On March 18, 2010, the “Hiring Incentives to Restore Employment Act” (P.L. No. 111-147) or “HIRE Act” was signed into law by the President. The HIRE Act contains several modifications to the Foreign Account Compliance and Taxation (FACTA) regime including foreign tax reporting rules, tax penalty structure, as well as the statute of limitations.
1. Foreign Financial Account Disclosure (New § 6038D)
Section 511 of the HIRE Act creates new § 6038D of the Code. This new section requires individual taxpayers with interest in a “specified foreign financial asset” to attach a disclosure statement to their return if the aggregate value of all such assets exceeds $50,000. § 6038D(a). “Specified foreign financial assets” are depositary and custodial accounts at foreign financial institutions, as well as the following (if not held in an account a financial institution): (1) stocks or securities issued by foreign persons; (2) any financial instrument or contract issued by (or which has a counterparty that is) a non US person; and (3) any interest in a foreign entity. § 6038D(b).
The failure to make the required disclosures is subject to a penalty of $10,000 for the taxable year. § 6038D(d). If the IRS notifies the individual regarding his failure to make the required disclosures, and the failure continues for more than 90 days after the mailing of the notification, there is an additional $10,000 penalty for each 30 day period that passes, up to a maximum of $50,000. § 6038D(d)(2).
2. A (Second) New Component of the Accuracy Penalty
New subsection (b)(7) of section 6662, provides a 20% penalty for “any undisclosed foreign financial asset understatement.” New subjection (j) of section 6662 provides the following definitions:
(j) UNDISCLOSED FOREIGN FINANCIAL ASSET UNDERSTATEMENT.
(1) IN GENERAL.--For purposes of this section, the term ‘undisclosed foreign financial asset understatement’ means, for any taxable year, the portion of the understatement for such taxable year which is attributable to any transaction involving an undisclosed foreign financial asset.
(2) UNDISCLOSED FOREIGN FINANCIAL ASSET.--For purposes of this subsection, the term ‘undisclosed foreign financial asset’ means, with respect to any taxable year, any asset with respect to which information was required to be provided under section 6038, 6038B, 6038D, 6046A, or 6048 for such taxable year but was not provided by the taxpayer as required under the provisions of those sections.
There is also a new enhanced (i.e. 40%) penalty for any “undisclosed foreign asset understatement.” § 6662(j)(3).
3. Modification of the Statute of Limitations with Respect to Omissions of Income in Connection with Foreign Assets
Section 6501(e)(1) is amended by the addition of new § 6501(e)(1)(A) (current §§ 6501(e)(1)(A) and 6501(e)(1)(B) are renumbered §§ 6501(e)(1)(B) and 6501(e)(1)(C), respectively), which provides:
(A) GENERAL RULE.--If the taxpayer omits from gross income an amount properly includible therein and--
(i) such amount is in excess of 25 percent of the amount of gross income stated in the return, or
(ii) such amount--
(I) is attributable to one or more assets with respect to which information is required to be reported under section 6038D (or would be so required if such section were applied without regard to the dollar threshold specified in subsection (a) thereof and without regard to any exceptions provided pursuant to subsection (h)(1) thereof), and
(II) is in excess of $5,000, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time within 6 years after the return was filed.
Conforming amendments are also made to § 6229 for partnership omissions of foreign income.
4. Suspension of Statute of Limitations for Failure to Provide Certain Information Regarding Foreign Assets and Funds
Section 513(b) of the HIRE Act revises § 6501(c)(8) of the Code, providing for the suspension of the statute of limitations when the taxpayer fails to provide the required information regarding “specified foreign financial assets” required by new § 6038D, as well as certain information required with respect to PFICs under the new law. The statute runs three years after the required information is finally furnished to the IRS.