The hedge fund industry has asked the Internal Revenue Service for official guidance on the application of the duty to file the Report of Foreign Bank and Financial Accounts (FBAR) for investments in hedge funds and other private investment funds. The industry has been seeking such guidance since 2006, but events in the weeks immediately prior to the most recent June 30 deadline for filing FBAR forms make it manifestly evident that prompt action by the IRS is necessary. In a letter to the IRS, the Managed Funds Association also requested a one-year moratorium on FBAR filings not related to a traditional financial account.
Earlier, the MFA asked for guidance concerning whether a hedge fund organized outside of the United States constituted a “financial account” for purposes of FBAR and, if such a fund was treated as a “financial account”, how the IRS should resolve a variety of collateral issues arising under FBAR. The MFA said that there is widespread confusion concerning these basic questions and urged the IRS to issue an announcement clarifying that, until the IRS issues further guidance, it should not treat a hedge fund organized outside of the United States as a “financial account” for purposes of FBAR compliance.
Since there was no such official guidance in advance of the June 30, 2009 filing deadline, noted the MFA, fund managers were forced to make filing decisions based on unofficial statements delivered by IRS personnel at an industry forum and through a series of press reports. According to the MFA, the absence of official statements from senior Treasury or IRS officials or official guidance has caused great consternation and confusion among practitioners and other affected parties in light of the significant penalties for non-compliance.
Senior IRS officials have advised the MFA that no official guidance would be
forthcoming until the IRS has had an opportunity to fully examine all of the issues and determine an appropriate process to provide guidance. In lieu of the requested official guidance, the IRS announced an extension to September 23, 2009 for filings by persons who had only recently learned that they may have an FBAR filing requirement, where certain conditions were satisfied. However, ISDA noted that, in the absence of prompt official guidance, persons who took advantage of the extension will have no better information than those who made timely June 30, 2009 filings.