Just in time for the holiday season, the IRS has released regulations for certain persons who hold “specified foreign financial assets.” FATCA contains a number of provisions that are intended to make it more difficult to use foreign accounts to shelter income from US tax.

New disclosure form. A new form, Form 8938, Statement of Specified Foreign Financial Assets, that will need to be filed by certain taxpayers for tax year 2011. The form must be included with your tax return each year in which the aggregate balance of your foreign financial assets exceeds $50,000 on the last day of the year or more than $75,000 at any time during the tax year.

Who must file? The new filing requirement generally applies to individuals with specified foreign financial assets.

The foreign financial assets generally include:
1. Any financial account maintained by a foreign financial institution
2. If not held at an account at a financial institution
o Stock or securities issued by foreign persons;
o Any other financial instrument or contract held for investment issued by non US person; and
o Any interest in a foreign entity
If you have been filing Form TD F 90-22.1, Report of Foreign Bank Account and Financial Accounts (FBAR’s), or Form 5471, Information Return of US Person with Respect to Certain Foreign Corporations, the new disclosure may seem redundant. However, situations exist where a foreign asset may be required to be reported on both the FBAR and the new disclosure form.

Penalties for Non-Compliance . If you fail to file, FATCA imposes a $10,000 penalty in addition to a 40% penalty on any understatement of tax attributable to undisclosed financial assets.

The US reporting requirements are getting tighter. If you feel you need assistance in this area, please contact us.

Additionally, U.S. taxpayers are taxed on their world-wide income, requiring taxpayers to recognize income earned outside the U.S.

Last month, key IRS spokespersons announced that the tax liabilities related to offshore issues of taxpayers that make “voluntary disclosure requests” will be settled in a prescribed manner, allowing those who voluntarily step forward to report unearned foreign-source income to settle with the IRS by paying penalties and interest as outlined in the settlement offer, and to escape criminal prosecution.

The terms of the settlement offer will remain in effect only for six months from March 23, 2009, ending on September 23, 2009.

The settlement offer should not be used by taxpayers that have properly reported all of their taxable income but have not been filing FBARs in prior years to report a personal foreign bank account or to report the fact that taxpayers have signature authority over bank accounts owned by their employers. These taxpayers are advised to file the delinquent FBAR reports according to the Instructions and attach an explanation of why the reports are being filed late.

Please contact me at your earliest convenience should either of these situations apply to you so that we can discuss these points in greater detail and determine the best way to proceed.

Summary of the IRS settlement offer:

… Taxes and interest due going back 6 years will be assessed. The taxpayer must file or amend all returns, including information returns, and Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts (FBAR)).

… IRS will assess either an accuracy or delinquency penalty for all years (no reasonable cause exception will be applied).

… In lieu of all other penalties that may apply (including FBAR and information return penalties), IRS will assess a penalty equal to 20% of the amount in a foreign bank account or entity in the year with the highest aggregate account or asset value. The penalty is reduced to 5% if, with respect to the accounts or entities formed: (a) the taxpayer did not open them or cause them to be opened or formed; (b) there has been no activity during the period the accounts/entities were controlled by the taxpayer; and (c) all applicable U.S. taxes have been paid on the funds in the accounts/entities (where only the earnings have escaped U.S. taxes).

The above terms will apply only to taxpayers that “fully cooperate with IRS both civilly and criminally,” for all voluntary disclosure requests that are submitted to IRS, and are not yet resolved. The terms will remain in effect only for six months from Mar. 23, 2009 (the date that IRS released its volunt ary disclosure offer). IRS Commissioner Doug Shulman said that those taxpayers who hid money offshore can avoid criminal prosecution by timely complying with the terms of the offer and warned that when the 6-month window closes—on Sept. 23, 2009—IRS would reevaluate all of its options, and warned that for those “who continue to hide their heads in the sand, the situation will only become more dire.”

Following are highlights of the settlement offer guidance carried in IRS’s new FAQs recently posted to its website:

Illustration of how settlement would work.

In FAQ 12, a taxpayer deposits $1 million in a foreign account in 2003. It’s assumed this amount is not unreported income. The account earns $50,000 of income each year, and the account balance in 2008 is $1.3 million. The taxpayer is in the 35% bracket, files a return but doesn’t report the foreign account or the interest income on it, and the maximum applicable penalties are imposed.

If the taxpayer takes advantage of IRS’s voluntary disclosure offer he would pay a total of $386,000 plus interest. This sum consists of:

… tax of $105,000 (six years at $17,500 [$50,000 × .35]) plus interest;

… an accuracy-related penalty of $21,000 (i.e., $105,000 × .20); and

… an additional penalty, in lieu of the FBAR and other potential penalties that may apply,
of $260,000 (i.e., $1,300,000 × .20).

If the taxpayer didn’t come forward and the IRS discovered his offshore activity, he would face up to $2,306,000 in tax, accuracy-related penalty, and FBAR penalty. The taxpayer would also be liable for interest and possibly additional penalties, and an examination could lead to criminal prosecution.

FAQs 14 and 15 list in detail the criminal and civil penalties that might apply to taxpayers who don’t take advantage of the voluntary disclosure offer.

Who is eligible and ineligible for relief under the voluntary disclosure initiative.

The offer is open to all taxpayers that comply with IRS’s terms, including corporations, partnerships and trusts (FAQ 19), and those taxpayers that have an offshore merchant account (FAQ 8). The offer does not apply if IRS has initiated a civil examination of the taxpayer, regardless of whether it relates to undisclosed foreign accounts or undisclosed foreign entities. (FAQ 7)

IRS discourages “quiet disclosure.”

IRS says it is aware that some taxpayers are attempting “quiet disclosure” by filing amended returns and paying any related tax and interest for previously unreported offshore income without otherwise notifying IRS. In FAQ 10, IRS strongly encourages such taxpayers to come forward under the voluntary disclosure offer. Those that don’t run the risk of being examined and potentially criminally prosecuted for all applicable years. IRS says it has identified, and will continue to identify and closely review, amended tax returns reporting increases in income.

Remember also that state tax returns would need to be amended to include the unreported foreign income. The IRS FAQ’s can be found on their website at: http://www.irs.gov/pub/irs-news/faqs.pdf

We are here to help. Please contact me at your earliest convenience should you have a concern about foreign income reporting so that we can discuss these points in greater detail and determine the best way to proceed.