New Tax Filing Requirement for US Taxpayers with Foreign Assets

Enacted in 2010, The Foreign Account Tax Compliance Act (FATCA) purpose is to combat tax evasion by holding investments in offshore accounts.

It imposes a new annual reporting requirement for US Tax Payers holding foreign assets with an aggregate value exceeding $50,000. International banking firms, or Foreign financial institutions (“FFIs”), will also be required to report certain information directly to the IRS on its account holders.

In a special agreement with the IRS, participating FFIs will be obligated to undertake certain identification and due diligence procedures with respect to its accountholders,  report annually to the IRS on its accountholders who are U.S. persons or foreign entities with substantial U.S. ownership, Withhold 30 percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to (a) non-participating FFIs, (b) individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person, or (c) foreign entity accountholders failing to provide sufficient information about the identity of its substantial U.S. owners.

We are most concerned with those not informed of this new filing requirement.  Failure to report foreign financial assets will result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification).  In addition, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional underpayment penalty of 40 percent.

Many details of the new reporting and withholding requirements pertaining to FFIs must be developed through Treasury regulations that are expected to be proposed by December 31, 2011.

Tax preparation and planning is an important component of the wealth management process. We are here to help. Contact us to discuss your FATCA filing requirements and how it may affect you for the 2011 tax year.

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