Are hedge funds and private equity funds foreign financial accounts?

• Author: Wong, Alan

Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), is used to report a financial interest in or signature authority over a foreign financial account. A U.S. 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 exceeds $10,000 at any time during the calendar year.

The instructions to the October 2008 version of Form TD F 90-22.1 defined a financial account to include

any bank, securities, securities derivatives or other financial instruments accounts. Such accounts generally also encompass any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund (including mutual funds). [Form TD F 90-22.1 instructions, p. 6, General Definitions, Financial Account (rev. October 2008) (emphasis added)] For tax years prior to 2009, Treasury and the IRS had not issued any formal guidance to help taxpayers determine whether the FBAR filing requirements applied to a foreign investment fund, such as a hedge fund or a private equity fund. However, senior personnel at the IRS had informally indicated that certain foreign pooled investment funds might be viewed as "foreign financial accounts" for purposes of the FBAR filing requirements (see, e.g., Paul, Hastings, Janofsky & Walker, LLP, "'FBAR' Filing Requirement May Apply to Interests in Foreign Pooled Investment Funds; IRS Has Issued New Guidance on June 30 Filing Deadline," StayCurrent, A Client Alert from Paul Hastings, p. 2 (June 2009)).

As a result of this uncertainty, it had been considered prudent for funds and fund managers with an interest in or signature or other authority over foreign pooled investment funds (hedge funds or private equity funds included) to make "protective FBAR filings" for years prior to 2009. Further, various shareholders and investors in hedge funds and private equity funds, such as tax-exempt investors and U.S. investors with either a financial interest in or signature or other authority over a financial account held by a hedge fund or private equity fund, were seen to be within the scope of the FBAR filing requirements at that time as well.

On August 31, 2009, the IRS published Notice 2009-62, which extended the filing deadline for persons with a financial interest in, or signature authority over, a foreign financial account in which the assets were held in a commingled fund...