IRS Indicates that U.S. Persons May be Required to Report Interests in Offshore Hedge Funds in Reports of Foreign Bank and Financial Accounts

On June 12, 2009, in the course of a teleconference jointly sponsored by the American Bar Association and the American Institute of Certified Public Accountants, Internal Revenue Service (IRS) officials stated that a U.S. person’s equity interest in offshore hedge funds (as well as offshore mutual funds and similar pooled investment vehicles) constitutes a foreign financial account.  Under this view, U.S. persons with investments in offshore hedge funds would be required to file Treasury Form TD F 90-22.1, the Report of Foreign Bank and Financial Accounts (FBAR) with respect to such interests.  In recent guidance, the IRS clarified that certain U.S. persons will have until September 23, 2009 to file FBARs in respect of 2008 calendar year.  The IRS officials on the call framed the interpretation as a “clarification” of the existing filing regime, but the interpretation nonetheless took the hedge fund community by surprise: heretofore, U.S. persons with interests in offshore hedge funds generally had not filed FBARs based solely on those interests.  While the filing is not terribly onerous, the new interpretation may be understood as part of the federal government’s more general effort to obtain more information about hedge funds.  However, this move is different from recent hedge fund regulation bills in Congress or the Obama administration’s proposals in that while those efforts focus on obtaining information from hedge fund managers, this new and more expansive understanding of the range of required FBAR filers focuses on hedge fund investors.  The primary concern it raises – other than the surprise factor and the danger of accidentally tripping up an evolving rule that can result in liability – is that at the margin, the required disclosures will serve as a disincentive for required filers to invest in offshore hedge funds.  One of the historic attractions of investments in offshore hedge funds was the relative anonymity they offered to investors.  To a degree, the IRS’ new interpretation cuts back on the opportunity for anonymity.  We discuss the new IRS interpretation in detail, and offer, among other things, relevant excerpts from the transcript of the call in which the IRS espoused its new interpretation.

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