Need To Know

Relief For U.S. Investors In Offshore PE Funds

U.S.-based investors in off-shore private equity and hedge funds can rest easier now that the government has given them a pass on filing forms on their investments.

American taxpayers have long had to report investments of $10,000 or more in foreign countries through so-called Foreign Bank and Financial Account Reports, or FBARs. But the Internal Revenue Service last year caused considerable uncertainty and concern when—in the midst of initiating a fresh crack-down on tax evaders—some officials made remarks that implied that investors in private equity and hedge funds, and non-U.S. citizens doing business in the United States, should also be subject to FBAR requirements. The remarks came as regulators, in response to the financial crisis, were evaluating ways to reign in Wall Street, and Congress was searching for palatable ways to generate revenue at a time when raising taxes was unpopular.

But on Feb. 26, the IRS released guidance that would exempt investors in offshore private equity and hedge funds from filing FBARs, at least for the next year. Also, people who have investments in the United States but are not U.S. citizens or residents will not have to file FBARs, according to a report issued March 8 by the law firm Squire Sanders & Dempsey LLP

Though exempt when it comes to investments in off-shore private equity and hedge funds, FBARs are still required for U.S. taxpayers if they have invested $10,000 or more in a foreign account, which could include a foreign bank, brokerage account, annuity, or an off-shore mutual fund, according to The Wall Street Journal.

The IRS will continue to study investments in offshore private equity and hedge funds and may require such investors to file FBARs in the future, according to the Squire Sanders & Dempsey report.

Failure to file FBARs can result six-figure fines and as much as 10 years in prison, according to the IRS. In 2009, about 550,000 taxpayers filed the reports, an increase of nearly 60 percent compared to 2008, according to the WSJ.