New U.S. Foreign Reporting Requirements and Penalties  

The recently-enacted 2010 HIRE Act includes several new foreign reporting requirements and penalties. These include:

• Additional disclosures required for foreign account holders. The HIRE Act imposes new reporting requirements on those whole hold foreign financial accounts or other foreign assets. Currently, holders of foreign accounts with a total value of over $10,000 must file a Report of Foreign Bank and Financial Accounts (Form TD F 90-22.1) (“FBAR”). Additionally, for tax years beginning after March 18, 2010, individuals with foreign financial assets with a total value of $50,000 or more must also disclose these assets on a statement attached to their tax return. Individuals who fail to file this statement are subject to a penalty of $10,000 for the tax year; an additional penalty may apply if Treasury notifies an individual by mail of the failure to disclose and the failure to disclose continues.  This penalty is in addition to any penalties for failure to file FBARs.

• New penalties for underpayments attributable to undisclosed foreign financial assets. The HIRE Act imposes a penalty equal to 40% of the amount of any federal tax understatement that is attributable to an undisclosed foreign financial asset (i.e., any foreign financial asset that a taxpayer is required to disclose and fails to disclose on an information return). This penalty applies to tax years beginning after March 18, 2010.

• New 6-year limitations period. The HIRE Act imposes a new six-year limitations period for omissions of items from a tax return that exceed $5,000 and are attributable to one or more reportable foreign assets. The Act also clarifies that the statute of limitations does not begin to run until the taxpayer files the information return disclosing the taxpayer's reportable foreign assets. This new 6-year limitations period applies to returns filed after March 18, 2010, as well as for any other return for which the assessment period has not yet expired as of Mar. 18, 2010.

• New minimum penalty for failure to disclose foreign trust transactions. The HIRE Act imposes a minimum penalty of $10,000 for failure to file information returns related to certain foreign trust transactions, including the creation of a foreign trust, the transfer of money or property to a foreign trust, or the death of a US owner of a foreign trust. The penalty for failure to file these returns is 35 percent of the amount required to be disclosed on the return. Previously, if the IRS learned of an undisclosed foreign trust, but could not determine the amount required to be disclosed on its return, it could not impose a penalty. This new minimum penalty applies to notices and returns required to be filed after December 31, 2009. Notwithstanding this minimum penalty, the penalties imposed on taxpayers for failing these information returns may never exceed the amount required to be disclosed on the return.

• New information return for PFICs.   The HIRE Act requires each US shareholder of a passive foreign investment company (“PFIC”) to file a new annual information return unless the IRS specifies otherwise. This requirement is effective on March 18, 2010.

• New presumption regarding transfers to foreign trusts. The HIRE Act allows the IRS to treat a foreign trust (other than a trust established for deferred compensation or a charitable trust) as having a US beneficiary if a US person directly or indirectly transfers property to the foreign trust. The US person may rebut this presumption by demonstrating that under the terms of the trust, (1) no part of the trust may be paid or accumulated during the year for the benefit of a US person (2) that if the trust were terminated during the year, no part of the trust could be paid to a U.S. person, (3) and that such person provides any additional information as IRS may require with respect to such transfer. This presumption applies to transfers of property after March 18, 2010.

• Clarifications regarding foreign trusts. The HIRE Act codifies Treasury regulations that treat a foreign trust as having a US beneficiary if any current, future, or contingent beneficiary of the trust is a U.S. person. This provision is effective on March 18, 2010. The Act also clarifies that a foreign trust will be treated as having a US beneficiary if (1) any person has discretion to determine the beneficiaries of the trust, unless the terms of the trust specifically identify the class of beneficiaries and none of those beneficiaries are U.S. persons or (2) any written, oral, or other agreement could result in a beneficiary of the trust being a US person. The Act also clarifies that the use of any trust property will be treated as a payment from the trust in the amount of the fair market value of such use. 

  For more information, please contact Jimmy Martens (jmartens@textaxlaw.com) or Kelli Todd at (ktodd@textaxlaw.com) at (512) 542-9898.