Sunday, November 29, 2009

Foreign Account Tax Compliance Act - Traps for the Unwary

For anyone who has clients or family members that live and work abroad, the new Foreign Account Tax Compliance Act (FATCA) is a real doozy. Although this Act is supposed to punish Americans who hide assets abroad to avoid their tax liabilities, the Act doesn't differentiate between those deliberately hide assets and those who don't realize that they are required to report their assets to the IRS.

Under the FATCA, there’s an up-to-$50,000 penalty for failing to file with your return the new 6038D statement disclosing specified foreign financial assets with an aggregate value >$50k ($10,000 for not filing, plus up to an additional $40,000 if you don’t file within 90 days after the Secretary notifies you that you’ve failed to disclose). Then, if you don’t include the income from such foreign assets, you get hit with a new 40-percent penalty on an understatement attributable to an undisclosed foreign financial asset. And to top it all off, the IRS gets 6 years to assess you for the underreporting and penalty.

But wait, there’s more. There’s a new open-ended unlimited extension of the assessment statute for failing to provide timely information returns required with respect to PFICs and the new 6038D self-reporting of foreign financial assets. Until you file the 6038D disclosure form there’s no SOL on assessment (making it akin to the current situation for fraud). That’s true even if the IRS knows you’ve got the asset(s) because they notified you about failing to file the 6038D and then socked you with $40,000 in penalties for not filing the attachment. And the killer is that the unlimited extension is “not limited to adjustments to income related to the information required to be reported.” I read that to mean the entire return has no SOL on assessment until you file a 6038D for "every" foreign financial asset once the aggregate of your foreign financial assets is >$50k.

For U.S. citizens living abroad the FATCA would require reporting the purchase of a residence with a fair market value of >$50k, even though such an asset is not currently taxable and any gain on the sale of the asset may not be taxable. I assume the same would be true of tax-exempt assets.

5 comments:

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Joe Mastriano, CPA said...

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Clemencia said...

Being abroad and unaware of the responsibilities for reporting assets and getting penalized for it is very painful for an individual who had no intentions of hiding his assets from the government. This can happen a lot of times and there would be no differentiating from those who do it on purpose and those who are unaware. Everyone based abroad must take this seriously so they won’t be branded equally like those who try to intentionally hide their assets.

Clemencia Summers

Kathy Gregory said...

This happens to a lot of wealthy individuals, who by chance, hire an unjust accountant or financial manager. What's worse is that the problems only come to light when it has gone worse. It's good advice for business owners and individuals to be very careful in hiring professionals when it comes to matters involving finances.


Kathy Gregory

Lauren Padilla said...

Tax is a word that everyone should be aware about. Regardless of the issue about FACTA last January 2013, I know for sure that the terms and acts will continue to evolve in the coming years. Let's just hope that it will benefit us for the best when the changes come.
Lauren Padilla