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International Tax Issues –
Reporting Foreign Income and Accounts |
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Dear Financial Leader,
In recent months, enforcement of reporting requirements of income from foreign sources and accounts has increased significantly. Layers of laws and regulations governing reporting of foreign assets and income create a complex environment for maintaining your compliance. I want to bring to your attention several international tax issues that may impact you, your employees, and your business and help you make sense of these complexities.
Foreign Banks and Financial Accounts Reporting
Taxpayers are required annually to file a Report of Foreign Bank and Financial Accounts, (FBAR) and to pay U.S. tax on income of those foreign accounts, as appropriate. The Bank Secrecy Act regulates foreign bank account reporting. On February 24, the Financial Crimes Enforcement Network (FinCEN) issued final regulations, effective March 28, 2011, that further define persons who must report and address the scope of accounts to report. A revised Form TD F 90-22.1 is effective immediately to report foreign accounts and is due June 30, 2011. The final rule and preamble:
- Clarify what accounts are foreign and reportable, including custodial account treatment;
- Clarify “signature or other authority” as authority to control the disposition of assets;
- Explain that employees filing an FBAR due to employer’s accounts are not expected to personally maintain the foreign account records; and
- Advise filers that they may rely on provisions of this final rule to determine filing obligations where filing was properly deferred under prior Treasury guidance.
Taxpayers who have properly reported foreign income and paid the associated tax and those who have delinquent FBARs are advised by the IRS to file the delinquent FBAR reports and attach a statement explaining why the reports are filed late. The IRS has indicated that they will not impose a penalty for the failure to file the delinquent FBARs if there are no underreported tax liabilities and the FBARs are filed by August 31, 2011 (or by the June 30, 2011 due date for calendar 2010 FBARs). Similar guidance exists for other tax information returns such as Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
New IRS guidance is also available for individuals answering questions relating to foreign financial accounts on 2010 federal income tax and information returns.
2011 Offshore Voluntary Disclosure Initiative
Last month, the IRS announced that a new 2011 Offshore Voluntary Disclosure Initiative (Disclosure Initiative) will run through August 31, 2011 and will enable individuals and businesses to bring money held in foreign accounts back into the U.S. tax system, avoid otherwise applicable criminal prosecution and incur reduced civil penalties.
The Disclosure Initiative requires participants to do the following by the August 31 deadline:
- File all original and amended tax returns for the affected years between 2003 to 2010;
- Include payment for taxes, interest and accuracy-related penalties; and
- Pay a penalty of 25% of the highest aggregate account balance in the taxpayer’s foreign bank accounts.
The 25% penalty is in lieu of all other penalties that might apply, except for the failure to file, failure to pay, and accuracy-related penalties. Individuals with offshore accounts or assets of less than $75,000 in any calendar year covered by the disclosure initiative will qualify for a 12.5% penalty rate. The IRS has issued 53 questions and answers that give extensive details about the 2011 program and about the civil and criminal penalties that may apply to taxpayers that do not come forward voluntarily.
Foreign Account Tax Compliance Act
Starting with calendar 2011 for individual taxpayers, there is an additional annual reporting requirement for foreign financial assets. This new reporting requirement is the result of the Foreign Account Tax Compliance Act (FATCA) contained in the Hiring Incentives to Restore Employment (HIRE) Act that added IRC Section 6038D.
The penalty for failure to disclose the required information for any taxable year will generally be $10,000. Separate significant penalties also exist for underpayments of tax that are attributable to undisclosed foreign financial assets.
Some examples of foreign assets and investments that must be disclosed include:
- Foreign bank accounts
- Foreign pension assets
- Foreign brokerage accounts
- Interests in foreign partnerships and hedge funds
For more information and resources regarding these topics, visit the AICPA’s FBAR and FATCA Resources page. The AICPA submitted a Request for Guidance on Foreign Trusts as Part of the HIRE Act and other letters to the IRS to seek clarification on these provisions.
We will continue to update you as the FBAR and FATCA issues develop. The AICPA works diligently to advocate on behalf of our profession and we will continue to keep you informed through email, articles and our BusIndNews newsletter. You also can find out more about this and other important information affecting our profession in the Journal of Accountancy, AICPA News Update and CPA Letter Daily.
Sincerely,
Carol Scott, CPA, MBA
Vice President - Business, Industry & Government
American Institute of Certified Public Accountants
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