Focus on tax avoidance leads to changes in foreign reporting requirements.

• Author: O'Connell, Frank J., Jr.

The use of information reporting to prevent tax avoidance has been a major focus of the current administration and the IRS. Published comments regularly made by senior IRS officials to various professional organizations indicate the intent to use improved information reporting as a means to reduce tax avoidance and capture lost tax dollars. In the past year, legislation has been passed and additional guidance has been released related to foreign reporting requirements in the United States. It is important for practitioners to pay close attention to these developments to ensure that taxpayers are in compliance with the expanded requirements as they become effective. It is also important to stay informed as additional guidance is released clarifying these recent changes.

FBAR Filing Relief

In October 2008, the IRS released a revised Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), and related instructions. The new instructions added to the definition of a U.S. person the phrase "a person in and doing business in the United States." The instructions also included in the definition of foreign accounts those 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). These changes, as well as the issuance of informal guidance from the IRS, created substantial confusion among taxpayers and practitioners. This caused the IRS to release Announcement 2009-51, allowing taxpayers to rely on the earlier definition of U.S. persons for all FBARs due on June 30, 2009.

The IRS has granted some relief to certain persons for filing FBARs. In Announcement 2010-16, the IRS temporarily suspended the filing requirement for persons who are not U.S. citizens or residents, or domestic corporations, partnerships, trusts, or estates. In addition, Notice 2010-23 further extended the deadline for filing reports originally due on June 30, 2010, and earlier years to June 30, 2011, for persons who have only signature authority but no financial interest in a foreign financial account and for those holding foreign commingled funds. The deadline for 2008 and earlier years had previously been extended to June 30, 2010, in Notice 2009-62 for these foreign financial accounts. The IRS indicated that it intends to limit the interpretation of the term "commingled funds" to mutual funds with respect to FBARs for calendar year 2009 and prior years (2010 reports and earlier). Therefore, investments in foreign hedge funds or private equity funds will not create an FBAR filing requirement. Treasury's Financial Crimes Enforcement Network (FinCEN) has issued proposed regulations to clarify some of the confusion related to the FBAR filing requirements, specifically defining "U.S. persons," "financial interest," and "signature authority." Taxpayers and practitioners should continue to monitor the situation to ensure compliance with the rules.

The HIRE Act

On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act of 2010, P.L. 111-147 (the HIRE Act), which contains the Foreign Account Tax...