FATCA: Increased Foreign Asset Disclosure Requirements for U.S. Persons

The Foreign Accounts Tax Compliance Act (FATCA) was enacted as part of the Hiring Incentives to Restore Employment Act of 2010 (“HIRE Act” or “Act”). In addition to specific requirements and a withholding tax, FATCA imposed a new foreign asset disclosure requirements on U.S. persons.

This article will give a general summary about FATCA disclosure requirements, penalties and its statute of limitations

Disclosure Requirements

In general, under IRC section 6038D, disclosure is required if the aggregate value of all “specified foreign financial assets” as defined in the statute, exceeds $50,000 (compare this threshold to the FBAR requirement of $10,000). This information must be attached to the current year tax returns. The provision of FATCA is effective as of tax year 2011.

Covered individuals or entities must disclose the maximum value of the asset(s) during the year, as well as other pertinent information regarding the account, stock, financial instrument, contract, interest, or related items. It should be noted that FATCA disclosure is likely to be broader than the reporting requirements under the FBAR.

Penalties

IRC section 6038D imposes a penalty of $10,000 on U.S. persons (i.e., individuals, corporations, partnerships, trusts or LLC’s) who do not meet the required disclosure requirement. If the required disclosure information is not provided within 90 days of notice and demand by the IRS, penalties will increase by $10,000 each 30 days following the notification, up to a maximum penalty of $50,000. A reasonable cause exception to the penalty may apply in certain circumstances. An international tax attorney should determine whether exception applies to your particular situation.

Furthermore, FATCA amended IRC section 6662 (substantial understatement penalty provision) to double the penalty on any underpayment attributable to an undisclosed foreign financial asset (which means any asset that should have been reported under IRC sections 6038, 6038B, 6038D, 6046A, or 6048) to a draconian 40% penalty. This provision is effective for tax years beginning after the enactment of the Act on March 18, 2010 – i.e. tax year 2011.

State of Limitations Provisions

In addition to other provisions expanding the powers of the IRS under FATCA, the Act also has an increased statute of limitations for an IRS audit. Under Section 513 of the Act, the statute of limitations is extended to six years after a return is filed when a taxpayer makes an omission of income attributable to one or more assets required to be reported under section 6038D in excess of $5,000. This is an extension of the general statute of limitations of three years from the filing of a return.

The Section 513 statute of limitations applies to returns filed after March 18, 2010. The extended statute of limitations may also apply to returns filed on or before this date if the general statute of limitation period (under IRC section 6501) has not yet expired.

Contact Sherayzen Law Office to Help You

Do you have questions relating to FATCA reporting issues, or concerns that you may be neglecting to report information that can lead to substantial penalties? Sherayzen Law Office is here to assist you with all of your U.S. tax compliance tax issues. Call now at (612) 790-7024 to discuss your tax situation with an experienced international tax lawyer.

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