(Dow Jones) A new U.S. law that is part of a crackdown on tax havens means that wealthy clients will be hit with stricter filing requirements next tax season.
New rules will result in duplicate reporting for some taxpayers and steep penalties for those who fail to comply. The law makes it more difficult to hide assets overseas, partly by taxing foreign banks that don't share information about U.S. account holders.
Tax advisors are awaiting compliance guidance from the Internal Revenue Service, which hasn't yet issued the reporting form for the law, called the Foreign Account Tax Compliance Act, or FATCA. The law was enacted this spring as part of an overall effort that led to the Stop Tax Haven Abuse Act, introduced in 2007.
Some people, trustees of foreign trusts for example, can take steps to prepare. Taxpayers need to be aware of the broad reach of the law and let their tax-return preparers know. Many accountants do a good job soliciting the information needed to comply with the U.S. reporting of foreign interests, but some don't know about all the filing requirements.
A big concern is that the law will require some people to do a lot of duplicate reporting. A taxpayer with more than $10,000 in an offshore account already has to file a Report of Foreign Bank and Financial Accounts with the IRS. Under the new rules, anyone with at least $50,000 in a foreign account must report it separately. So someone already reporting on a foreign bank account will also have to file a separate foreign tax compliance form.
People with real estate overseas held in foreign entities also will have to file a FATCA form, in addition to the Form 5471 that is already required if a foreign corporation holds the property. If the asset is in a foreign partnership, the FATCA form will be required in addition to Form 8865.
This potential explosion of extra reporting is what has tax practitioners most worried, says Leigh-Alexandra Basha, partner and chairman of International Private Wealth Services at law firm Holland & Knight in McLean, Va.
Another worry is that more taxpayers will be required to report their stakes in offshore entities, including closely held partnerships. Someone--such as a sibling with a piece of a family-owned villa overseas--will have to get an appraisal to make sure the stake isn't valued at more than $50,000. A stake that is any higher now needs to be reported to the IRS.
The IRS couldn't immediately be reached for comment.
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