In Notice 2022-1 (the Notice), released 9 December 2022, the Financial Crimes Enforcement Network (FinCEN) further extended the filing deadline for certain individuals who previously qualified for an extension of time to file the Report of Foreign Bank and Financial Accounts (FBAR) regarding signature authority under Notice 2021-1 and previous guidance.
The Notice pertains only to individuals who were initially granted extensions of time to report signature authority under FinCEN Notices 2011-1 and 2011-2 (most recently extended by FinCEN Notice 2021-1). Under the Notice, individuals have until 15 April 2024, to file deferred FBARs, subject to any potential further extension. Any persons not covered by the Notice for 2022 will have until 17 April 2023 — automatically extended six months to 16 October 2023 — to file their FBARs for the 2022 calendar year.
In no case is an extension (beyond the automatic six-month extension) available for financial interest filing obligations.
Generally, United States (US) persons with either a financial interest in, or signature or other authority over, a foreign bank, brokerage, or other financial account must annually report it on Form 114, Report of Foreign Bank and Financial Accounts. In many cases, US persons may have both financial interest and signature authority accounts to report. Forms 114 are filed with FinCEN (not the Internal Revenue Service (IRS)) using the BSA E-Filing System. Questions on federal income tax returns are designed to remind taxpayers of this requirement and reinforce their responsibility to comply. The existence and completion of such questions are often referenced in examinations involving FBAR failures and whether willful or non-willful penalties ought to apply.
Signature authority exemptions versus deferrals
Final regulations issued by FinCEN on 24 February 2011, effective for 2010 and subsequent years, provide various exemptions from the requirement to file reports regarding signature authority, including: (i) signature authority held by officers and employees over accounts owned by publicly traded or certain widely held companies (e.g., reporting companies under the Securities Exchange Act of 1934); and (ii) signature authority held by employees of SEC-registered investment advisors over accounts owned by regulated investment companies.
From the beginning, there were concerns that these exemptions were too narrow. The exemptions did not provide relief to officers or employees of publicly traded or widely held companies if an officer or employee of one group entity held signature authority over an account owned by another group company. For example, suppose a US publicly traded company has two US subsidiaries. If an individual is an officer of only one subsidiary (and not the other) but has signature authority over accounts owned by both subsidiaries, then the individual is only exempt from a filing requirement for the entity where the individual holds the position of officer. The individual still has a filing requirement for the foreign accounts of the other entity.
Further, the final regulations provided no relief for signature authority over accounts owned by non-US members of the group, such as subsidiaries that are controlled foreign corporations (CFCs). The regulations also provided no relief for persons with signature authority over accounts owned by investment funds other than regulated investment companies, such as hedge funds, venture capital funds and private equity funds.
The 2011 FinCEN notices addressed these concerns. Notice 2011-1 extended the filing deadline by one year for officers and employees of a US publicly traded company (or any of its subsidiaries) who were required to report signature or other authority FBARs in 2010 over accounts owned by any US or non-US member of the group. The same extension applied for groups headed by any widely held US company that was a reporting company under the Securities Exchange Act of 1934. Thus, Notice 2011-1 provided an extension where the individual was an officer or employee of a non-US group member, or the individual had signature authority over an account owned by another group member. Therefore, under the notice, there was relief for signature authority over accounts owned by non-US members of the group, such as subsidiaries that are CFCs.
In addition, Notice 2011-21 provided a one-year extension for reports of signature authority in 2010 for direct employees or officers of SEC-registered investment advisors (but not employees or officers of other group entities) who had signature or other authority over accounts owned by customers other than regulated investment companies, such as hedge funds, venture capital funds, and private equity funds. Under both notices, relief was not available if the person also had a financial interest in the account.
Subsequent annual FinCEN notices have extended the relief available under these two 2011 notices on a rolling basis. The most recent extension of time before FinCEN Notice 2022-1 was FinCEN Notice 2021-1, which granted an extension of time until 15 April 2023, to file reports for situations governed by the two notices. Due to the rolling nature of the notices, qualifying individuals have not been required yet to file signature authority FBARs for the years 2010 through 2021. When and if these filings eventually become due, it is questionable whether record retention policies at various organizations will be expansive enough to enable all the source data to be accessed on such an extensively deferred basis.
Coordination with informational questions on income tax return
As highlighted previously, the Notice further extends the filing deadline to 15 April 2024, for reports of signature authority for 2022 and prior years in the situations governed by Notices 2011-1 and 2011-2. The IRS has not yet confirmed whether persons benefitting from Notice 2022-1 should continue to follow prior informal guidance for FBAR-related questions on their 2022 income tax returns. Based on the prior informal guidance, one would answer "Yes" to the first part of question 7a (does one have signature authority over a foreign financial account?), "No" to the second part of question 7a (is one required to file Form 114?), and not answer prompt 7b (if you are required to file FinCEN Form 114, enter the name of the foreign country where the financial account is located).
Additional guidance considerations
Although the relief provided by the Notice and prior notices may be beneficial, filers should consider the possibility of proposed changes to the reporting rules before deciding whether to avail themselves of the extension. On 10 March 2016, FinCEN issued a Notice of Proposed Rulemaking (NPRM) proposing various changes to the signature authority regulations (see Tax Alert 2016-0455).2 FinCEN has justified the continued extensions of signature authority filings based on the potential burden associated with adjusting to the new rules outlined in the NPRM. It is not known when or whether the proposed regulations will be finalized or adjusted from their originally proposed form, although support was expressed during the public comment period for the reduced duplicative filing the new rules would engender.
Filers with 25 or more reportable foreign financial accounts
Under the current regulations, US persons with 25 or more reportable accounts must only report the number of such accounts and keep detailed information on file for inspection, if requested. The proposed regulations would require details of all accounts to be provided, such as financial institution details, bank account numbers, and maximum account balance information, regardless of how many accounts are being reported.
Thus, US persons who benefit from the current regulations should consider submitting filings while the current regulations are in effect (before issuance of new regulations, if and whenever that may be). Otherwise, US persons, particularly entities with financial interest in 25 or more foreign financial accounts, may face a substantially higher filing burden associated with reporting detailed information for every account.
Reporting exemption for certain officers, employees, and agents with signature or other authority
The proposed regulations would replace the exemptions for reporting signature authority contained in FinCEN Notices 2011-1 and 2011-2 with new and generally broader exemptions. They provide a reporting exemption for certain individual officers, employees, and agents with signature or other authority over (but no financial interest in) the foreign financial account of an entity when the entity, or another group member, must report its financial interest in the foreign financial account.
The proposed regulations would benefit many signature authority filers not previously extended or exempted, such as employees of US-headquartered groups that are neither publicly traded nor widely held. These changes may also withdraw relief from others, such as employees of regulated investment advisors with signature authority over accounts owned by non-US investment funds.
Organizations that assist their officers, employees and agents with their personal FBAR responsibilities as related to the entities' accounts may consider whether to defer the 2022 filing in hopes that FinCEN issues new regulations containing the signature authority exemption. If the regulations, however, are finalized before the 2023 deadline, it is possible they could only apply to 2023 reports due in 2024.
Additional factors affecting whether to defer the 2022 filing include the following:
Regardless of the approach, US persons should not delay data gathering because the information needed is generally the same under either scenario for determining filing requirements, applying exceptions and satisfying the record-retention requirement.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), International Tax and Transaction Services
Ernst & Young LLP (United States), Information Reporting & Withholding Services
Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor
Notice 2011-2 applies to calendar year 2010, 2009 and earlier calendar years for which the filing deadline was properly deferred under Notice 2009-62, 2009-35, IRB 260, or Notice 2010-23, 2010-11 IRB 441.