More On Legal & Compliancefrom The Advisor's Professional Library
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- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
Failure to file an FBAR (Report of Foreign Bank and Financial Accounts) can result in penalties of up to $500,000 and 10 years imprisonment, so it’s essential for you and your clients with foreign financial accounts (FFAs) to get a handle on the Treasury’s escalating FBAR rules.
But deciphering the FBAR rules hasn’t always been a straightforward proposition. Until recently, the FBAR requirements were shrouded in mystery; but with the release of final regulations this year, the rules are starting to make sense. Further important clarifications also were made by the IRS at a June 1 webcast.
An FBAR must be filed by anyone (1) who is a “United States person”—a U.S. citizen, resident, business entity, trust, or estate; (2) with a financial interest in, or signature authority over, one or more FFAs; or (3) with an aggregate value exceeding $10,000 during any period of the calendar year reported.
On Feb. 24, 2011, the Financial Crimes Enforcement Network (FinCEN), a bureau within the Treasury Department, published final regulations amending the FBAR regulations. The final FBAR regulations came into effect on March 28, 2011, and apply to all FBARs that must be filed for FFAs maintained during the 2010 calendar year and all subsequent calendar years. FinCEN issued a revised Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), shortly thereafter.
Although the final regulations were welcomed by many financial professionals for the increased certainty they offered, a lot of questions were left unanswered.
Some of those questions were answered at the IRS-sponsored webcast presented by Rod Lundquist, IRS Senior Program Analyst, Bank Secrecy Act. At the end of his presentation, Lundquist read participants’ questions. Answers were provided by Samuel Berman, an attorney with the IRS’ Small Business/Self-Employed Division.
Accounts at Foreign Branches of a U.S. Bank
One answer was particularly surprising. When asked whether an FBAR must be filed by an individual who is issued a form 1099-INT for an account at a foreign branch of a U.S. bank, Berman answered in the affirmative.
He said that for FBAR purposes, whether a financial institution is owned by a U.S. or foreign entity isn’t relevant. If a branch of a U.S. bank is located in a foreign country, that branch is considered a foreign financial institution and accounts owned at that branch by U.S. persons are required to be reported on an FBAR.
U.S. Beneficiaries of Foreign Life Insurance Policies
Another participant questioned whether a beneficiary of a foreign life insurance policy is required to file an FBAR. Berman responded that, although a U.S. owner of a foreign life insurance policy is required to file an FBAR if the cash value of the policy is $10,000 or greater, the beneficiaries generally aren’t required to file.
U.S. Hedge Fund Investors
One person asked about investor reporting of foreign accounts held by hedge funds. Hedge funds are resistant to requests for information about their underlying accounts, so it should come as a relief to investors that, according to Berman, they are not required to file an FBAR on the hedge fund’s foreign accounts.
To conclude, If your clients have FFAs, the IRS’ webcast may be of interest to you. The IRS has made the webcast available on its website.
For additional coverage of this issue and similar ones, we invite you to sign up with AdvisorOne’s partner, AdvisorFX, for a free trial.
See also The Law Professor's blog at AdvisorFYI.