Friday, December 3, 2010

Supplementing FBAR: New 2011 Foreign Asset Disclosure Requirements

       On March 18, 2010, the President signed into law the Hiring Incentives to Restore Employment (HIRE) Act that contains a provision that changes and supplements the FBAR filing requirement.  Section 511 of the HIRE Act added Section 6038D to the Internal Revenue Code which requires individual taxpayers with an aggregate balance of more than $50,000 in “specified foreign financial assets” to file a disclosure statement with his or her income tax return.  26 U.S.C. §6038D.  While an FBAR filing is only required to be filed for individuals who had financial interest in or signature or other authority over any foreign financial accounts if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, the new code section defines a "specified foreign financial asset" to include ownership of:  (1) any financial account maintained by a foreign financial institution;  (2) any stock or security issued by a non-U.S. person;  (3) any financial interest or contract held for investment that has a non-U.S. issuer or counterparty; and (4) any interest in a foreign entity.  The broad language makes the Section 6038D filing requirement more applicable than the FBAR filing.  Some taxpayers will be required to file both next year.

            Unlike FBAR information, which originates under Section 31 of the United States Code and is normally not permitted to be verified against a tax return or tax information due to privacy and disclosure concerns, the new provision under Section 6038D has none of these restrictions.  This change allows the IRS to use its arsenal of tools and resources to verify the information reported. 

The minimum penalty for failing to submit the required disclosure pursuant to Section 6038D  is $10,000, which increases by $10,000 for each 30-day period following receipt of notification of your failure to file from Treasury, with the maximum penalty being $50,000.  There is a 90-day grace period following notification from the Treasury before the additional $10,000 penalties accrue.  The penalty may be waived if the taxpayer is able to demonstrate that the failure to file was due to reasonable cause.  Furthermore, the HIRE Act amends Section 6662 to make the underpayment penalty applicable to understatements attributable to undisclosed foreign financial assets.  For such understatements, the penalty imposed by Section 6662 is 40 percent, rather than the normal penalty of 20 percent.

IRS Commissioner Doug Shulman called Section 6038D “the next big thing” in international tax compliance and enforcement.  He further noted that the President has authorized funding to hire 1600 new people for the IRS’ international operations over the next two years.  (“Tax From the Top: Q&A With IRS Commissioner Doug Shulman,” Journal of Accountancy, April 2010, page 16.)  The reporting requirements are effective beginning in the 2011 taxable year.  The IRS is eager to find assets abroad so remember to disclose these foreign assets or risk incurring a hefty IRS fine.

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