Fiduciaries Might Need to Report Foreign Plan Investments

A client advisory from the Washington, D.C.-based Groom Law Group about FBAR, transmitted to the Internal Revenue Service (IRS) on Form TD F 90-22.1, warned that recent IRS input about the filing suggests it may become more of an issue in the retirement plan space.

According to the law firm, fiduciaries must file FBAR regarding, among other things, a plan’s investments in certain types of offshore entities, such as hedge funds. Persons with foreign financial accounts that have an aggregate value of $10,000 or less need not file FBAR.

The civil penalties for a failure to file FBAR can range from $500 per violation up to the greater of $100,000 or 50% of the account balance, and in some circumstances, criminal penalties may apply, the law firm said.

Under current rules, U.S. persons (including employee benefit trusts) with a “financial interest in or signature or other authority over” certain “foreign financial accounts” must file an FBAR form.

“Thus, an FBAR filing could be required where an employee benefit plan trust makes an equity investment in an offshore hedge fund or other commingled investment vehicle if the offshore vehicle itself is considered the ‘foreign financial account’ and the equity investment causes the plan to have the requisite interest in or authority over the foreign financial account,” the Groom advisory indicated. “Similarly, the plan’s directed trustee may have a requisite interest in the same account by reason of the directed trustee’s status as the record owner of the investment. In this case, both the trust and the trustee may have to file with respect to the same account.”

Hedge Fund Accounts

Groom said that during a recent teleconference sponsored by the American Bar Association and the American Institute of Certified Public Accountants, an IRS official asserted that an offshore hedge fund would be a “foreign financial account.” Groom said: “This informal guidance has brought to the attention of fund managers, financial institutions, and plan sponsors the potential application of FBAR filing requirements to plan investments.”

Groom indicated that some FBAR filers may be able to make a simplified submission. Specifically, persons required to report 25 or more foreign financial accounts need not provide information regarding every account, provided they retain detailed records about the accounts for five years.

In an announcement released on June 5, the IRS acknowledged the widespread confusion regarding FBAR and requested comments on the FBAR form and instructions before August 31.

An IRS list of frequently answered questions about FBAR is available here.