• Help your parents manage their bank accounts in their home country?
• Own an account located in a foreign country, individually or as a joint owner?
• Own, co-own or help manage stock portfolios or other financial accounts located with financial institutions outside of the United States?
• Own an interest in a non-U.S. entity?
If you answered yes to any of these questions, you likely will be affected by new legislation regarding offshore asset reporting that goes into effect for most taxpayers beginning January 1, 2011. Have you previously declared such foreign accounts on your U.S. tax returns? If not, you may be affected by increased IRS enforcement actions against U.S. taxpayers with undeclared offshore accounts and assets.
The Foreign Accounts Tax Compliance Act (FATCA) enacted in March, is far reaching and too complex for a full explanation in this limited space. Accordingly, I have only described, in the briefest of terms, three new provisions from FATCA which, I believe will impact the readers of this publication the most. Readers are advised to consult their own tax professionals to determine how they will be affected by the Act and the IRS’ increased enforcement of undeclared offshore assets and accounts.
As a result of the FATCA provisions, many U.S. residents with bank accounts, other financial accounts, or trusts located outside of the U.S., could be subject to new reporting obligations and penalties. Current law requires U.S. individuals who own more than 50% of a non-U.S. financial account valued above $10,000, or who have signature authority over such account, to disclose this ownership on their annual Form 1040 and on Form TD F 90-22.1.
FATCA goes beyond this and imposes new information reporting requirements on any U.S. individual who holds interests valued at more than $50,000 (in the aggregate) in most types of accounts located in foreign countries or financial contracts with foreign counterparties. Failure to disclose a reportable account will be subject to a penalty of $10,000, and additional penalties (up to $50,000) could apply.
In addition to such failure to file penalties, FACTA also imposes a 40% penalty on any understatement of income from an undisclosed foreign financial asset and extends the statute of limitations to six years where an omission of income more than $5,000 is attributable to reportable foreign assets, and this six year period will not begin until a taxpayer files an information return disclosing these reportable assets. These new reporting requirements under FATCA are in addition to the existing “FBAR” reporting requirements described above, and apply without regard to whether the individual owns more than a 50% interest in such accounts, as long as the $50,000 aggregate value threshold is met.
Currently, U.S. shareholders of certain non-U.S. funds and corporations categorized as “passive foreign investment companies” (PFICs), are required to file information returns only if they receive a distribution from the PFIC, recognize gain upon the disposition of their interest in a PFIC, or make certain U.S. tax elections regarding the PFIC. FATCA now requires U.S. shareholders report their ownership interest in a PFIC annually, even if they don’t receive a distribution or recognize gain from the PFIC. Also, FATCA introduces a new provision under which the use of property owned by a non-U.S. trust, by the U.S. grantor or U.S. beneficiaries of such trust, is treated as a distribution in the amount of the fair market value of the use of the property, unless the grantor or beneficiary pays the trust for the use of the property within a “reasonable period of time.” This provision could have a significant impact on trust structures that own assets such as real estate and art, if the trusts allow the beneficiaries or other U.S. persons to use this property without receiving adequate compensation.
Inreased IRS Enforcment
Lastly, many readers may be aware of the IRS’ Offshore Voluntary Compliance Initiative (OVCI) that expired in October 2009 for taxpayers to come forward and report previously undeclared offshore assets and accounts. Under this OVCI program, more than 15,000 taxpayers came forward and filed to report previously undeclared offshore assets and accounts under a partially amnesty. Based on the information discovered as a result of these 15,000 filings, the IRS is preparing for a new round of investigations targeting banks other than UBS and jurisdictions other than Switzerland.
It is widely believed that these 15,000 taxpayers are only the tip of the iceberg when it comes to non-compliant taxpayers, and that banks in Asia and taxpayers using Asian offshore companies will be the next primary targets of IRS enforcement in this area. Further, practitioners currently assisting clients in the OVCI program are getting vibes from IRS auditors that the IRS is very upset more taxpayers did not take advantage of the OVCI program and, therefore, will enter the next round of enforcement with a harsher attitude and less amenable to leniency for still non-compliant taxpayers.
As noted above, the summary above only describes a small portion of the new legislation and ongoing IRS enforcement actions with respect of offshore assets and accounts. The FATCA provisions are far reaching and complex, and likely will affect many readers of this publication, as could the next round of IRS enforcement actions in this area. Accordingly, you should consult your tax professional for a full explanation of how the Act and the IRS’ enforcement actions will affect your financial and tax reporting matters.n
Rahul P. Ranadive is admitted to the Florida and California bars and the U.S. Tax Court, and has practiced international and domestic tax planning focusing on high net-worth families with international ties for over ten years. He is based in Miami, Florida with satellite locations globally, and can be reached at [email protected] or 305-913-7128 or by visiting www.globaltaxcounsel.com.