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March 2, 2010

Treasury proposes clarifications to FBAR reporting requirements

FinCEN’s Proposes Clarifications to Foreign Bank Accounts Report (FBAR):
The Treasury Department's Financial Crimes Enforcement Network (FinCEN) recently issued a Notice of Proposed Rulemaking (NPRM) proposing to amend the Bank Secrecy Act (BSA) implementing regs regarding the Report of Foreign Bank and Financial Accounts (FBAR).

Background. The FBAR form is used to report a financial interest in, or signature or other authority over, one or more financial accounts in foreign countries. No report is required if the aggregate value of the accounts does not exceed $10,000. When filed, FBARs become part of the BSA database. They are used in combination with Suspicious Activity Reports, Currency Transaction Reports, and other BSA reports to provide law enforcement and regulatory investigators with valuable information to fight fraud, money laundering, terrorist financing, tax evasion and other financial crime.
FinCEN delegated the authority to enforce the FBAR rules and to amend the form to IRS in 2003. However, FinCEN retained the authority to revise the applicable regs.

Overview of proposed changes. The proposed regs would:

·       include provisions to prevent persons from avoiding reporting requirements;
·       define a U.S. person required to file the FBAR and define the types of reportable accounts such as bank, securities, and other financial accounts;

·       exempt certain persons with signature or other authority over, but no financial interest in, foreign financial accounts from filing FBARs;
·       exempt certain low-risk accounts e.g., the accounts of a government entity or instrumentality for which reporting wouldn't be required;
·       exempt participants/beneficiaries in certain types of retirement plans and include a similar exemption for certain trust beneficiaries;
·       clarify what it means for a person to have a financial interest in a foreign account;
·       permit summary filing by persons who have a financial interest in 25 or more foreign financial accounts, or signature or other authority over 25 or more foreign financial accounts; and
·       permits an entity to file a consolidated FBAR on behalf of itself and the subsidiaries of which it owns more than a 50% interest.
Filing requirement. The proposed regs would use a new term U.S. person to indicate persons that would be required to file an FBAR. A U.S. person would be defined as a citizen or resident of the U.S., or an entity, including but not limited to a corporation, partnership, trust or limited liability company, created, organized, or formed under the laws of the U.S., any state, the District of Columbia, the Territories and Insular Possessions of the U.S. or the Indian Tribes.
This definition would apply to an entity regardless of whether an election has been made under Reg. § 301.7701-2 or Reg. § 301.7701-3 to disregard the entity for federal income tax purposes. The determination of whether an individual is a U.S. resident would be made under Code Sec. 7701(b) and its regs except that the definition of the term “United States” provided in the FinCEN regs 31 CFR 103.11(nn) would be used instead of the definition of “United States” in Reg. § 301.7701(b)-1(c)(2)(ii). FinCEN believes that this approach is appropriate because it would provide for uniformity regardless of where in the United States an individual may be. In addition, it believes this approach would take into account that individuals may seek to hide their residency in an effort to obscure the source of their income or location of their assets.

Accounts subject to reporting. The regs would be amended to add definitions of the accounts subject to reporting. Bank account would be defined a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking. Securities account would be defined as an account maintained with a person in the business of buying, selling, holding, or trading stock or other securities. The proposed regs would define “other financial account” to mean:
·       An account with a person that is in the business of accepting deposits as a financial agency;

·       An account that is an insurance policy with a cash value or an annuity policy;
·       An account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or
·       An account with a mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions

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