Publications

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The Obama Administration has provided new details to the proposals contained in its FY 2010 budget.

The details, outlined in the US Department of the Treasury’s General Explanation of the Administration's Fiscal Year 2010 Revenue Proposals (the Greenbook), contain more detailed explanations of the changes to the tax law which were proposed by the President on May 4, 2009. A summary of the main body of the proposals may be found here. 

The proposal, released on May 11, 2009, also contains numerous provisions designed to combat under-reporting of income through use of accounts and entities in offshore jurisdictions. The backbone of the Administration’s proposals in this area is to strengthen the existing regime for registering financial intermediaries, which hold US securities on behalf of customers, as “qualified intermediaries” (QIs). This would be done by increasing the obligations assumed by QIs, and by discouraging intermediaries from acting as “nonqualified intermediaries.” Set forth below is a brief summary of these new compliance proposals.

Compliance Provisions

Additional Qualified Intermediary Reporting Requirements. The proposal would require that QIs identify all account holders that are US persons. Second, a QI would need to report on Forms 1099 all payments received on behalf of US account holders, and to backup withhold on such payments if documentation is not received from the US account holders. In other words, a QI could not fail to assume primary Form 1099 and backup withholding responsibility. The IRS would be authorized to publish a list of QIs, and the Treasury Department would be authorized to promulgate Regulations designed to control abuses of the existing program. For example, Regulations could require QIs to collect information on the “beneficial owner” of a foreign account holder, such as a shareholder of a foreign corporate account holder, and to report to the IRS any US beneficial owners it discovers. Also, Regulations could provide that all commonly controlled financial institutions must either register as QIs, or implement similar reporting procedures as the affiliated QI. The proposal would be effective beginning after December 31 of the year of enactment.

Withholding on Payments of US Source Fixed or Determinable Annual or Periodical Gains, Profits or Income (FDAP Income) through Nonqualified Intermediaries. In order to disadvantage nonqualified intermediaries, a US withholding agent making a payment of FDAP to one would be required to presume that it is made to an unknown foreign person, and so withhold at the maximum 30 percent rate, irrespective of the documentation it received from the intermediary. Foreign persons subject to over-withholding, for example those entitled to treaty benefits, would be allowed to apply for a refund of any excess tax withheld. The Treasury Department would be authorized to provide exceptions for payments considered to present a low risk of tax evasion. The proposal would be effective beginning after December 31 of the year of enactment.

Withholding on Proceeds from the Sale of Securities to Nonqualified Intermediaries. In order to further disadvantage nonqualified intermediaries organized in certain jurisdictions, a US withholding agent would be required to withhold tax at a rate of 20 percent on gross proceeds from the sale of any type of security that would otherwise be reportable to a US non-exempt payee, if the agent pays them to a nonqualified intermediary located in a country which does not have a US income tax treaty that includes a satisfactory exchange of information program. Nonqualified intermediaries could claim a refund on behalf of their direct account holders if they identify all US direct account holders for the year and report all payments received by all of their US account holders. Foreign persons subject to over-withholding, and on whose behalf a refund claim is not made by a nonqualified intermediary, could also apply for a refund of any tax withheld. The Treasury Department would be authorized to provide exceptions. The proposal would be effective for payments made after December 31 of the year of enactment.

Additional Reporting Requirements for Transfers to Foreign Financial Accounts. The proposal would require US individuals to report on their federal income tax returns any transfers to or from a foreign bank or brokerage account owned by the individual (or by any entity of which the individual owns more than 50 percent). Transfers to or from accounts held at QIs would be exempt. Reporting would be excused if cumulative transfers, and receipts, were each less than $10,000 for the year. Failure to report a covered transfer would result in a penalty equal to the lesser of $10,000 per reportable transfer or 10 percent of the cumulative amount or value of the unreported covered transfers. Exceptions could be made by Regulation, such as for arm’s-length payments for services. The proposal would be effective for transfers made after December 31 of the year of enactment.

Require Disclosure of FBAR Accounts to be Filed with Tax Returns. The proposal would require individual taxpayers to file a Report of Foreign Bank and Financial Accounts (FBAR) and also to disclose similar information on a schedule as part of their federal income tax returns. This schedule would be subject to the tax return filing date, irrespective of the FBAR filing date. Failure to disclose the foreign accounts under the proposal could give rise to penalties and other consequences separate from the applicable FBAR penalties. The proposal would be effective for taxable years beginning after December 31 of the year of enactment.

Third Party Information Reporting Regarding Foreign Financial Accounts. To supplement taxpayer reporting obligations, various financial intermediaries would be required to report to the IRS transfers to and from foreign financial accounts, and the establishment of such accounts. Any US financial intermediary or QI would need to report any transfer to a foreign bank or brokerage account, or any receipt from such an account, on behalf of a US person or its controlled entity in excess of $10,000. Any US financial intermediary or QI that opened a foreign bank or brokerage account on behalf of a US person or its contolled entity would also need to report. Transfers on behalf of public companies and their subsidiaries, and transfers involving QIs, would be excepted. The proposal would be effective for amounts transferred and accounts opened beginning after December 31 of the year of enactment.

Third Party Information Reporting Regarding Formation of Foreign Entities. The proposal would require any US person or QI that forms or acquires a foreign entity on behalf of a US individual (or on behalf of any entity of which the individual owns more than 50 percent) to file an information return with the IRS about the foreign entity. Treasury’s regulatory authority could include requiring US withholding agents to attempt to determine whether a US person is the beneficial owner of a foreign entity, and to report any US persons that it discovers. The proposal would be effective for entities formed or acquired after December 31 of the year of enactment.

Negative Presumption for Foreign Accounts Where FBAR Not Filed. In order to assist enforcement actions, the proposal would create a rebuttable evidentiary presumption in a civil administrative or judicial proceeding that any foreign financial account owned by someone otherwise subject to the FBAR regime contains sufficient funds to trigger the FBAR reporting obligation. The presumption would not apply to accounts held through a QI, or other exceptions by Regulation. The proposal would be effective for FBARs due to be filed beginning after the date of enactment; (FBARs must be filed on or before June 30).

Negative Presumption Regarding FBAR Reporting for Accounts Over $200,000. the proposal would create a rebuttable evidentiary presumption in a civil administrative or judicial proceeding that the failure to file an FBAR is willful if the foreign account has a balance of greater than $200,000 at any point during the calendar year unless the account is held with a QI. (Under existing law, for willful violations the maximum civil penalty is the greater of $100,000 or 50 percent of the balance in the account at the time of the violation; absent willfulness, the civil penalty for failing to disclose a foreign financial account on a FBAR does not exceed $10,000). The presumption would not apply to accounts in which the person has signature or other authority only by virtue of being an officer or employee of a corporation. The proposal would be effective for FBARs due to be filed beginning after the date of enactment; (FBARs must be filed on or before June 30).

Negative Presumption Regarding Withholding on FDAP Payments. The proposal would require any withholding agent making a payment of FDAP to a “foreign entity” to treat it as made to an unknown person (and therefore subject to the maximum 30 percent rate of withholding tax), unless the foreign entity provides documentation of the entity’s beneficial owners. In other words, self-certification by foreign entities would be insufficient without evidence of beneficial ownership. Exceptions would apply for public companies and their subsidiaries, foreign governments and pension funds, and other entities such as charities and certain investment funds identified by the Treasury Department. The proposal would be effective for payments made after December 31 of the year of enactment.

Extended Statute of Limitations for Reportable Cross-Border Transactions and Foreign Entities. The general three-year statute of limitations on tax assessments does not begin to run for taxes that relate to certain information returns until the information is reported to the IRS. The proposal would extend this limitations period to six years, and expand the information returns covered to include the foreign account information returns proposed as part of this package and several others (including PFIC QEF returns). This exception to the general statute of limitations would be made applicable to the taxpayer’s entire income tax return. The proposal would be effective for returns due to be filed after the date of enactment.

Double Penalties on Understatements Involving Undisclosed Foreign Accounts. The proposal would double the existing 20 percent accuracy-related penalty when the understatement arises from a transaction involving a foreign account not disclosed on the income tax return under the proposal that requires taxpayers to disclose FBAR-related information on their returns. For accuracy-related penalties arising from a reportable transaction understatement involving such an undisclosed account, the reasonable cause exception would not be available. The proposal would be effective for taxable years beginning after December 31 of the year of enactment.

Changes to Foreign Trust Reporting Penalty. In refinement of existing rules governing information reporting on certain foreign trusts, the proposal would impose a revised initial penalty of the greater of $10,000 or 35 percent of the “gross reportable amount” if the gross reportable amount is known. The additional $10,000 penalty for continued failure to report for each 30-day period would remain unchanged. Thus, even if the gross reportable amount is unknown, the IRS may impose a $10,000 penalty for each 30-day period that the failure to report continues. The proposal would be effective for information reports required to be filed after December 31 of the year of enactment.

For more information regarding the foregoing, please contact:

Thomas S. Dick

Diana Erbsen

Frank Jackson

Ellis Reemer

Cory Stigile