January 7, 2021

FinCEN Notice Continues Deferral Trend for Certain Signatories Lacking Financial Interest in Foreign Accounts

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• Notice 2020-1 maintains deferral of FBAR filing deadline for certain individuals having signature authority over, but lacking financial interest in, foreign financial accounts

• New filing due date for affected individuals only is April 15, 2022; otherwise, April 15, 2021, deadline applies

On December 11, 2020, the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) released Notice 2020-1, which once again extends the “time for certain Report of Foreign Bank and Financial Accounts (FBAR) filings.” ¹ FinCEN clarified that since 2016 proposed rules have not yet been finalized, the filing deadline is extended to April 15, 2022, for individuals whose filing deadline for reporting their signature authority was previously extended by a string of FinCEN notices.  More specifically, the deferral notices have targeted certain individuals having signature authority over, but lacking financial interest in, foreign financial accounts of their employer (or closely related entities). However, for all other individuals with an FBAR filing requirement, the April 15, 2021, still applies.²

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In the discussion below, we look more closely at what many individuals perceive as an onerous and confusing requirement for reporting signature authority and FinCEN’s now long-standing practice of issuing annual notices which defer reporting requirements of signature authority for certain individuals.

Background

According to the Bank Secrecy Act (BSA) §5314, the FBAR filing requirement arises when: (1) the filer is a U.S. person; (2) the U.S. person had a financial account(s) during the calendar year; (3) the financial account(s) is located in a foreign country; (4) the U.S. person had a financial interest in the account, or signature (or other) authority over the financial account(s); and (5) the aggregate amount of the account(s)’ value exceeded $10,000 (U.S. dollars) at any time during the calendar year.³

What is Signature Authority?

Again, a U.S. person may still be required to file an FBAR even though that person lacks a financial interest in a foreign account. Specifically, a U.S. person files an FBAR to report their signature authority over a foreign financial account.

Signature authority is defined in 31 C.F.R. §1010.350(f)(1) as:

the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained.⁴”

The regulations further specify that the reporting requirement of this signature authority defined above is only applicable to U.S. persons.⁵  Additionally, the preamble to the 2011 FinCEN final regulations also clarifies that such person must be able to communicate the instructions directly to the financial institution, and that:

[t]he test for determining whether an individual has signature or other authority over an account is whether the foreign financial institution will act upon a direct communication from that individual regarding the disposition of assets in that account.⁶”

Per the 2015 update, the IRM definition of signature authority parallels the definition in the regulations—requiring the ability to control asset or fund disposition by direct communication to the financial institution.⁷

When Does Signature Authority Typically Exist?

Typically, signature authority exists when someone has power of attorney on an account—even if that power of attorney is never exercised. Consider the example provided in the IRS FBAR Reference Guide:

Megan, a United States resident, has a power of attorney on her elderly parents’ accounts in Canada, but she has never exercised the power of attorney. Megan is required to file an FBAR if the power of attorney gives her signature authority over the financial accounts. Whether or not the authority is ever exercised is irrelevant to the FBAR filing requirement.⁸”

           Additional contexts where signature authority may arise include:

  • An executor or administrator of an estate,
  • An entity owner whose interest is not a “financial interest,” yet the owner has signature authority for the entity’s foreign bank account, and
  • Employees that have signature authority over their employer’s foreign bank account.⁹

Exemptions from FBAR Filing Requirement

The reach of “signature authority”—remember, as noted above, even employees may be required to report signature authority over their employer’s foreign bank account—is widely perceived as onerous and often uncertain. The 2011 FinCEN final regulations were intended to provide clarification and enumerated exemptions from the reporting of signature authority. Subsequently, in March of 2016, FinCEN issued a Notice of Proposed Rulemaking (NPRM) to further simplify and expand the exemptions for certain individuals who lack a financial interest in the account.¹⁰ Ever since the 2011 FinCEN final regulations were promulgated, FinCEN has continued to release notices deferring the reporting requirements.

A. 2011 FinCEN Final Regulations

The 2011 FinCEN final regulations created exemptions for certain officers and employees having signature authority over the foreign financial accounts of certain regulated entities and publicly traded entities, so long as they do not have a financial interest in the accounts.¹¹ However, it was apparent almost immediately that these exemptions were too narrow to provide much-needed relief in various circumstances. For instance, “over-lapping” signature authority exists in many cases, such as when an individual is the officer in only one subsidiary of a parent company with multiple subsidiaries. The 2011 FinCEN final regulations only expressly absolve the officer from the filing requirement related to the subsidiary for which the individual is an officer. Under the express language of the regulations, the individual would still be required to file for the other subsidiaries.¹²

Notably, the regulations also lack relief provisions applicable in the contexts of (1) accounts owned by non-US members (i.e., controlled foreign corporation subsidiaries), and (2) accounts owned by funds that are not regulated investment companies.

B. FinCEN Initiates Series of Deferrals

Considering the limited applicability of some of the exemptions, soon after the 2011 FinCEN final regulations were issued, FinCEN began issuing notices every year— deferring reporting requirements of signature authority for certain signatories.  Beginning with Notice 2011-1, FinCEN has deferred reporting requirements for officers and employees of entities that are US publicly traded companies (or subsidiaries thereof)—so long as the officers and/employees do not have a financial interest in the accounts. And in a follow-up notice, Notice 2011-2, “officers or employees of investment advisors registered with the Securities and Exchange Commission who have signature or other authority over but no financial interest in certain foreign financial account” became part of that group having deferred reporting requirements.

C. March 2016 FinCEN Notice of Proposed Rulemaking (NPRM)

In March of 2016, FinCEN issued a Notice of Proposed Rulemaking (NPRM), which proposed amendments to the existing regulations. Significantly, the proposed regulations would eliminate the narrow and confusing signature authority exemptions, as enumerated in FinCEN Reg. §1010.350(f)(2)(i)–§1010.350(f)(2)(v), and “expand and clarify the exemptions for certain U.S. persons with signature or other authority over foreign financial accounts.”¹³ Indeed, “the proposed exemption is intended to address instances in which employees have over-lapping signature authority with respect to U.S. parent and subsidiary accounts within the same corporate or other business structure.”¹⁴

Conclusion

Once again, on December 12, 2020, Treasury issued another deferral notice, Notice 2020-1. Treasury emphasizes that “[b]ecause the proposed rulemaking is not yet finalized, FinCEN is further extending the filing due date to April 15, 2022, for individuals whose filing due date for reporting signature authority was previously extended by Notice 2019-1.”¹⁵ In other words, like its predecessors, Notice 2020-1 provides ongoing deferral of the FBAR filing deadline for certain individuals having signature authority over, but lacking financial interest in, foreign financial accounts of their employer (or closely related entities).

Of course, no one knows when to expect finalized regulations—even assuming they are finalized before April 15, 2022, it’s quite possible that the regulations would only be applicable to 2021 reports. We urge you to work with an experience practitioner to determine whether or not to defer your 2020 filing—and regardless of that decision, to ensure that data is properly compiled for when it is needed.

If you are looking for a skilled tax attorney, contact the Frost Law team at 410-862-3957 or fill out our online form for any FBAR questions.

Footnotes

  1. Treasury, FinCEN Notice 2020-1 (Dec. 9, 2020)].
  2. Note this deadline is automatically extended to October 15, 2021.
  3. 31 U.S.C. §5314; 31 C.F.R. §1010.350; 31 C.F.R. §1010.306(c); BSA Electronic Filing Requirements For Report of Foreign Bank and Financial Accounts (FinCEN Form 114), p. 4 (last updated June 2014).
  4. 31 C.F.R. §1010.350(f)(1).
  5. 31 C.F.R. §1010.350(a).
  6. Amendment to the Bank Secrecy Act Regulations—Reports of Foreign Financial Accounts, 76 Fed. Reg. 10,234, 10,235–10,256 (Feb. 24, 2011).
  7. IRM 4.26.16.3.4 (11-06-15).
  8. IRS FBAR Reference Guide, available at https://www.irs.gov/pub/irs-utl/irsfbarreferenceguide.pdf.
  9. 31 C.F.R. §1010.350(f)(2).
  10. Amendment to the Bank Secrecy Act RegulationsReports of Foreign Financial Accounts, 81 Fed. Reg. 12,613 (proposed Mar. 10, 2016) (to be codified at 31 C.F.R. §1010.350(f)(2)).
  11. 31 C.F.R. §1010.350(f)(2)(i)-(v).
  12. Amendment to the Bank Secrecy Act Regulations—Reports of Foreign Financial Accounts, 81 Fed. Reg. 12,613 (proposed Mar. 10, 2016) (to be codified at 31 C.F.R. §1010.350(f)(2)).
  13. Amendment to the Bank Secrecy Act Regulations—Reports of Foreign Financial Accounts, 81 Fed. Reg. 12,613 (proposed Mar. 10, 2016) (to be codified at 31 C.F.R. §1010.350(f)(2)).
  14. Id.
  15. Note that for FBAR filings for taxable years beginning before 2016, the due date is June 30th of the succeeding year.
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