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The term “foreign financial accounts” is described expansively and includes any bank, brokerage, securities, securities derivatives and other financial instruments accounts located outside of the United States and its territories. In the instructions to the FinCEN Form 114 formerly Form TD F 90-22.1, the IRS also includes in this definition savings, demand, deposit, time deposit, debit card, prepaid credit card and any other account maintained with a financial institution or other person engaged in the business of a financial institution. Since October 2008, accounts, such as mutual funds, where the assets are held in a commingled fund and the account owner holds an equity interest in the fund are also considered “financial accounts.” It should be noted that the IRS granted the extension for reporting mutual funds accounts (and certain other filers) for the tax year 2008 and earlier years until June 30, 2010. See IRS Announcement 2009-62. Individual bonds, notes and stock certificates are not considered as “financial accounts.”

The Proposed Regulations further elaborate the definition of “foreign accounts.” The term includes all “bank, securities, and other financial accounts,” but the understanding of what these terms mean is expanded. 75 Fed. Reg. at 8846. The IRS expressly states that, in defining types of the accounts that must be reported on the FBAR, it will focus on the kinds of financial services for which a person maintains an account with a foreign financial institution, irrespective of how long this account is being maintained. The IRS, however, limits itself by stating that “an account is not established simply by conducting transactions such as wiring money or purchasing a money order where no relationship has otherwise been established.” Id.

Outside of this limitation, the Proposed Regulations tend to add the types of accounts that need to be reported on the FBAR. The definition of the “bank account” expressly includes time deposits, such as certificates of deposit accounts that allow an account owner to “deposit funds with a banking institution and redeem the initial amount, along with interest earned after a prescribed period of time.” Id. A “securities account” is defined as “an account maintained with a person in the business of buying, selling, holding, or trading stock or other securities.” Id.

The term “other financial accounts” receives most attention under the Proposed Regulations. The IRS states that, due to the fact that this term covers a broad range of relationships with foreign financial institutions, the new regulations strive to delineate clearly what accounts should be included in the definition. Hence, the Proposed Regulations include in “other financial accounts” the following types of accounts: “an account with a person that is in the business of accepting deposits as a financial agency; an account that is an insurance policy with a cash value or an annuity policy; an account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or an account with a mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions.” Id.

Foreign retirement accounts present an interesting classification problem. The Proposed Regulations state that “participants and beneficiaries in retirement plans under sections 401(a), 403(a) or 403(b) of the Internal Revenue Code as well as owners and beneficiaries of individual retirement accounts under section 408 of the Internal Revenue Code or Roth IRAs under section 408A of the Internal Revenue Code are not required to file an FBAR with respect to a foreign financial account held by or on behalf of the retirement plan or IRA.” 75 Fed. Reg. at 8851. This exception, however, is not extended to the foreign financial accounts. Therefore, it appears that a foreign retirement account that is similar in design to an IRA needs to be disclosed in the FBAR.

The readers must also be aware that other reporting requirements may apply to a foreign retirement account. For example, Canadian Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) should be reported by U.S. residents on Form 8891. In other cases, a foreign retirement plan may be considered as “foreign trust” by the IRS and should be reported on Form 3520.

There are three narrow categories of foreign financial accounts for which the U.S. persons do not have to file the FBAR. First, accounts held in a military banking facility designated by the U.S. government to serve U.S. Government installations located abroad. Second, officers or employees of most banks regulated by the federal government are exempt from filing the FBARs (unless an officer or an employee has personal financial interest in the account). Finally, officers or employees of publicly-traded domestic corporations or privately-owned corporations with assets exceeding $10 million and 500 or more shareholders of record, need not file an FBAR concerning the signature authority (usually acquired by virtue of the officer’s or employee’s position) over a foreign financial account of the corporation (as long as an officer or an employee has no personal financial interest in the account, and he is advised in writing by the chief financial officer of the corporation that the corporation has filed a current report which includes that account).

Determining whether you need to have a foreign financial account that needs to be reported on the FBAR can be difficult. Sherayzen Law Office can help you deal with this complex maze of U.S. tax compliance laws. Call to discuss your tax case with an experienced tax attorney!