Foreign Account Reporting Redux

KCL KCL

The US Treasury requires certain individuals and entities to report the existence of certain foreign financial accounts and entities (the “foreign reporting rules”).  Since the foreign reporting rules became an area of focus for Treasury, there has been uncertainty regarding specifically who is obligated to file.  Given that the penalties for non-compliance are potentially severe (and include both financial and criminal sanctions) this initial determination is of crucial importance.  Treasury has now issued final regulations that will assist in that determination.

The regulations are involved, but do provide guidance to help determine who must report which accounts and entities.  The regulations related to domestic trusts that hold foreign assets are especially involved, and will require detailed analysis anytime.  As the facts surrounding trusts are dynamic, re-uation will need to be an annual event.  Again, as the penalties are severe, trust settlors, trustees and beneficiaries should seek assistance, and should keep their advisors apprised of any changes  – such as changes in trustees, deaths of beneficiaries, changes in trust investments, or distributions.

One concerning part of the new regulations is the definition of what constitutes a domestic trust for foreign reporting purposes.  Treasury has decided to create its own definition of what constitutes a foreign trust, rather than relying on the definition that has already been established for income tax purposes.  Those associated with trusts must therefore become acquainted with both definitions.

Now for the “Redux” part.   As if Treasury’s foreign reporting rules were not involved enough, the IRS has announced its own separate and additional foreign account reporting requirement!  The IRS requirement will be effective for tax years beginning after March 18, 2010 (meaning 2011 for most individual taxpayers).   If you’ve guessed that the IRS definitions and reporting requirements are different from the Treasury rules, you’d be right!  The IRS requirements will not replace the Treasury rules, and compliance with one or both sets of rules may well be necessary, depending on your particular fact situation.

N.B. – See also my Law Alert reviewing the recently-announced 2011 voluntary disclosure program, whereby those who have not met prior-year Treasury requirements to report the existence of foreign financial accounts or entities may qualify to pay reduced financial penalties and avoid possible criminal penalties.