Under the 2010 HIRE Act (IRC §1471(c)(1)), a foreign financial institution that is a party to a qualified intermediary agreement with the IRS must report the following information regarding each U.S. account maintained by the institution:
1. The name, address, and TIN of each account holder that is a specified U.S. Person.
2. The name, address and TIN of each substantial U.S. owner of any account holder that is a U.S. owned foreign entity.
3. The account number.
4. The account balance or value as determined at such time and in such manner as the IRS prescribes.
5. The gross receipts and gross withdrawals or payments from the account as determined for such period and in such manner as the IRS prescribes.
A Qualified Intermediary (“QI”) is a foreign financial institution that has entered into a withholding and reporting agreement (QI Agreement) with the IRS (T.R. §1.1441-1(e)(5)(ii)).
For U.S. Taxpayers, the QI must provide the U.S. payor with Form W-9 for each U.S. recipient account holder (the QI is not required to back-up withhold or file Form 1099).
For non-resident withholdings, a QI is a withholding agent subject to reporting rules, and payor for purposes of back-up withholding and Form 1099 information reporting rules.
Under a QI Agreement, a QI may choose not to assume primary responsibility for non-resident withholding. The QI must provide a U.S. withholding agent with Form W-8IMY certifying the status of its unnamed U.S. account holders and is not required to withhold or report the payments on Form 1042-S.
A foreign financial institution that becomes a QI and elects primary withholding responsibility is not required to forward beneficial ownership information regarding its customers to a U.S. financial institution or other withholding agent of U.S. source investment income to establish the customer’s eligibility for an exemption from or reduced rate of, U.S. withholding tax.
Instead, the QI is permitted to establish for itself the eligibility of its customers for an exemption or reduced rate, based on a Form W-8, and information as to residence obtained under the know-your-customer rules to which the QI is subject in its home jurisdiction, as approved by the IRS or as specified in the QI Agreement (Rev. Proc. 2000-12, 2000-1 CB 387).
A QI may treat an account holder as a foreign beneficial owner of an account if the account holder provides a valid Form W-8 or other valid documentary evidence supporting foreign status. The QI cannot reduce the withholding rate if the QI knows the account holder is not the beneficial owner of a payment to the account.
If the foreign account holder is the beneficial owner of a payment, the QI can shield the account holder’s identity from U.S. custodians and the IRS.
If a foreign account holder is a nominee and not the beneficial owner of a payment, the account holder must provide the QI with Form W-IMY for interest and specific information about each beneficial owner to which the payment related.
A QI that receives this information may shield the account holder’s identity from a U.S. custodian, but not from the IRS.
If an account holder is a U.S. Person, the account holder must provide the QI with Form W-9 supporting U.S. status. Absent receipt of Form W-9, the QI must follow the presumption rules in the QI agreement to determine whether non-resident 30% withholding, or 28% back-up withholding, is required. A reduced rate of non-resident withholding may not be applied based on the presumption rules.
Pursuant to the QI agreement presumption rules, U.S. source investment income paid to an off-shore account is presumed paid to an undocumented foreign account holder and is subject to 30% withholding.
Foreign source income and broker proceeds paid to an off-shore account are presumed paid to a U.S. exempt recipient and are exempt form both non-resident and back-up withholding.
A QI must file Form 1042 by March 15th of the year following any calendar year in which the QI acts as a QI.
A QI is not required to file Form 1042-S for amount paid to each separate account holder, but must file a separate Form 1042-S for each type of reporting paid (income that falls within a particular withholding rate or within a particular income, exemption or recipient code).
Under the new law with respect to each U.S. account (any financial account held by one or more specified U.S. Persons or U.S. owned foreign entities (IRC §1471(d)(1)(A)), the foreign financial institution must provide information about account gross receipts and withdrawals.
U.S.-Source investment income is subject to U.S. information reporting and tax withholding.
Every person engaged in a trade or business in the United States must file with the IRS a Form 1099 information return for payments totaling at least $600 that it makes to a U.S. Person in the course of its trade or business (IRC §6041).
To avoid 28% back-up tax withholding (IRC §3406), a U.S. Person must furnish the payor with Form W-9 establishing that the payee is a U.S. Person (T.R. §32.3406(d)-1 and T.R. §32.3406(h)-3).
The combination of Form 1099 tax reporting and 28% back-up tax withholding is intended to ensure that U.S. Persons pay tax on investment income.
U.S. source income amounts, paid to foreign persons, are exempt from Form 1099 information reporting because they are subject to non-resident withholding rules.
A non-resident investor who seeks withholding tax relief for U.S. source investment income must provide certification on the appropriate IRS Form W-8 to the withholding agent to establish foreign status and eligibility for an exemption or reduced tax rate.
A withholding agent making payments of U.S. source amounts to a foreign person is required to report the payments, including any U.S. tax withheld, to the IRS on Forms 1042 and 1042-S by March 15th of the year following the year that the payment is made (T.R. §1.1461-1(b) and (c)). If the withholding agent withholds more than is required, the payee may file a claim for refund.
A non-financial foreign entity that is a beneficial owner of a withholdable payment must certify that it has no substantial U.S. owners or provide identifying information for each substantial U.S. owner.
The minimum amount of penalty for failure to report information or file returns for foreign trusts is increased to $10,000.
If any notice or return required to be filed under IRC §6048 is not filed on or before the due date, or does not include all the information that is required, or includes incorrect information, then the person required to file such notice or return must pay a penalty equal to the greater of :
1. $10,000, or
2. 35% of the gross reportable amount (5% for U.S. Persons treated as owners of the trust) (IRC §6677(a), as amended by the 2010 HIRE Act).
Prior to these revisions, the penalty for failure to provide the required information or file a return with respect to certain foreign trusts was 35% of the gross reportable amount (5% for U.S. Persons treated as owners of the trust).
With the new minimum amount, the IRS will be able to impose a $10,000 penalty even when there is not enough information to determine the gross reportable amount.
The maximum amount of the penalty has changed. The penalty for failure to report information or file a return with respect to certain foreign trusts cannot exceed the gross reportable amount (IRC §6677(a)).
To the extent that the aggregate amount of penalties exceeds the gross reportable amount, the IRS must refund the excess to the Taxpayer (IRC §6677(a), as amended by the 2010 HIRE Act).
By Jonathan Stempel, Reuters.com (7/1/30)
A former UBS AG client in New Jersey who once played for the Soviet Union’s national soccer team pleaded guilty on Thursday to concealing $2.6 million he had held in an offshore account from the U.S. Internal Revenue Service.
Click link above for complete story.
U.S. Taxpayers who hold any interests in specified foreign financial assets during the tax year must attach their tax returns for the year certain information with respect to each asset if the aggregate value of all assets exceeds $50,000. An individual who fails to furnish the required information is subject to a penalty of $10,000. An additional penalty may apply if the failure continues for more than 90 days after a notification by the IRS to a maximum of $50,000. The penalty may be avoided if the Taxpayer shows a reasonable cause for the failure to comply.
The Joint Committee on Taxation, Technical Explanation of the Hiring Incentives to Restore Employment Act (JCX-4-10) clarifies that although the nature of the information required to be disclosed is similar to the information disclosed on an FBAR, it is not identical.
For example, a beneficiary of a foreign trust who is not within the scope of the FBAR reporting requirements because his interest in the trust is less than 50%, may still be required to disclose the interest with his tax return if the $50,000 value threshold is met. In addition, this provision is not intended as a substitute for compliance with the FBAR reporting requirements which remain unchanged.
For purposes of IRC Code §6038(D) as added by the HIRE Act, a specified foreign financial asset includes:
1. Any depository, custodial, or other financial account maintained by a foreign financial institution, and
2. Any of the following assets that are not held in an account maintained by a financial institution:
a. Any stock or security issued by a person other than a U.S. Person
b. Any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. Person, and
c. Any interest in a foreign entity (IRC §6038(D)(b) as added by the 2010 HIRE Act).
The information required to be disclosed with respect to any asset must include the maximum value of the asset during the tax year (IRC §6038(D)(c) as added by the 2010 HIRE Act).
For a financial account, the Taxpayer must disclose the name and address of the financial institution in which the account is maintained and the number of the account.
In the case of any stock or security, the disclosed information must include the name and address of the issuer and such other information as is necessary to identify the class or issue of which the stock or security is a part.
In the case of any instrument, contract, or interest, a Taxpayer must provide any information necessary to identify the instrument, contract, or interest along with the names and addresses of all issuers and counterparties with respect to the instrument, contract, or interest.
Under these rules, a U.S. Taxpayer is not required to disclose interests held in a custodial account with a U.S. financial institution. In addition, the U.S. Taxpayer is not required to identify separately any stock, security instrument, contract, or interest in a disclosed foreign financial account.
An individual who fails to furnish the required information with respect to any tax year at the prescribed time and in the prescribed manner is subject to a penalty of $10,000 (IRC §6038(D)(d) as added by the 2010 HIRE Act). If the failure to disclose the required information continues for more than 90 days after the day on which the notice was mailed (from the Secretary of Treasury), the individual is subject to an additional penalty of $10,000 for each 30-day period (or a fraction thereof) with the maximum penalty not to exceed $50,000.
In addition to the $10,000 penalty (up to $50,000) under IRC §6038(D) a 40% accuracy-related penalty is imposed on any understatement of tax attributable to a transaction involving an undisclosed foreign financial asset.
The statute of limitations for omission of gross income attributable to foreign financial assets (omission of gross income in excess of $5,000 attributable to a foreign financial asset), is extended to six years.
The IRC §6038(D) penalties are not imposed on any individual who can show that the failure is due to reasonable cause and not willful neglect. (IRC §6038D(g), as added by the 2010 HIRE Act.)
The information disclosure with respect to foreign financial assets supplements the FBAR reporting regime. The HIRE Act broadens reporting requirements and extends the rules to ownership of foreign assets such as foreign stocks, securities, interests in foreign companies not covered by the FBAR reporting. The threshold reporting requirement amount for FBARs ($10,000) is increased to $50,000. While the FBAR reporting covers those having signatory or other authority, the new reporting regime focuses on ownership.
In March 2010, the IRS suspended TD F 90-22.1 (FBAR) filing requirements for persons other than U.S. Citizens and domestic entities (including those “in and doing business in the U.S.”). (IRS Announcement: 2010-16)
On 8/7/09, IRS Notice 2009-62, extended the deadline for filing FBAR’s for 2008 (and prior years) for persons with signature authority (but no financial interest) in foreign financial accounts until June 30, 2010.
In March 2010, the IRS extended the 2008 FBAR filings due June 30, 2010 until June 30, 2011 (for FBAR filings due for 2010 and prior years) for “persons with signature authority” (but no financial interest) in foreign financial accounts, defined as including: “Those in which the assets are held in a commingled fund and the account owner holds an equity interest in the fund (including mutual funds). (IRS Announcement: 2010-23)
On March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment (“HIRE”) Act (P.L. 111-147) (The “Act”) which included the Foreign Account Tax Compliance Act containing new foreign account tax compliance rules.
Under the Act, new reporting and disclosure requirements for foreign assets will be phased in between 2010 – 2013:
1. Foreign Institutional Reporting: Foreign Institutions have new reporting and withholding obligations for accounts held by U.S. Persons (generally effective after 12/31/12, commencing 1/1/13).
2. Foreign Financial Assets ($50,000): Individuals with an interest in a “Foreign Financial Asset” have new disclosure requirements. If foreign financial assets are valued in excess of $50,000, the U.S.
Taxpayer must attach certain information to their income tax returns for tax years beginning after March 18, 2010. (U.S. Taxpayers are not required to disclose interests that are held in a custodial account with a U.S. financial institution).
The penalty is substantial ($10,000, plus additional amounts for continued failures, up to a maximum of $50,000 for each applicable tax period). The penalty may be waived if the individual can establish that the failure was due to reasonable cause and not willful neglect.
3. 40% Penalty: A 40% accuracy-related penalty is imposed for underpayment of tax that is attributable to an undisclosed foreign financial asset understatement. Applicable assets are those subject to mandatory information reporting when the disclosure requirements were not met. The penalties are effective for tax years beginning after March 18, 2010.
4. 6 Year Statute of Limitations: Statute of limitations re: omission of income in connection with foreign assets: The statute of limitations for assessments of tax is extended to six (6) years if there is an omission of gross income in excess of $5,000 attributable to the foreign financial asset. The six year statute of limitations is effective for tax returns filed after March 18, 2010, as well as for any other tax return for which the assessment period has not yet expired as of March 18, 2010.
5. Passive Foreign Investment Companies: The Act imposes an information disclosure requirement on U.S. Persons who are PFIC shareholders.
A PFIC is any foreign corporation if:
a. 75% or more of the gross income of the corporation for the taxable year is passive income; or
b. The average percentage of assets held by such corporation during a taxable year which produce passive income or which are held for the production of passive income are at least 50%.
6. Foreign Trusts with U.S. Beneficiaries: The Act clarifies if a foreign trust is treated as having a U.S. Beneficiary, an amount accumulated is treated as accumulated for the U.S. Person’s benefit even if that Person’s trust interest is contingent. The Act clarifies that the discretion to identify beneficiaries may cause the trust to be treated as having a U.S. Beneficiary. This provision is effective after March 18, 2010.
7. Rebuttable Presumption/Foreign Trust – U.S. Beneficiary: The Act creates a rebuttable presumption that a foreign trust has a U.S. Beneficiary if a U.S. Person directly or indirectly transfers property to a foreign trust (unless the transferor provides satisfactory information to the contrary to the IRS). This provision is effective for property transfers after March 18, 2010.
8. Uncompensated Use of the Foreign Trust Property: The Act provides that the uncompensated use of the foreign trust property by a U.S. Grantor, a U.S. Beneficiary (or a U.S. Person, related to either of them), is treated as a distribution by the trust.
The use of the trust property is treated as a distribution to the extent of the fair market value of the property’s use to the U.S. Grantor/U.S. Beneficiary, unless the fair market value of that use is paid to the trust.
The loan of cash or marketable securities by a foreign trust, or the use of any other property of the trust, to or by any U.S. Person is also treated as paid or accumulated for the benefit of the U.S. Person. This provision applies to loans made and uses of property after March 18, 2010.
9. Reporting Requirements, U.S. Owners of Foreign Trusts: This provision requires any U.S. Person treated as the owner of any portion of a foreign trust to submit IRS-required information and insure that the trust files a return on its activities and provides such information to its owners and distributees.
This new requirement imposed on U.S. Persons treated as owners is in addition to the current requirement that such U.S. Persons are responsible for insuring that the foreign trust complies with its own reporting obligations. This provision is effective for taxable years beginning after March 18, 2010.
10. Minimum Penalty re: Failure to Report Certain Foreign Trusts: This provision increases the minimum penalty for failure to provide timely and complete disclosure on foreign trusts to the greater of $10,000 or 35% of the amount that should have been reported.
In the case of failure to properly disclose by the U.S. Owner of a foreign trust of the year-end value, the minimum penalty would be the greater of $10,000 or 5% of the amount that should have been reported.
This provision is effective for notices and returns required to be filed after December 31, 2009.
On 6/24/09, the IRS updated their Voluntary Disclosure FAQ clarifying the FBAR reporting requirements for foreign accounts with multiple signatories:
If parents have a jointly owned foreign account on which they have made their children signatories, the children have an FBAR filing requirement but no income. Should the children just file delinquent FBARs as described by FAQ 9 and have the parents submit a voluntary disclosure? Will both parents be penalized 20 percent each? Will each have a 20 percent penalty on 50 percent of the balance?
Only one 20 percent offshore penalty will be applied with respect to voluntary disclosures relating to the same account. In the example, the parents will be jointly required to pay a single 20 percent penalty on the account. This can be through one parent paying the total penalty or through each paying a portion, at the taxpayers’ option. For those signatories with no ownership interest in the account, such as the children in these facts, they may file delinquent FBARs with no penalty as described in FAQs 9 and 41. However, any joint account owner who does not make a voluntary disclosure may be examined and subject to all appropriate penalties.
If there are multiple individuals with signature authority over a trust account, does everyone involved need to file delinquent FBARs? If so, could everyone be subject to a 20 percent offshore penalty?
Only one 20 percent offshore penalty will be applied with respect to voluntary disclosures relating to the same account. The penalty may be allocated among the taxpayers making the disclosures in any way they choose. The reporting requirements for filing an FBAR, however, do not change. Therefore, every individual who is required to file an FBAR must file one.
The California Tax Lawyer (Summer 2009 Edition) published my article: FBARs and Offshore Hedge Funds. Please see copy below.
FBARs and Offshore Hedge Funds
After the landmark agreement between the U.S. and Swiss government over secret UBS Swiss bank accounts held by U.S. citizens, the IRS is now focusing on hedge funds in the Cayman Islands. Recently, IRS officials advised that certain U.S. investors in off-shore hedge funds must file a FBAR.
On June 12, 2009, an IRS official stated that the term “financial interest” (which requires a FBAR filing) includes hedge funds that “function as mutual funds.” It appears the IRS and Justice Department will identify U.S. taxpayers who evade U.S. taxes by investing with off-shore hedge funds. The IRS and Justice Department are pressing foreign financial institutions to provide them with information about Americans with “foreign, secret bank accounts.”
Senate Finance Committee Chairman Max Baucus (D., Mont.) has introduced legislation that would require an FBAR to be filed with a tax return. It would also require U.S. financial institutions to report to the IRS transfers of money into any foreign financial account. This would make it possible for the IRS to have information about the creation of a foreign account at the beginning.
The California Tax Lawyer (Summer 2009 Edition) published my article: Penalty Regime for Foreign Bank Account Filing (FBAR), please see copy below.
Penalty Regime for Foreign Bank Account Filing (FBAR)
Each U.S. person who has a financial interest in, or signature or other authority over, one or more foreign financial accounts (valued over $10,000, at any time during a calendar year) is required to report the account on Schedule B/Form 1040, and TD F 90-22.1 (Report of Foreign Bank and Financial Accounts (FBAR)), due by June 30 of the succeeding year (I.R.M. 126.96.36.199. (2/17/09)). The IRS has six years to assess a civil penalty against a taxpayer who violates the FBAR reporting rules.
Failure to file the required report or maintain adequate records (for 5 years) is a violation of Title 31, with civil and criminal penalties (or both). For each violation a separate penalty may be asserted.
(I) Non Willful Violation: Civil Penalty – Up to $10,000 for each violation.
(II) Negligent Violation: Civil Penalty – Up to the greater of $100,000, or 35 percent of the greatest amount in the account.
(III) Intentional Violations -
(1) Willful Failure to File FBAR or retain records of account: (a) Civil Penalty – Up to the greater of $100,000, or 50 percent of the greatest amount in the account; (b) Criminal Penalty – Up to $250,000 or 5 years or both.
(2) Knowingly and Willfully Filing False FBAR: (a) Civil Penalty – Up to the greater of $100,000, or 50 percent of the greatest amount in the account; (b) Criminal Penalty – $10,000 or 5 years or both.
(3) Willful Failure to File FBAR or retain records of account while violating certain other laws: (a) Civil Penalty – Up to the greater of $100,000, or 50 percent of the greatest amount in the account; (b) Criminal Penalty – Up to $500,000 or 10 years or both.