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Final Regulations and Guidance Issued on Reporting Interest Paid to Nonresident Aliens under FATCA

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The Foreign Account Tax Compliance Act (FATCA), was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, and mandates new reporting requirements, and amends existing IRC Sections.  Recently, the IRS issued final regulations and guidance regarding the reporting interest paid to nonresident aliens by certain financial institutions, as well as revenue procedure specifying foreign countries with which the U.S. has a information exchange agreement.  Nonresident aliens should be especially aware of these new rules, as many individuals will likely be affected by these rules.

TD 9584 (Guidance on Reporting Interest Paid to Nonresident Aliens), effective April 19, 2012, has the final regulations concerning the reporting requirements for commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that pay interest on deposits.

In general, beginning with interest payments made on, or after, January 1, 2013, covered financial institutions will be required to report deposit interest paid to certain nonresident alien individuals.  The IRS may then exchange information relating to tax enforcement with the officials of foreign countries.  Under the new Treas. Reg. §§ 1.6049-4(b)(5) and 1.6049-8(a), interest paid to nonresident aliens must be reported if the amount in aggregate is $10 or more.

The IRS views this ability to share such information as important to its goal of gathering information from other jurisdictions about US taxpayers who may be evading US tax by hiding assets offshore.  Additionally, the IRS enacted the new reporting requirements to limit US taxpayers with US deposit accounts from falsely claiming to be nonresident aliens in order to avoid paying US taxes on interest they receive from deposits.

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

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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. Contact us by email: [email protected] to discuss your tax situation with an experienced international tax lawyer.