Taxpayers in Florida and across the country who have offshore accounts and other overseas assets are already subject to increased scrutiny by the IRS under its investigation into potential tax evasion. Now they will have to do more paperwork to ensure offshore compliance. This year marks the advent of new reporting standards under the Foreign Account Tax Compliance Act, or FATCA.
The distinguishing features of FATCA are the range of assets to which it applies and the potential IRS tax penalties assessed for non-compliance. In addition to ordinary accounts in foreign banks, U.S. taxpayers will be required to disclose any stock they hold in a foreign partnership or corporation. This is an entirely new reporting measure. Taxpayers who have invested in overseas mutual funds or hold any foreign life insurance policies must report them as well as certain real estate holdings in foreign countries.
The IRS has established a strong penalty structure for those who fail to adhere to the new standards. Taxpayers who only make a mistake on a form could face a penalty of $10,000. And the cost is much steeper if the IRS believes that a taxpayer willfully attempted to engage in tax evasion. In that case, the IRS could assess a penalty equal to half of the asset's value.
FATCA may apply in addition to taxpayers' current reporting obligations under the Report of Foreign Bank and Financial Accounts, or FBAR. For some taxpayers, this can mean more complex and time consuming paperwork. Not all aspects of the law will take effect immediately. Instead, it will undergo gradual implementation over the course of the next few years.
Source: The Wall Street Journal, "New Rules Target Offshore Funds," Arden Dale, Mar. 12, 2012.