

form ► Apply the instructions/regulations in force for the specific year

being amended to apply the filing rules ► Must wait at least 90 days after the original filing before amending

an FBAR

► Failure to issue a CFO letter for a prior year can be remediated by issuing the letter now with a current date on the letter.

Prior-year FBAR remediation issues


Prior-year FBAR issues

► Certain signature authority only filers who did not qualify for a filing exemption, but for whom the filing deadline was delayed by IRS Notice until 30 June 2011, have an additional extension of time to file.

► IRS Notice 2011-54 provided an extension to 1 November 2011 for signature authority only filers who are not eligible for an exemption for calendar years 2005–2009.

► FinCEN Notices 2011-1 and 2011-2 provided filing extensions to 30 June 2012 for signature authority only filers who were required to file by 30 June 2011 under the regulations and who are officers/employees of: ► Publicly traded, widely held companies or regulated financial institutions

(or controlled entities of any of these) as to: ► Foreign financial accounts of foreign controlled entities Or ► Foreign financial accounts of affiliates of which the individual is not an

officer or employer








► Other matters



Reportable interests in foreign funds

► Definition of when a foreign fund is itself a “foreign financial account” is largely unchanged from prior (informal) guidance.

► Foreign fund is only reportable if it meets all three tests: ► Available to the general public ► Regular determination of net asset value (NAV) ► Regular redemption opportunities

► Remember: Ownership of >50% of an entity (foreign or domestic) creates indirect financial interest in the entity’s own foreign financial accounts – this would apply to funds that do not meet the test listed above.

► IRS has informally indicated that “signature authority” for a fund means the ability to request a redemption


Pension plans and IRAs

► Participants in and beneficiaries of US pension plans and individual retirement accounts (IRAs) need not report.

► Implication: trustees and custodians required to report

► IRS has informally indicated that an IRA custodian may report foreign accounts owned by IRAs in effect as if they were the custodian’s accounts: ► If custodian has financial interests in 25 or more foreign

accounts, add accounts owned by IRAs to the total number of accounts reported

► No need to schedule out beneficiaries on the report ► Keep details available for IRS request


Insurance policies and annuities

► Only reportable if they have cash value

► Reportable by the policy holder, not the beneficiary

► IRS has informally indicated that “signature authority” over an insurance policy or annuity means the power to request redemption and/or access cash


Foreign Account Tax Compliance Act (FATCA) Information with respect to foreign financial assets – Section 6038D

► Commonly referred to as Tax FBARs ► Draft Form 8938 and instructions (issued 28 September 2011) are

a window into what the regulations will cover when they are issued. ► IRC Section 6038D generally only applies to “individuals;”

however, Section 6038D(f) , Application to certain entities, states that the Secretary in regulations or other guidance shall apply the provisions of this Section to any domestic entity that is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if such entity were an individual.

► The Draft Form 8938 lists the type of filer for specified domestic entities as: (1) partnership, (2) corporation, (3) trust and (4) estate.

► Filing criteria is different from FBAR filing; focus of FBAR is on accounts and focus of the Form 8983 is on the foreign financial assets.


FATCA – information with respect to foreign financial assets – Section 6038D (cont.) ► Information on Form 8938 may duplicate FBAR

information, and no relief from duplicate reporting is contemplated as they are covered by different US Code Sections (Title 26 vs. Title 31).

► Duplicate reporting within the income tax return forms is not required. Any information reported on a Form 3520, 5471, 8621, 8865 or 8891 does not have to be duplicated on Form 8938, but taxpayers will need to identify the form(s) where they reported the asset and the number of forms filed.


FATCA – information with respect to foreign financial assets – Section 6038D (cont.) ► The draft instructions require Form 8938 to be attached to

the following types of annual returns: ► Form 1040

► Form 1120

► Form 1065

► Form 1041

► Form 1120-F

► Form 1120-S

► Form 1040NR of a resident alien who is a bona fide resident of Puerto Rico or American Samoa

► No reference to Form 990 or Form 990-T in the draft instructions

Page 48

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21st Annual Health Sciences Tax Conference€¦ · · 2015-07-232011-06-30 · 21st Annual Health Sciences Tax Conference ... Practical application of the “financial interest