On June 21, 2010, the U.S. Internal Revenue Service (the "IRS") issued Notice 2011-55 (the "Notice"), providing temporary relief from certain information reporting requirements imposed under the Hiring Incentives to Restore Employment Act (the "HIRE Act").1 The Notice suspends, until such time as the IRS releases forms containing necessary modifications, the statutory requirements that (1) taxpayers report information concerning interests in certain foreign financial assets and (2) shareholders in a passive foreign investment company ("PFIC") report certain information on an annual basis. The Notice further announces that the Treasury Department intends to promulgate regulations implementing these provisions, although no information about the possible content of such regulations, or of the revised forms and instructions, is included in the Notice. The terms of the Notice require affected taxpayers to file this information for all taxable years for which these reporting requirements are suspended once revised forms are released, but taxpayers will be treated as though such reports were filed on the same date as the original tax returns for those taxable years, assuming compliance with the terms of the Notice.
Wholly separate from the statutory requirements covered by the Notice, a U.S. person that has a financial interest in or signature authority over foreign financial accounts must file a "Report of Foreign Bank and Financial Accounts" ("FBAR") on Treasury Department Form TD F 90-22.1, if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. The FBAR filing requirements are not identical to the reporting obligations required under the HIRE Act covered by the Notice and, notwithstanding the Notice, U.S. persons may be required to file an FBAR for the 2010 calendar year. The Notice has no effect on whether or not, or by what date, any person is required to file an FBAR. If a U.S. person is not eligible for an extension granted under recent guidance, a U.S. person who is required to file an FBAR for the 2010 calendar year must arrange for such FBAR to be delivered to the Treasury Department at the address specified in the FBAR instructions by June 30, 2011. For a further discussion of the FBAR requirement, please see our client alerts dated June 8, 2010, March 14, 2011 and June 16, 2011.
For further information about the Notice, these filing requirements, or any other issues related to foreign asset disclosure requirements generally (including FBAR-related matters), please contact any of the attorneys listed on this client alert, or the Proskauer attorney with whom you normally consult on these matters.
Background
In March 2010, Congress enacted the HIRE Act, which contains (among other provisions) substantial new withholding and information reporting requirements with respect to U.S. persons' foreign bank accounts and financial assets (sometimes referred to as "FATCA," short for the Foreign Account Tax Compliance Act, which was the original legislative vehicle proposing these rules). To date, the IRS has issued two major notices with respect to the implementation of the vast reporting and recordkeeping requirements that these provisions of the HIRE Act impose, and further guidance and substantial regulations are expected.2
Among other provisions, the HIRE Act imposes a reporting requirement on individuals with respect to "specified foreign financial assets" ("SFFAs"), codified at Section 6038D,3 as well as an annual reporting requirement on U.S. persons who hold stock of a PFIC, codified at Section 1298(f). These reporting requirements are effective for taxable years beginning after March 18, 2010.
Reporting by Individuals in Respect of Specified Foreign Financial Assets
Section 6038D requires that, if any U.S. individual4 holds an interest in any SFFA during the taxable year and such SFFAs exceed $50,000 in aggregate value,5 such individual must report on his or her annual tax return all such SFFAs. For this purpose, an SFFA is:
- a "financial account" at a "foreign financial institution";
OR any of the following assets:
- stocks or securities issued by foreign persons,
- any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and
- any interest in a "foreign entity";
provided, in the case of the last three categories, that such asset is not held in an account maintained by a "financial institution."6
The Notice announces that individuals subject to Section 6038D will be required to file new IRS Form 8938, "Statement of Specified Foreign Financial Assets." The IRS released a draft of Form 8938 on June 22, 2011 (available in PDF format here), but the draft form contains several references to the instructions, which the IRS has not released. The draft Form 8938 is subject to change and should not be relied upon or filed until a final version is released. Once Form 8938 is finalized and instructions are released, affected taxpayers will be required to complete and attach a Form 8938 for each taxable year in which filing was suspended by the Notice (a "Suspended Year") to their next tax or information return filed with the IRS (the "Catch-Up Requirement"). If an affected taxpayer complies with the Catch-Up Requirement, the terms of the Notice provide that Suspended Year forms filed will be treated as having been filed on the same date as the original tax return for the Suspended Year for purposes of the statute of limitations, a result favorable to taxpayers.
The Notice does not specify what information will be required to be disclosed with respect to any particular SFFA, and in the absence of draft instructions for Form 8938 or definitive guidance in respect of certain core definitions in the HIRE Act, uncertainty relating to SFFA disclosures remains. As a result, affected taxpayers and their advisors should take care to maintain their books and records for Suspended Years in order to comply with the Catch-Up Requirement once final Form 8938 is released.
Reporting by U.S. Persons in Respect of PFIC Stock
Section 1298(f) requires that each U.S. person who is a shareholder of a PFIC file an annual report containing "such information as the Secretary [of the Treasury] may require," for taxable years beginning after March 18, 2010. To date, no guidance has been provided as to what information will be required to be reported.
According to the Notice, the Section 1298(f) annual report will be made on Form 8621, "Return by a Shareholder of a Passive Foreign Investment Company or a Qualified Electing Fund," and existing Form 8621 will be revised for this purpose. Revised Form 8621 has not been released, and until such time as a revised Form 8621 is released, the Notice suspends the Section 1298(f) annual reporting requirement. However, just as with the relief provided for Section 6038D reporting, the Notice imposes the Catch-Up Requirement with respect to Section 1298(f). Therefore, affected taxpayers will need to file a revised Form 8621 for all Suspended Years and include any information ultimately required under any regulations that are promulgated. As a result, in the absence of guidance to the contrary, U.S. persons who currently hold stock of a PFIC ultimately will be required to file revised Form 8621, even if such PFIC stock is disposed of before Form 8621 is revised. Taxpayers and their advisors should maintain relevant books and records with respect to investments in PFIC stock sufficient to comply with the Catch-Up Requirement.
Proposed Regulations
As noted above, the Notice announces that the Treasury Department intends to propose regulations in respect of the reporting requirements of Sections 6038D and 1298(f). However, the Notice provides no discussion as to what the content of such regulations might be or when such regulations might be proposed.
Footnotes
1. Public Law 111–147 (March 18, 2010).
2. See Notice 2011-34, I.R.B. 2011-19 (April 11, 2011), and Notice 2010-60, I.R.B. 2010-37 (August 27, 2010).
3. All references to Section are to the Internal Revenue Code of 1986, as amended.
4. Section 6038D on its terms applies only to individual taxpayers.
5. The Secretary of the Treasury has the authority to raise this threshold pursuant to regulations. See Section 6038D(a).
6. See Section 6038D(b). For this purpose, a "financial account," "foreign financial institution," and "financial institution" have the meanings ascribed in Section 1471(d), and a "foreign entity" has the meaning ascribed in Sections 1473; these Sections were also enacted as part of the HIRE Act. The precise meaning of each of these terms, along with many other related HIRE Act provisions, is subject to a broad grant of regulatory authority to the Treasury, and although there has been some interim guidance, such regulations have not yet been promulgated.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.