HIRE Act incorporates provisions intended to curb offshore tax evasion

The Hiring Incentives to Restore Employment Act (the "HIRE ACT") was signed into law on March 18, 2010. The HIRE Act includes a number of provisions intended to curb offshore tax evasion. These provisions impose increased information reporting requirements, as well as a separate set of penalties for non-compliance. Some of these provisions are highlighted below.


Changes to withholding requirements

The HIRE Act added several new code sections that impose a 30 percent withholding on income from U.S. financial accounts or assets held by a foreign financial institution. There is an exception from the reporting requirements if that institution enters into and complies with an agreement with Treasury to report U.S. account/asset holders and other related account information. Under this agreement, the financial institution would be required to request waivers from account holders of any applicable foreign secrecy law and to close any account for which the holder refuses to provide such a waiver.

Similar withholding requirements apply to nonfinancial foreign entities, such as corporations or trusts. However, account holders that are public corporations, tax-exempt organizations, banks, real estate investment trusts, or regulated investment companies are exempt from the reporting requirement. Additionally, withholding is not required for income connected with a U.S. business and taken into account under sections 871(b)(1) or 882(a)(1). These new withholding provisions are effective for payments made after December 31, 2012.


Disclosure of foreign financial assets

A newly enacted Section 6038D requires disclosure on an income tax return of foreign financial assets if they exceed a value of $50,000 during a taxable year.

Under Section 6038D, an individual holding an interest in a foreign financial asset in any taxable year is required to attach a disclosure statement to his or her tax return for that year if the aggregate value of all such assets exceeds $50,000. Applicable assets include financial accounts, foreign stock and securities, and other financial instruments and contracts. Any entity "formed or availed of for purposes of holding" such assets is treated as if the entity were an individual. The penalties for failure to comply with this reporting start at $10,000 and can go up to $50,000 if the failure continues after notification from the IRS. The HIRE Act provides a penalty exception for reasonable cause. These foreign financial asset reporting requirements are effective for taxable years beginning after the date of enactment, March 18, 2010.


Changes to Section 6662 underpayment penalty

The HIRE ACT amends Section 6662 to make the underpayment penalty applicable to understatements attributable to undisclosed foreign financial assets. For such understatements, the penalty imposed by Section 6662 is 40 percent, rather than the normal penalty of 20 percent.

This change to Section 6662 is effective for taxable years beginning after the date of enactment.


Changes to statute of limitations on assessments

The HIRE Act amends Section 6501(e) to extend the statute of limitations on assessments to six years for significant omissions of income attributable to foreign assets. Under the new law, a significant omissions of income attributable to foreign assets exists if there is an omission from gross income that (i) is attributable to one or more assets with respect to which information is required to be reported under Section 6038D (or would be required if not for the $50,000 threshold and without any exceptions that may be provided in the regulations to Section 6038D), and (ii) is in excess of $5,000.

The HIRE Act also amended Section 6501(c)(8), which provides an exception to the general rule that taxes are to be assessed within three years after a taxpayer's return is filed. Prior to its recent amendment, Section 6501(c)(8) extended the assessment statute if a taxpayer failed to provide information about certain cross-border transactions until three years after the required information was actually provided to the IRS.

The HIRE Act added the words "tax return" such that the relevant portion of the provision now reads as follows: "…the time for assessment of any tax imposed by this title with respect to any tax return, event, or period to which such information relates shall not expire before the date which is 3 years after the date on which the Secretary is furnished the information required to be reported under such section." The revised provision clarifies that the limitations period will not begin to run until the required information has been furnished to the IRS. In addition, it clarifies that the extension is not limited to adjustments to income related to the information required to be reported.

Sections 6501(e) and 6501(c)(8), as amended, are effective for returns for which the assessment statute of limitations is open after March 18, 2010.