Foreign Financial Information - New Provisions

The Foreign Account Tax Compliance Act ("FATCA") provisions of the recently enacted Hiring Incentives to Restore Employment Act ("HIRE Act") contains several provisions related to foreign financial asset disclosures to be made on income tax returns. New § 6038D) imposes a tax return disclosure requirement for an interest in a "specified foreign financial asset." Reportable “specified foreign financial assets” are depository or custodial accounts at foreign financial institutions and, to the extent not held in an account at a financial institution, (1) stocks or securities issued by foreign persons, (2) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (3) any interest in a foreign entity.

Key related provisions are:

1. Failure to comply with this provision can subject the entire return to an open statute of limitations until 3 years from the date the information is provided to the IRS.  § 6501(c)(8), as amended.  Moreover, failure to report income in excess of $5,000 attributable to foreign financial assets subjects the return to a 6 year statute of limitations.  § 6501(e)(1)(A)(ii).  Note in applying these two special statute of limitations rules, it is important to distinguish between the reporting of the information about the foreign financial assets and including the income attributable to the foreign financial assets in gross income.

2. Failure to comply can subject the taxpayer to significant penalties just for the failure to comply, regardless of whether additional tax is due. The penalty is $10,000, with an escalating penalty of $10,000 for each 30 days that the information is not provided after notice from the IRS.  § 6038D(d).

3. If the failure to comply results in an understatement of tax, there is a new 40-percent penalty on any understatement attributable to an undisclosed foreign financial asset. (This penalty applies not only to the new foreign financial assets disclosures under § 6038D, but also disclosures required under §§ 6038, 6038A, new 6038D, 6046A, and 6048.)  § 6662(b)(7) and (j).

For more information, I link to the pertinent portions of my Tax Procedure text. For a good discussion of the open statute of limitations issue, KPMG has a good discussion here.