Last Thursday, March 18, 2010, President Obama signed H.R. 2847, the Hiring Incentives to Restore Employment (HIRE) Act, into law. There are a number of international tax provisions in the Act.
One of the provisions is new Code § 6038D. This section, titled “Information with Respect to Foreign Financial Assets,” is effective for taxable years beginning after March 18, 2010 (2011 for calendar year taxpayers).
Code § 6038D applies to individuals who hold one or more interests in “specified foreign financial assets,” if the aggregate value of all such assets exceeds $50,000. If the section applies, the individual must attach to his/her tax return for that year certain basic information about the foreign financial assets. The rule also applies to domestic entities formed or availed of to hold specified foreign financial assets.
The penalty for failure to disclose is the [standard] $10,000 with a reasonable cause exception. The penalty can increase where the taxpayer has been notified of the failure to file and the taxpayer continues to not file.
The accuracy related penalty under Code § 6662 is also modified to include penalties for “undisclosed foreign financial asset understatements.” The penalty is 40% rather than the typical 20% understatement penalty. Interestingly, an “undisclosed foreign financial asset” does not need to be a financial asset at all. An “undisclosed foreign financial asset” means:
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.
The types of assets required to be reported under Code §§ 6038, 6038B, 6038D, 6046A, and 6048 do not only include financial assets. For instance, Code § 6038B requires the reporting of certain nonrecognition transfers of “property” to foreign persons. Such transferred property can, and often does, include non-financial assets. Consequently, the penalty for undisclosed foreign financial assets can be imposed on non-financial assets as well as financial assets.
The Act includes a number of additional international tax provisions that will be discussed in a future blog posting.