Got foreign assets? Beware!
The Federal Government is getting more serious about foreign reporting requirements for U.S. taxpayers.
The HIRE Act (the Act) was signed into law by President Obama on March 18, 2010. The Act included new reporting and disclosure requirements for foreign assets held by U.S. taxpayers. The Act incorporates provisions of the Foreign Account Tax Compliance Act (FATCA) of 2009.
Starting in 2011, a U.S. taxpayer, who holds any interest in specified foreign financial assets during the tax year, must attach a disclosure to their individual tax returns of those assets. The nature of the information to be disclosed is similar to the information reported on Form TDF 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR) but there are differences with respect to the type of assets, the extent of the reporting, and the penalties involved.
What is a Specified Foreign financial Asset?
Foreign financial assets are any assets held outside of United States with an aggregate value exceeding $50,000. These include:
- Any depository, custodial or other financial account maintained by a foreign financial institution, and
- Any of the following assets which are not held in an account maintained by a financial institution, such as:
- Any stock or security issued by a non-U.S. company
- Any financial instrument or contract held for foreign investment that has an issuer or counterparty which is a non-U.S. person and
- Any interest in a foreign entity such as interests in foreign partnerships, foreign hedge funds and private equity funds.
How will this be reported?
At the moment, is not clear how this new disclosure will be made. There may be a new form created by the Internal Revenue Service or Form 8275, Disclosure Statement, might be used. However, all individuals who fall into this new reporting requirement would have to attach the disclosure statement to their Individual Income Tax return, Form 1040. Remember, this disclosure will be in addition to the FBAR reporting form TDF 90-22.1 if required.
The FATCA disclosure statement should include the following:
- Name and address of the financial institution in which the foreign account is maintained by the U.S. taxpayer, including account number, or
- In the case of any stock or security, financial instrument or contract, the name and address of all the issuers and counterparties, and
- The maximum value of the asset held during the tax year.
What are the penalties for failure to disclose?
An individual who fails to provide the required information with respect to specified foreign financial assets for any taxable year is subject to a penalty of $10,000 per year.
In addition, this penalty will be increase by $10,000 for each 30 day period if failure continues after 90 days from notification from the IRS. However, the maximum penalty will not exceed $50,000.
Are there any exemptions from this penalty?
Yes, the penalty is not imposed to any individual who can show to the IRS satisfaction that the failure is due to reasonable cause and not due to willful neglect.
Are there additional foreign issues covered by the HIRE Act?
- Passive Foreign Investment Companies (PFIC): For persons owning shares in a PFIC, the Act increases the reporting requirements. However, the IRS is still developing further guidance regarding this new reporting obligation.
- United States Owner of a Foreign Trust: The Act requires U.S. persons who are owners of any portion of a foreign trust or U.S. persons who receive any distributions from the trust to provide information with respect to the trust and ensure the trust complies with its reporting obligations.
The Act included several other international tax provisions. For the full text of the bill, click here
These additional requirements come into effect for tax year begining 2011. If you think you may fall under these new requirements, please contact a tax advisor.
Maria Toledo, CPA, MST, is a International Tax Principal at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.