The New York State Society of CPAs has written a letter to the Internal Revenue Service asking the IRS to clarify several rules governing the reporting of foreign financial assets.
The NYSSCPA outlined several areas of Internal Revenue Bulletin: 2012-8 that should be revised prior to permanent implementation in its comment letter, which was sent to the IRS on March 19. The society asked the IRS to provide more examples to clarify and define the regulations, along with a more reasonable penalty structure. The rules are already in effect as temporary regulations, but are slated to be permanently implemented. The regulations have been proposed as part of the new rules for the Foreign Asset Tax Compliance Act. FATCA, which was included as part of the HIRE Act of 2010, has provoked consternation among taxpayers who will be required to report in detail to the IRS on their foreign assets, along with foreign financial institutions. Both face potentially steep penalties under the new rules if they do not comply.
The proposed regulations are amendments to income tax regulations that determine what constitutes a foreign asset and what information related to foreign assets is required to be reported on the new Form 8938, which is to be included with a taxpayer’s annual income tax return. The amendments also include a proposed regulation describing the requirements for certain domestic entities to report foreign financial assets in the same manner as an individual, which go into effect for taxable years beginning after December 2011.
The regulations lack examples indicating what is considered a foreign asset and how it should be reported, noted Melissa Gillespie, who chairs the NYSSCPA’s International Taxation Committee. She said additional guidance is also needed to outline what is considered to be a specified foreign financial asset and how it should be valued and reported.
The NYSSCPA also took issue with the penalty structure in the proposed regulations, saying it could unfairly punish taxpayers whose foreign assets are near the threshold for filing. Taxpayers whose foreign assets may have originally been valued at just below the threshold limit for filing the Form 8938, and later are determined to be valued at slightly over the threshold, could be hit with large penalties.
“If you make a mistake in the valuation, you can be hit with a $10,000 penalty,” Gillespie said. “We asked for some leeway there, especially when it comes to the first year of valuation.”
The NYSSCPA recommends instead a range of penalties to accurately reflect the scope of the error. It also said consideration should be given to individuals or companies that are showing due diligence in fixing the errors.
The temporary regulations were put into effect on Dec. 19, 2011. The comment period for the proposed regulations closed on March 19.
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