The HIRE Act, FBAR and FATCA

The HIRE Act: Big changes take place this year regarding reporting of foreign bank accounts and foreign owned assets by Americans. Back in 2010 President Obama signed the Hiring Incentives to Restore Employment Act (HIRE Act). We were told at the time the bill was aimed at job creation, money laundering and drug dealers. The real result has been the establishment of new tax reporting requirements that can leave those holding unreported foreign assets or bank accounts in big trouble with the IRS. The penalties and interest are high for non compliance. In 2010 the first part of the HIRE Act kicked in with the Foreign Bank Account Reporting (FBAR) requirement. Under that rule any American citizen with over $10,000 in aggregate holdings in foreign banks must report the amount each year on their tax return. The real purpose of the HIRE Act is a U.S. effort to combat tax evasion by U.S. persons holding investments in offshore accounts.

Extreme Penalties: Willfully failing to file an FBAR form by June 30 each year is an act against the treasury and the penalty is $10,000 for non willful violations but for willful violations the penalty can be up to $100,000 and 50% of the value of the non reported asset. Not only are Americans required to report and pay tax on worldwide income, we must also now report worldwide financial assets. The official form is TD F 90-22.1 As in past years, the IRS is still offering an offshore Amnesty program but each year the cost of reporting under that program invokes higher penalties and interest. This year the penalty is 12.5% and the interest is now over 20%.

FATCA: This year the second major aspect of the HIRE Act law kicks in, The Foreign Account Tax compliance Act (FATCA). Under FATCA, US tax payers must report foreign assets if valued over $50,000. Foreign financial institutions are also forced to become the compliance agent for the IRS. The IRS is requiring Foreign Financial Institutions to report the name, address, account numbers, balances and tax payer identification number on every American with deposits in their financial institution. This goes beyond just bank accounts, forcing these foreign institutions to become agents of the IRS whether they like it or not..

Forced Compliance: Financial institutions worldwide that do not comply will be subject to a 30% withholding on every transaction from a US financial institution. Foreign financial institutions will not want to lose 30% of a transaction, pretty much forcing compliance if they want to continue doing business with the US. Accounts covered include financial accounts, stocks or securities, financial interest, contracts or real estate with a value of $50,000 or more. Again the fines and penalties for non compliance are severe. The form(s) required are form 8938 or 5471 in certain cases. Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification). Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent.

Written by Steve Linder – International Sales Manager for Pacific Lots of Costa Rica www.PacificLots.com.