New IRS Reporting Rules for Foreign Accounts


The Foreign Account Tax Compliance Act (FATCA) is part of the Hiring Incentives to Restore Employment (HIRE) Act and is effective for tax years beginning after March 18, 2010. It affects U.S. taxpayers with foreign accounts and assets. This act is a second filing requirement in addition to the filing requirements by the Report of Foreign Bank and Financial Accounts (FBAR). The asset threshold for the FBAR is $10,000 and the report is filed separately from your individual income tax return.

The new FATCA disclosure threshold is $50,000 but applies to a wider range of assets including investments in foreign hedge funds and private equity funds. The disclosure is filed as an attachment to your individual income tax return. There are now more disclosures and penalties associated with noncompliance and the statute of limitations for IRS audits could double from three years to six years. The cost to taxpayers of reporting their foreign activities will increase due to the FATCA rules.

There are severe penalties for nondisclosure of foreign accounts. The minimum penalty for failure to file is $10,000 with a maximum penalty of up to $50,000 per tax year. There is also a 40% accuracy-related penalty on any portion of an underpayment caused by failing to report the foreign transaction. The statute of limitations for IRS audits is increased from three years to six years if the taxpayer omits 25% or more of gross income or $5,000.

The safest course of action is to file the required FBAR disclosures now for individuals and be prepared to file the required FATCA disclosures in 2011. The FATCA reporting requirements for financial institutions begin in 2013. Failure to file could be revealed when the financial institution reporting requirements become effective. By then, with the higher penalty amounts and increased statute of limitations, failure to comply could be very costly to taxpayers.

Be sure to answer the questions on your tax organizer regarding foreign accounts. The answers to these questions appear on your individual income tax return at the bottom of Schedule B. A “yes” answer to any of these questions will require you to file the FBAR. If you have any foreign investments it would be wise to discuss them with us so we may determine if you are required to report any foreign activities.