As you may be aware, a US person (US citizen or resident, US partnership, US corporation or US estate or trust) has an obligation to file a Report of Foreign Bank and Financial Account (FBAR) if that person has a financial interest in or signature authority (or comparable authority) in one or more accounts in a foreign country if the aggregate value of those accounts exceeds $10,000 USD at any time during the calendar year. However, what you may not know is that starting with the 2011 tax year under the Hiring Incentives to Restore Employment Act of 2010 (“HIRE Act”) and Internal Revenue Code section 6038D, there is now an additional requirement for an individual who holds an interest in a “specified foreign financial asset” to disclose information on each such asset if the aggregate value of all the individual’s specified foreign financial assets exceeds $50,000 USD. This disclosure is done on a form which will be attached to the individual’s income tax return. In addition, “individual” refers to any US entity which holds directly or indirectly non-US financial assets. Lastly, if the Secretary determines that an individual has an interest in one or more “specified foreign financial assets” but fails to provide sufficient information to determine whether the $50,000 USD threshold has been met, then the aggregate value will be assumed to be greater than the $50,000 USD threshold for purposes of assessing penalties.
A “specified foreign financial asset” includes any financial account maintained at a non-US financial institution and any of the following assets which are not held in an account at a foreign financial institution: a stock or security issued by a person other than a US person, any financial instrument or contract held for investment that has an issuer or counterparty which is a non-US person and any interest in a foreign entity. The required information that must be disclosed is:
- the name and address of the financial institution in which the account is maintained and the account number;
- in the case of a stock or security the name and address of the issuer and other information such that the class or issue of the stock or security can be identified;
- in the case of another instrument, contract or interest then such information necessary to identify the instrument and names and addresses of any issuers; and
- the maximum value of the asset during the year.
Under section 6038D(d), an individual who fails to provide the required information is subject to a $10,000 USD penalty. Moreover, where the failure to disclose continues for more than 90 days after the day on which the Secretary mails notice of such failure, then such person will be subject to a penalty of $10,000 USD for each 30-day period after the expiration of the initial 90-day period. The maximum penalty will be $50,000 USD. However, no penalty will be assessed where the failure to disclose the required information was due to a reasonable cause and not willful neglect.
Sound familiar? There is much overlap with the new section 6038D reporting requirements and the FBAR reporting already in place. One notable difference is that, as mentioned above, the new reporting requirements under the HIRE Act are attached to an individual’s tax return and sent to the IRS location where the individual files his or her return whereas the FBAR is sent separate from the tax return to a different location from where returns are filed. Additionally, unlike the FBAR, the section 6038D filing requirement would apply to an individual who holds a specified foreign financial asset whether or not he or she has signature authority or other authority over the account. An example of this distinction would be an individual who is a beneficiary of a foreign trust but is not within FBAR reporting requirements because he or she holds less than a 50 percent interest and does not have the specified authority over the account but would still fall under the section 6038D reporting requirements because the $50,000 USD threshold is exceeded.
The cross-border tax professionals at Moodys LLP would be pleased to comment on your own specific issues regarding this topic. Please feel free to contact any one of our cross-border tax professionals.