Section 6038D was added to the Internal Revenue Code (IRC) by the 2010 HIRE ACT. The new code section is generally effect for tax years beginning after March 18,2010.
Prior to the addition of Section 6038D, reporting of interests in foreign financial accounts was done on Treasury Form TD 90-22.1 (FBAR) which was required under the provisions of the Bank Secrecy Act (BSA) as opposed to the IRC. The result was that the collection of penalties for non-compliance could only be accomplished through civil court proceedings which is far less efficient that the assessment and collection powers afforded the IRS under the IRC. Further, for reasons having to do with non-disclosure rules, the fact that a taxpayer made a disclosure of foreign assets on Schedule B of Form 1040, could not be disclosed to those who administer the FBAR rules under the BSA.
What IRC § 6038D does is impose a $10,000 penalty on a U.S. person (individuals, corporations, partnerships, LLC’s and trusts) who fails to furnish required information on a timely basis. If after notice and demand to furnish the information,the information is not provided within 90-days, the penalty increase by $10,000 for each 30-day period up to a maximum of $50,000.
A disclosure under IRC § 6038D must be attached to the current year income tax returns disclosing with particularity the interests held in “specified foreign financial assets”, (Required Information”). The disclosure is required if the value of the specified foreign financial assets exceeds $50,000 while the requirement of an FBAR filing is $10,000. There are other differences as well. While the information required is similar in content for both an FBAR and a disclosure under IRC § 6038D, the 6038D requirement covers more persons. Example: Under IRC §6038D(c) beneficiaries of a foreign trust may not have an FBAR filing requirement and yet still be subject to IRC §6038D. Take the case where a beneficiary of a foreign trust has less than a 50% beneficial interest, there is no FBAR filing required, but if the specified foreign financial asset value (the trust value) exceeds the threshold of $50,000, then the taxpayer must make a disclosure on his/her tax return under IRC § 6038D.
The fact that there are now two filing and notice requirements one under the BSA and one under the IRC in the short terms increases the likelihood of compliance problems and the possibility of tax preparer errors. It would seem a requirement that tax preparers become familiar with the provisions of IRC § 6038D and the penalties for non-disclosure. The burden of proof of exemption from filing is on the taxpayer. The conclusion for the tax preparer, is that when in doubt, disclose. If requested by the taxpayer not to disclose, then the tax prepare should consider the tax preparer penalties under Circular 230 and the risk of other charges being levied as well.

Tags: due diligence foreign assets reporting, FBAR, Penalties, preparer penalties, tax preparer penalities