Monday, November 14, 2011

Increasing the Burden: FATCA Reporting Requirements for 2011

In addition to foreign account disclosures filed through FBAR reports, taxpayers now carry the additional burden to disclose additional financial assets held outside of the United States when they file their annual tax return. The Foreign Account Tax Compliance Act (FATCA) requires taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report information about these assets on a new Form 8938 beginning with their 2011 taxable year tax return. Failure to report these assets timely means big trouble: A penalty of $10,000.00 and additional penalties up to $50,000 for willful failure after IRS notification. Underpayments of tax relating to the undisclosed foreign accounts will be subject to a penalty of 40 percent of the tax owed, plus other additional penalties such as the substantial understatement penalty. In sum—do not ignore this new disclosure requirement!

FATCA further imposes a burden on your foreign financial institutions (FFI) themselves. In order to adequately monitor your offshore assets, these institutions must directly report certain information about financial accounts of U.S. taxpayers to the IRS. Indeed, these financial institutions will police potential violators of the new law. If you do not provide information to the IRS on your foreign assets, your financial institutions will do it for you.

To facilitate these disclosures, FATCA “invites” all FFIs to enter into a contract. Pursuant to this contract, the FFI agrees to identify accounts held by US persons and provide the IRS information regarding those accounts and their owners. To facilitate the transfer of this sensitive information, FFIs must also require their customers to sign a waiver permitting the FFI to release such information to the IRS. A 30% withholding tax is deducted from payments related to U.S. sources to foreign financial intermediaries which do not enter into a contract with the IRS and to recalcitrant account holders who do not sign a waiver. In other words, the FFI is going to turn over the information to avoid the 30% withholding.

The IRS’ definition of a “foreign financial institution” includes your typical bank—savings and depository banks, commercial banks, credit unions, and thrifts. It also includes broker-dealers, trust companies, custodial banks, and entities acting as custodians for employee benefit plans, entities trading in securities, mutual funds, and hedge funds. Essentially, if you hold assets in an offshore account, your account information will end up in the hands of the IRS.

The definition of “you” is also extensively defined in the new code sections. You, a U.S. taxpayer, are featured as an all inclusive definition with only exceptions explicitly provided. Exceptions to the definition include publicly traded corporations, tax-exempt organizations or individual retirement plans, several types of trusts and banks. The information disclosed to the IRS shall include your name, address, social security number, account number, account balance/value, gross receipts and gross withdrawals/payments from the account, and any “further information as requested by the IRS.”

FATCA impositions are in addition to, not in replacement of, any FBAR requirements you may be subject to. FBAR requires United States persons to disclose offshore assets if they had a financial interest in, or signatory authority over, at least one financial account outside of the United States if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. FBAR, unlike your FATCA form, is not filed with your tax return but must be received by the IRS on or before June 30 of the year in which your return is due.

These new requirements may result in hefty fines if you fail to comply. Be sure to discuss these FBAR and FATCA requirements with your accountant or tax attorney to see if you must report.

IRS CIRCULAR 230 NOTICE: Internal Revenue Service regulations generally provide that, for the purpose of avoiding federal tax penalties, a taxpayer may rely only on formal written advice meeting specific requirements. Any tax advice in this message, or in any attachment to this message, does not meet those requirements. Accordingly, any such tax advice was not intended or written to be used, and it cannot be used, for the purpose of avoiding federal tax penalties that may be imposed on you or for the purpose of promoting, marketing or recommending to another party any tax-related matters.