December 06, 2010
New U.S. Rules Requiring Reporting on Certain Foreign Accounts
IRS is currently scrutinizing U.S. Persons holding offshore accounts by requiring mandatory information to be reported on certain foreign financial accounts. The purpose of this crucial reporting to the IRS is to prevent offshore tax abuses through increased transparency, enhanced reporting and strong sanctions. To allow financial institutions to adapt to these new reporting requirements, the IRS delayed the implantation of the new reporting requirements.
Effective in 2013, the IRS will be drafting regulations to introduce new provisions to implement the new regulations. Institutions and foreign persons that would like to invest on behalf of clients that are in the U.S. capital markets or on their own behalf will have to agree to comply with the new provisions. On the other hand, those who choose not to comply with the new provisions will be required to pay a 30% withholding tax. Foreign Financial Institutions (FFI) with a withholding payment is subject to the new U.S. Withholding Tax Regime unless the FFI enters into an agreement with the IRS. The agreement requirement for reporting below is important to understand in order to avoid agreement termination by the IRS:
Obtain such information regarding each holder of each account maintained by the FFI to determine U.S. accounts,
Comply with IRS verification and due diligence procedures with respect to the identification of U.S. accounts,
Report annual U.S. account information to the IRS,
Withhold 30% on payments made by the FFI to Recalcitrant Account Holders or other non-compliant FFIs,
Comply with additional IRS information requests with respect to U.S account holders,
Attempt to obtain a waiver in any case in which any foreign law would, but for the waiver, prevent the reporting of information as required under this provision and if a waiver is not obtained within a reasonable period of time, to close the account.
Nonetheless, what is required to be reported by the FFI when entering into the IRS agreement? The FFI is required to report information for those accounts held by specified U.S. Persons and U.S. owned foreign entity. First, the FFI is required to report the name, address and the taxpayer identification number of each account holder that is a specified U.S. Person. Second, the account number should be provided. Third, the account balance or value that determines the gross receipts and gross withdrawals or payments from the account. Finally, IRS may request the taxpayer to provide the gross receipts and gross withdrawals or payments from the account. Alternatively, the FFI may elect to be subject to the same requirements as a U.S. entity which would require them to just report the name, ID and account number.
Penalties may be assessed on the taxpayer for incorrect reporting of Foreign Financial Accounts. If you have any additional questions about this particular reporting, please contact your Marcum tax advisor.