HIRE Act Imposes New Foreign Tax Compliance Requirements

The Hiring Incentives to Restore Employment (HIRE) Act imposes additional reporting and disclosure requirements for taxpayers with any interest in a “specified foreign financial asset” if the aggregate value of all such assets exceeds $50,000. These reporting requirements apply to any domestic entity which holds “specified foreign financial assets” directly or indirectly, as if the entity were an individual taxpayer.  The reporting provision applies to tax years beginning after March 18, 2010.

For purposes of the additional reporting and disclosure requirements, a specified foreign financial asset is:

  • any financial account maintained by a foreign financial institution;
  • any of the following assets which are not held in an account maintained by a financial institution:
    • any stock or security issued by a person other than a U.S. person;
    • any financial instrument or contract held for investment that has an issuer or countertparty which is other than a U.S.person; and
    • any interest in a foreign entity.

The required information varies depending on the type of specified foreign financial asset. Therefore, taxpayers with an interest in:

  • foreign bank accounts must provide the name and address of the financial institution where the account is maintained, and the account number;
  • foreign-issued stocks and securities must provide the name and address of the issuer, and all pertinent information that allows the class or issue of such stock or security to be identified; and
  • foreign instruments, contracts, or entities must provide the names and addresses of all foreign issuers and counterparties, the maximum value of the asset during the tax year, and all pertinent information required to identify the foreign asset.

The HIRE Act also requires a withholding agent to deduct and withhold a tax equal to 30 percent on any withholdable payment made to a foreign financial institution if the foreign financial institution does not meet certain requirements. There are exceptions and special rules in situations where there is an agreement in effect between the financial institution and the Secretary of the Treasury.

A withholding agent includes any person, in whatever capacity, having the control, receipt, custody, disposal, or payment of any payment of interest (including OID), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodic gains, profits, and income from sources within the United States.

A foreign financial institution may make an election and report as if the foreign financial institution were a U.S. person. The withholding payments provision generally applies to payments made after December 31, 2012.

The penalty for failing to disclose the required information in a timely manner is $10,000. If the failure to disclose continues for more than 90 days after the IRS notifies the taxpayer of a failure to report, the taxpayer must pay an additional $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period. The maximum penalty is $50,000. However, no penalty is imposed if the failure to disclose is due to reasonable cause, and not due to willful neglect. In addition, the penalties have increased from 20 percent to 40 percent for any portion of an underpayment attributable to understatement.

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