Last week, the U.S. Treasury finally clarified exactly what it expects U.S. taxpayers to disclose about their offshore holdings. And–no surprise here–they want to know lots more about what you own offshore. Beginning last year, in 2009. And, if you fail to comply, you could face a $10,000 fine and even prison.

In an announcement in the Federal Register, the Financial Crimes Enforcement Network (FinCEN), the Treasury Department’s “financial intelligence unit,” issued proposed regulations to become effective in the next two months. That’s well before the June 30, 2010 filing deadline for Treasury Form TD F 90-22.1, the “foreign bank account reporting” form, or FBAR. That means they would apply retroactively to 2009.

FinCEN’s proposed rules present a worst-case scenario for any U.S. citizen or permanent resident seeking offshore privacy. They greatly expand the types of offshore financial relationships that you need to acknowledge. Moreover, the FBAR isn’t considered a “tax return.” That means that Barney Fife or any other law enforcement officer in the United States can browse through FBAR filings. So can law enforcement officials in many other countries.

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If you’ve filed FBARs before, you know that the law requires U.S. persons “having a financial interest in, or signature or other authority over, a bank, securities, or other financial accounts” with an aggregate value of $10,000 or more to report such accounts annually. It’s relatively clear what constitutes a foreign “bank account” or “securities account.” But, what’s an “other financial account?”

With these proposed regulations, FinCEN has finally answered that question. Not bad, guys–it’s only been 40 years since Congress enacted the ironically named “Bank Secrecy Act,” the law requiring U.S. persons to submit FBARs.

FinCEN now demands that U.S. persons report retroactively to 2009 and in the future:

• All foreign insurance policies with cash value
• All foreign annuity policies
• All foreign accounts with brokers or dealers for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association
• All foreign accounts with mutual funds or similar pooled funds that issues shares available to the general public with a regular net asset value determination and regular redemptions.

FinCEN also says it wants U.S. persons to report “an account with a person that is in the business of accepting deposits as a financial agency.” A “financial agency” is “a person acting for a person as a financial institution bailee, depository trustee or agent, or acting in a similar way related to money, credit, securities, gold, or in a transaction in money, credit, securities or gold.” Basically, what this means is that if you entrust a person outside the USA with your money, securities, or gold, FinCEN wants to know about it.

The example FinCEN gives of a ” financial agency” is an escrow account at a foreign financial institution, but the definition is potentially much broader. For instance, if you buy gold overseas and pay a custodian a fee for safekeeping it, that custodian is probably acting as a financial agency. On the other hand, if you keep the gold in a safety deposit box at a bank or private vault facility to which only you have access, the bank or vault probably isn’t acting as financial agency. The final rules may clarify these requirements.

It’s almost inconceivable that these rules won’t become effective, although FinCEN may not succeed in making them retroactive to 2009. Indeed, the Obama administration is working on at least three fronts simultaneously to expand offshore reporting requirements:

1. The proposed FinCEN rules.
2. The proposed FATCAT law that contains many of these same provisions is working its way through the U.S. Senate
3. Proposals in the 2010 and 2011 Treasury Green Book submitted to Congress by the Obama administration

I summarized the proposals in FATCAT and the 2010 Green Book a few weeks ago here.

In my next column, I’ll describe some of the other provisions of these far-sweeping rules; in particular, their impact on foreign investors who use U.S. LLCs to conduct business outside the United States. I’ll also discuss the temporary “silver lining” they provide for on individuals holding foreign assets in their pension plans or IRAs, hedge fund investors and for foreign persons doing business in the United States.

You can see part II here.

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Andrew Makarik

to@welovecostarica.com

Andrew Makarik is the main editor of WeLoveCostaRica, a fan of this sunny country. He is also a loving husband and a has a lovely daughter. By being a devoted family man and the biggest Costa Rica fan, he wants to make more people feel at home there. WeLoveCostaRica unites people and helps them find new home or a new travel destination. This website is a friendly community where everyone can find not only information, but also new friends and travel pals. Andrew is also passionate about IT and programming, so he himself maintains a friendly atmosphere in this cozy environment of WeLoveCostaRica.com.