Foreign Bank and Financial Accounts Reporting Requirements

June 25, 2007

An often overlooked aspect of hedge fund compliance is the annual reporting of foreign bank accounts and other foreign financial accounts to the Internal Revenue Service.  The issue is generally encountered by U.S. hedge fund managers that have offshore parallel funds or employ master/feeder fund structures, but it can affect any U.S. manager who maintains a bank account, brokerage account, mutual fund, unit trust, or other financial account outside the United States.  Reporting of such accounts is made annually on Form TD F 90-22.1 - Report of Foreign Bank and Financial Authority ("FBAR").

Reporting on the FBAR is required of any U.S. person (i.e., any citizen or resident of the United States or any U.S. legal entity such as a partnership, corporation, estate, or trust) who has a financial interest in or authority over such accounts in a foreign country if the aggregate value of all such foreign accounts exceeds $10,000 at any time during the calendar year.

The FBAR is not an income tax return and should not be mailed with any income tax returns. The FBAR must be mailed on or before June 30 of the following year to the U.S. Department of the Treasury.  In contrast to filing federal income tax returns, the FBAR cannot be filed electronically and requests for an extension of time to file an FBAR are not granted.  Note, however, that because June 30, 2007 falls on a Saturday, the deadline for filing the FBAR report in 2007 is July 2.

There are serious consequences for foreign account holders who do not comply with the FBAR filing requirements.  The maximum civil penalty for a willful violation of the FBAR reporting and recordkeeping requirements is the greater of $100,000 or 50 percent of the balance in the account at the time of the violation.  Non-willful violations can result in a penalty as high as $10,000 for each violation. Criminal violations of the FBAR rules can result in a fine and/or five years in prison.

The FBAR and its instructions can be found on the IRS website at www.irs.gov or may be obtained by telephone at 1-800-829-3676.

U.S. fund managers should already be working with their accountants to file the FBAR, if applicable.  If not, they should raise this filing requirement with their accountants to ensure compliance.

If you have any questions about this e-Alert, please contact your regular Sonnenschein attorney.

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