On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act (the "HIRE" Act) intending to boost private sector hiring in 2010, principally through payroll forgiveness for Social Security taxes paid on certain new hires and a tax credit for retaining such new hires for at least one year thereafter.
While providing incentives for new hiring, the estimated $18 billion cost of the HIRE Act is by no means insubstantial. Offset, in part, through increased information reporting and enforcement in the area of offshore accounts and foreign grantor trusts, the impact of the HIRE Act is sure to impact many taxpayers.
Foreign Account Reporting
Individuals with an interest in a "foreign financial asset" will be required to attach to their individual income tax return for tax years beginning in 2010 certain information about the foreign financial asset if the aggregate value of all such specified foreign financial assets equals at least $50,000. A "foreign financial asset" includes (i) any financial accounts at foreign financial institutions; (ii) to the extent not held in an account at a financial institution, foreign issued stock or securities, interests in a foreign investment fund or derivatives with a foreign counterparty; and (iii) any interest in a foreign entity. The information that must be provided to the Internal Revenue Service includes (i) the name of the foreign financial institution maintaining the account, (ii) the account number, and (iii) the maximum value of the account during the tax year. Failure to make the required disclosure will subject the account holder to a $10,000 penalty. Moreover, a 40% penalty will apply to any actual underpayment attributable to an undisclosed foreign financial asset.
In addition, the statute of limitations period has been extended to six years for assessments relating to a "significant omission" of income from foreign assets. A significant omission is an omission that exceeds the lesser of 25% of the amount of gross income stated in the return, or $5,000.
A foreign trust created by a United States transferor for the benefit of one or more United States beneficiaries is treated as a grantor trust, and thus will be subject to taxation by the United States on the trust's worldwide income. The HIRE Act (i) clarifies, and possibly expands, the circumstances when a foreign trust will be treated as having one or more United States beneficiaries (for example, even when the interest of a United States person is contingent on a future event), (ii) provides a special rule requiring that discretionary distributions be limited to non-United States persons if the trust is to be treated as a foreign non-grantor trust, and (iii) presumes that a foreign trust has United States beneficiaries unless the United States transferor both submits as yet undetermined information to the Secretary of the Treasury, and demonstrates that the trust has no United States beneficiaries.
In addition, the Act provides that, effective upon enactment, any uncompensated use of foreign trust property by a United States grantor, United States beneficiary or any United States person related to such grantor or beneficiary will be subject to tax as a distribution to such grantor or beneficiary for the fair market rental value of such property. This provision will result in many individuals having to file a Form 3520 to report such deemed distributions.
Passive Foreign Investment Companies
United States persons who are shareholders of a passive foreign investment company (commonly known as a "PFIC") will now have to file an annual report with the Internal Revenue Service containing such information as the Internal Revenue Service may require.
Finally, United States owners of foreign trusts will be subject to new reporting requirements and increased penalties for failing to properly report (now equal to the greater of $10,000 and 35% of the value of the trust).
Financial Institution Reporting
Following on the heels of the UBS matter, the HIRE Act includes provisions intended to effectively end bank secrecy in foreign jurisdictions. Under the Act, United States "withholding agents" must withhold 30% of certain payments to foreign financial institutions unless the foreign financial institution has agreed to comply with onerous new reporting requirements relating to accounts held by or for the benefit of United States persons.
Specifically, to avoid being subject to withholding, a foreign financial institution must agree, among other things (i) to comply with verification and due diligence procedures with respect to accounts held by United States persons or United States owned foreign entities, (ii) to itself withhold 30% on certain passthrough payments to certain account holders, and to either (iii) obtain waivers from its account holders of the protection of foreign secrecy laws or, absent receipt of a waiver within a reasonable time, close the account.
Foreign financial in stitutions agreeing to the new rules will be required to report the name, address and taxpayer identification number of each United States account holder, as well as the account number, account balance, and gross receipts and withdrawals or payments from the account. In the case of any United States owned foreign entity, the institution will also be required to report the name, address and taxpayer identification number of each substantial (generally 10% or greater) United States owner.
As a result of the foregoing, United States taxpayers will no longer be able to hide behind bank secrecy laws in most foreign jurisdictions. Therefore, taxpayers who have not yet come forward under the voluntary compliance initiative should give serious consideration to doing so now lest the Internal Revenue Service find them first. If you wish to explore this issue further, please contact Gideon Rothschild who heads up our voluntary compliance representation before the Internal Revenue Service.