In 2012, the international community showed signs of increased cooperation on cross-border tax rule enforcement and increased information sharing. Budget realities provided additional incentives for countries to cooperate and share information. That said, parochial interests, costs, and local financial service industries that sell “secrecy” continue to slow the process.
The United States has increased its enforcement activities and information reporting for persons and businesses with foreign financial assets and/or business operations overseas. In 2012, the following important developments occurred:
- The IRS announced its third Offshore Voluntary Disclosure Initiative.
- Taxpayers were required to file a new form (Form 8938) that reports foreign financial assets.
- The IRS issued guidance related to the Foreign Account Transaction Compliance Act (FATCA) that requires foreign financial institutions to report activities of U.S. persons.
In January, the IRS announced its third Offshore Voluntary Disclosure Initiative that allows taxpayers to file (or refile) information returns and income tax returns related to undisclosed foreign financial assets with zero or reduced penalties. The IRS reported that 33,000 taxpayers participated in the prior two programs, and the IRS has received $4.4 billion in penalties and tax payments thus far.
If you have unreported foreign financial assets, the voluntary disclosure program allows you to report those assets and any undisclosed information. Penalties don’t apply if all prior income taxes have been correctly paid. However, significant penalties (27.5% of the highest balance in your foreign financial assets since 2003) may apply if income taxes have been understated. If you have undisclosed foreign financial accounts, you should discuss your situation with an appropriate advisor to determine how to proceed.
Taxpayers have been required to report foreign financial assets (Form TD F 90-22.1) to the Treasury since 1970. Beginning with their 2011 returns, taxpayers are also required to report most foreign assets and reconcile income from foreign assets on Form 8938 (Statement of Foreign Assets). While the Forms TD F 90-22.1 and 8938 report similar information, they have different filing thresholds and are submitted to different governmental agencies. The added information reporting is an illustration of the focus that the IRS has on finding revenue from unreported income on foreign assets.
Taxpayers and businesses with more than $10,000 in foreign financial accounts (foreign bank accounts, overseas brokerage accounts, etc.) are required to report those accounts annually on Form TD F 90-22.1. Individuals with more than $50,000 in foreign assets on the last day of the tax year or $75,000 at any time during the tax year are generally required to file Form 8938.
Lastly, the IRS issued guidance on information that foreign financial institutions (FFIs) must submit to the IRS on U.S. taxpayers. Failure to report this information will subject the FFIs to withholding taxes on payments from U.S. parties to the FFIs. The increased information reporting is required by FATCA and will be effective in 2013 for FFIs that participate with the IRS.