Financial Accounts Outside the USA

Financial Accounts Outside the USA


Financial Accounts Outside the USA
מאת:  Murrel Kohn, CPA   עודכן בתאריך:  01/06/2010  


THE IRS AND FINANCIAL ACCOUNTS OUTSIDE THE USA  

BY MURREL KOHN, CPA (USA,Isr.)

The US government’s latest move against unreported overseas financial accounts and income thereon has arrived in the form of the “HIRE ACT”, which was enacted on March 18, 2010.  Basically passed to boost private sector hiring in 2010, the Act also includes new draconian provisions for reporting on “foreign financial assets” (FFA).  These new laws are in addition to the existing requirements of the Report of Foreign Bank and Financial Accounts (FBAR) due every June 30, on which one reports on his financial accounts outside the USA if they total more than $10,000 in monetary assets at any time during the previous year.  The Act includes revenue offsets consisting of a comprehensive set of measures to reduce offshore noncompliance by giving IRS new administrative tools to detect, deter and discourage offshore tax abuses.

US individuals with an interest in a FFA will be required starting in 2010 to attach to their US tax return certain information about their FFAs if the total value of all such assets is $50,000 or more.  A FFA is defined as: 1] any financial account at foreign financial institutions (FFI); 2]  if not held in a FFI, foreign issued stock or securities, interests in a foreign investment fund or derivatives with a foreign counterparty; and 3] any interest in a foreign entity.

What information must be reported? 1] Name of the FFI; 2] the account number; 3] the maximum value of the account during the year.  Penalties for non disclosure: 1] $10,000; and 2] 40% of any underpayment of taxes attributable to the FFA.  To make matters worse, the statue of limitations has been extended to six years where there is a “significant omission” (an omission that exceeds the lesser of 25% of the return’s gross income or $5,000) of income from foreign assets.

Whereas the initial emphasis is on the collection of income tax on passive income earned outside the USA, it should be remembered that by reporting the taxpayer is disclosing assets that eventually will have to be included in the estate tax return, which includes world-wide assets.

The US government’s legislation has three legs consisting of the $50,000 + reporting of FFAs mentioned above, FFI reporting, and reporting by holders of a passive foreign investment company (PFIC).

Having been successful with UBS, the HIRE ACT includes provisions (generally for payments made after 2012) intended to effectively end bank secrecy in foreign jurisdictions.  The FFI must agree with the IRS to: 1] comply with verification and due diligence procedures, in addition to the existing requirements under the “Qualified Intermediary” regime, with respect to accounts (above $50,000) held by US persons or US owned foreign entities, 2] itself withhold 30% on certain pass-through payments to certain account holders and 3] obtain waivers of the protection of foreign secrecy laws, and if not to close the account.  If the FFI agrees, they will have to report the following: 1] Name, 2] Address, 3] SSN/EIN, 4] Account number, 5] Account balance, and 6] Gross receipts and withdrawals.  If the FFI does not agree, US withholding agents must withhold 30% of certain payments to FFI.  Such payments include, i.a., US sourced dividends, interest (including OID), rents, salaries, wages, premiums, annuities, compensation, remunerations, other “fixed or determinable annual or periodic” gains, profits, gross proceeds from the sale of any property that can produce US source interest or dividends, and the full sales price of US assets, including real estate, regardless of cost basis.  This withholding will take precedent over treaty benefits, which the taxpayer may realize by submitting a US tax return.

US persons owning shares in a PFIC will now have to file an annual report with the IRS starting in 2010.  Usually foreign mutual funds or unit trusts are considered to be a PFIC.

US persons are required to report annually to the IRS on Form 5471 their ownership (minimally 10%) in foreign corporations.  This form must be filed with the individual or corporate income tax return.  Failure to do so can result in penalties from $10,000-50,000 and a reduction in foreign tax credits allowed, as well as criminal penalties.

In conclusion, it is clear that US taxpayers will not be able to depend on bank secrecy to hide their foreign accounts and it is best to come forward for voluntary compliance before the IRS makes the discovery.  Entering into such agreements with the IRS will clearly increase the reporting and compliance costs of foreign financial institutions.  It appears that the situation will only become more difficult in the future for those intent on non-compliance.  One should bear in mind that since 2003 Israeli residents have been taxable on their world-wide passive income.  Said taxation is, of course, eligible for the benefits of the US-Israel tax treaty.

Please consult your professional adviser as how to proceed in light of these new US Treasury rules and regulations regarding ownership of foreign financial assets, trusts and companies by US persons.