In 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act (HIRE). One year hence and unemployment still in excess of 9 percent, I am not sure that the law is living up to its name. Nevertheless, one of the provisions of the HIRE Act relates to additional reporting and disclosures for US taxpayers with interest in certain foreign assets in excess of $50,000.
The federal government and US Treasury have a strong desire to close the “tax gap”. The tax gap is the difference between taxpayers should have paid and what is actually paid. Much of the tax gap is willful tax evasion by taxpayers. The remainder is primarily caused by incorrect tax filings due to the complexity of the tax code. Some estimate that the tax gap exceeds $300 billion per year. Obviously, closing this gap is good solution in Washington (and probably for all honest US taxpayers).
The HIRE Act is attempting to close the tax gap on those with financial accounts in foreign jurisdictions. It does this by requiring taxpayers to report their foreign financial holdings. This disclosure will be completed as part of one’s individual tax filing.
Section 6038D of the HIRE Act requires the following foreign financial assets to be disclosed as part of the taxpayers individual tax filing:
(1) Any financial account maintained by a foreign financial institution
(2) Any of the following assets which are not held in an account maintained by a financial institution:
- any stock or security issued by a person other than a United States person,
- any financial instrument or contract held for investment that has an issuer or counterparty which is other than a United States person, and
- any interest in a foreign entity.
The law specifies that the following is to be disclosed regarding these foreign assets:
(1) Foreign bank accounts - The name and address of the financial institution in which such account is maintained and the number of such account.
(2) Foreign stocks and other securities - the name and address of the issuer and such information as is necessary to identify the class or issue of which such stock or security is a part.
(3) Other foreign instrument, contracts, or interests – The name and address of the issuers or counterparties, and such information as is necessary to identify the instrument, contract, or interest.
(4) For the aforementioned items, the law requires disclosure of the maximum value of the asset during the taxable year.
US tax law has always required income to be reported for foreign assets. So you might think that someone not reporting income on these foreign assets in the past will continue their noncompliance. However, the HIRE Act has other provisions that are strong arming foreign institutions to disclose the assets of US taxpayers to the IRS. As such, the IRS may become aware of these assets regardless of your disclosure. Needless to say, failure to comply contains significant penalties.
The IRS recently issued a draft Form 8938. This is the form in which the IRS will collect the data. It is currently out for comment now. The disclosures are onerous, but I do not believe it is appropriate to blame the IRS on this one. They are merely following the law that Congress and the President enacted. The real issue is that these rules seem to create a presumption that those with foreign assets are evading taxes. In reality, most of the account owners are merely living abroad or have lived abroad in the past. The vast majority are complying with the tax law. So the significant minority evading taxes create a massive disclosure for the significant majority complying with the law.
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