On March 18, 2010, the Hiring Incentives to Restore Employment Act of 2010 was enacted into lawbrush wring a host of new information reporting requirements imposed on foreign financial institutions, which are often referred to as the Foreign Account Tax Compliance Act rules or “FATCA.”   FATCA imposes a 30 percent withholding tax on certain outbound payments to a foreign financial institution (an “FFI”), unless the FFI agrees to provide the IRS to comply with various information reporting and withholding requirements with respect to “U.S. accounts.” 

In essence, FATCA forces each participating foreign financial institution into an information exchange arrangement with the IRS akin to tax treaties typically between sovereigns. 

FATCA is meant to bolster the Service’s ongoing effort to halt US tax evasion activities involving offshore accounts. 

For individual taxpayers, FATCA requires The disclosure of  foreign financial assets with an aggregate value exceeding $50,000 on a new form (Form 8938) attached to the taxpayer’s annual tax return.  For most taxpayers, the 2011 tax return to be filed this year will represent the first such mandated report. Failure to report may result in a penalty of up to $50,000. Underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent. 

For foreign financial institutions (“FFIs”), these institutions will have to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. To comply with these new reporting requirements, an FFI must enter into a special agreement with the IRS by June 30, 2013. Under this agreement a FFI must: 

(1) undertake certain identification and due diligence procedures with respect to its accountholders;

(2) report annually to the IRS on its accountholders who are U.S. persons or foreign entities with substantial U.S. ownership; and

(3) withhold and pay over to the IRS 30-percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to (a) non-participating FFIs, (b) individual accountholders who do not provide sufficient information to determine whether or not they are a U.S. person, or (c) foreign entity accountholders failing to provide sufficient information about the identity of its substantial U.S. owners.

Given the anticipated reach of FATCA, those US taxpayers with undisclosed foreign assets may want to take advantage of the IRS’s recently announced voluntary disclosure initiative.