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New Foreign Reporting Requirements and Penalties

The recently-enacted 2010 HIRE Act includes several new foreign reporting requirements and penalties. These include:

Additional disclosures required for foreign account holders

Currently, holders of foreign accounts with a total value of over $10,000 must file a Report of Foreign Bank and Financial Accounts (Form TD F90-22.1), also known as FBAR reporting. For tax years beginning after March 18, 2010, individuals with foreign financial assets with a total value of $50,000 or more must also disclose these assets on a statement attached to their tax return. Individuals who fail to file this statement are subject to a penalty of $10,000 for the tax year. This penalty is in addition to any penalties for failure to file FBARs.

Note: FBARs are due June 30th.

Taxpayers should review their records to determine whether they have a reporting requirement for the 2009 reporting period. Failure to file penalties are $10,000.

New penalties for underpayments attributable to undisclosed foreign financial assets

Tax years beginning after March 18, 2010, the HIRE Act also imposes a penalty equal to 40 percent of the amount of any federal tax understatement that is attributable to an undisclosed financial asset as required above.

New penalty for failure to disclose foreign trust transactions

The HIRE Act imposes a minimum penalty of $10,000 for failure to file information returns related to certain foreign trust transactions, including the creation of a foreign trust, the transfer of money or property to a foreign trust, or the death of a U.S. owner of a foreign trust. The penalty for failure to file these returns is 35 percent of the amount required to be disclosed on the return. Previously, if the IRS learned of an undisclosed foreign trust, but could not determine the amount required to be disclosed on its return, it could not impose a penalty. The new minimum penalty applies to notices and returns required to be filed after December 31, 2009.

New information return for passive foreign investment company (PFIC)

The Hire Act requires each U.S. shareholder of a PFIC to file a new information return unless the IRS specifies otherwise. This requirement is effective March 18, 2010.

New presumption regarding transfers to foreign trusts

The HIRE Act allows the IRS to treat a foreign trust as having a U.S. beneficiary if a U.S. person directly or indirectly transfers property to the foreign trust. The U.S. person may rebut this presumption by demonstrating that under the terms of the trust, (1) no part of the trust may be paid or accumulated during the year for the benefit of a U.S. person (2) that if the trust were terminated during the year, no part of the trust could be paid to a U.S. person, (3) and that such person provides any additional information as IRS may require with respect to such transfer. This presumption applies to transfers of property after March 18, 2010.

Clarification regarding foreign trusts

The HIRE Act clarifies that a foreign trust will be treated as having a U.S. beneficiary if (1) any person has discretion to determine the beneficiaries of the trust unless the terms of the trust specifically identify the class of beneficiaries and none of those beneficiaries are U.S. persons or (2) any written, oral, or other agreement could result in a beneficiary of the trust being a U.S. person. The Act also clarifies that the use of any trust property will be treated as a payment from the trust in the amount of the fair market value of such use.

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