[OffshorePrivacy]

Fears are growing that offshore hedge fund investors might become the target of future Internal Revenue Service investigations. The Treasury department requires certain investors with foreign bank accounts and offshore mutual funds to file a so-called 'Report of Foreign Bank and Financial Accounts,' also known as an FBAR. Until recently, it was thought that this did not include US investors in offshore hedge funds. Recently, IRS officials have indicated unexpectedly that US investors in offshore hedge funds must make FBAR filings.

"Expect US investors in off-shore hedge funds in places like the Cayman Islands, who failed to properly report earnings to the IRS, to be the next target of US tax authorities," said Shahzad Malik, partner at lawyers and tax advisers TroyGould in Los Angeles. "There are indications that the US may be taking steps to target off-shore hedge funds by asking them about their US partners and investigating their earnings."

The New York State Bar Association has made written enquiries of the Treasury and IRS to seek clarification on the definition of 'financial accounts' for the purpose of the FBAR. This follows an American Bar Association and the American Institute of Certified Public Accountants teleconference with the IRS in June, during which an official stated that the term 'financial interest' would include hedge funds that 'function as mutual funds.'

With all the confusion of the past two months, the IRS has agreed twice to extend the annual deadline, the first time from June 30 to Sept. 23, then again until mid 2010. In the absence of more direct guidance from the IRS, US investors in the following should file an FBAR:

* offshore hedge funds (both stand-alone and offshore feeders)
* US feeder funds that invest in offshore master funds, and US residents who own more than 50% of such US feeders
* offshore master funds

Investment managers that have a financial interest in any offshore hedge funds should also file FBARs.