Taxpayers with foreign holdings have a complex new tax law to deal with this year that brings with it an early deadline and higher penalties.
The Foreign Account Tax Compliance Act (FATCA) is in effect for the 2011 tax year and applies to a broad range of foreign holdings that the existing law does not cover.
The Foreign Bank and Financial Account Report (FBAR) still applies to foreign holdings and the new law in some ways duplicates FBAR, but not in all respects, said James Robbins, a lawyer and principal at Marks Paneth & Shron, a New York accounting firm.
The filing deadline for FATCA also is much sooner-April 17 compared to June 30 for FBAR.
FATCA is a new IRS regulation that was part of the jobs bill (Hiring Incentives to Restore Employment Act) passed in March 2010. It has a broader definition of foreign holdings and requires a report on any interest in a financial asset, entity or contract, including stocks, debt, or swaps, entered into with a non-U.S. person.
The threshold for reporting under FATCA is higher than under FBAR, $50,000 compared to $10,000, but the potential penalty is worse, according to Robbins.
"The penalties can be significant," Robbins said. "It's not just the $50,000, but also accuracy-related penalties that could cost you a substantial amount over and above that."
Those who fail to report all foreign information will have to pay a minimum penalty of $10,000, increased by $10,000 every 30 days after a 90-day grace period, to a maximum of $50,000. In addition, underpayments will be subject to a 40% penalty on the amount that went undisclosed, which is double the amount under FBAR.
"The requirements of FATCA are challenging to interpret and it's easy to misstep," said Robbins. "In many cases, FATCA and FBAR will duplicate each other-but not always. Taxpayers need to understand the different requirements and make sure they are reporting correctly for each regulation. But it will be difficult for them to do that without professional advice.
"Given the complexity of FATCA reporting requirements and the severity of the penalties, taxpayers will be hard-pressed to know their exposure or understand what has to be reported," he warned. "A consultation with a tax professional is essential."