The Hiring Incentives to Restore Employment Act of 2010 (“HIRE Act”) enacted the Foreign Account Tax Compliance Act (“FATCA”). P.L. 111-47. FATCA greatly increases disclosure requirements and penalties on taxpayers with foreign accounts and assets. These reporting requirements will affect individuals beginning with the 2011 tax year, and are expected to apply to certain domestic entities beginning with the 2012 tax year.
FATCA reporting is in addition to the Form T.D. F 90-22.1, Report of Foreign Bank Accounts (“FBAR”) requirements and other foreign reporting requirements such as Form 5471 (foreign corporations); Form 3520 (foreign estates and trusts); 8865 (foreign partnerships); 8621 (passive foreign investment companies); 8891 (beneficiaries of certain Canadian registered retirement plans).
These new reporting obligations apply to U.S. individuals with an interest in “specified foreign financial assets” (“SFFA”) with an aggregate value exceeding certain thresholds. SFFAs generally include:
- Any financial account maintained by a foreign financial institution (i.e., a bank);
- Any stock or security issued by a foreign person,
- Any financial instrument or contract held for investment that has a non-U.S. issuer or counter-party, or any interest in a foreign entity.
It is important to note that the SFFA concept is much broader than related FBAR concepts. Some examples include:
- Investments by an entity that holds real estate;
- Investments in foreign hedge funds and private equity funds;
- Capital or profits interest in foreign partnership;
- Foreign debt(e.g., notes, bonds, other indebtedness issued by a foreign person);
- Interests in a foreign trust or estate;
- Swaps, options, derivatives, etc. with a foreign counterparty; and
- Foreign pension or deferred compensation plans.
As previously mentioned, beginning with the 2011 tax year, i.e., by April (or October if on extension) of 2012, Taxpayers with SFFAs must report these assets on new Form 8938 (click for additional information on Form 8938 ). If a Taxpayer is required to file Form 8938, they must attach the Form to their 2011 tax return. In contrast, the FBAR is not due until June 30th of each year and is mailed to Detroit (not with the Taxpayer’s tax return).