The IRS has instituted new reporting requirements for taxpayers with foreign financial assets effective for 2011 tax filings. These provisions are part of a broad initiative by the federal government to increase tax compliance, and may impact your reporting obligations for last year if you have any foreign financial assets.

The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, created a new reporting requirement for taxpayers holding financial assets outside the United States. Beginning with the 2011 tax filing, U.S. individuals and resident aliens are required to file Form 8938, Statement of Foreign Financial Assets, with their individual income tax returns to report interests in specified foreign financial assets if the aggregate value of those assets exceeds certain thresholds. At this time, only individuals are subject to the reporting requirements, but the IRS anticipates issuing regulations that will also require a domestic entity to file Form 8938, probably effective next year.

Who Must File

The IRS has set forth the following different thresholds for the requirement to file a Form 8938:

  • Unmarried individuals (or married individuals filing separately) residing in the U.S., if the value of their foreign financial assets is greater than $50,000 at year-end or greater than $75,000 at any time during the year.
  • Married individuals filing jointly and residing in the U.S., if the value of their foreign financial assets is greater than $100,000 at year-end or greater than $150,000 at any time during the year.
  • Unmarried individuals living outside the U.S. and satisfying either the bona fide resident or physical presence tests, if the value of their foreign financial assets is greater than $200,000 on the last day of year or greater than $300,000 at any time during the year.
  • Married individuals filing jointly living outside the U.S. and satisfying either the bona fide resident or physical presence tests, if the value of their foreign financial assets is greater than $400,000 at year-end or greater than $600,000 at any time during the year.

Definition of Specified Foreign Financial Asset

The term “specified foreign financial asset” includes the following:

  • Financial accounts maintained at financial institutions outside the United States, such as bank accounts, investment accounts and mutual funds;
  • Stocks, bonds or other securities issued by a non-U.S. person and not held through an investment account;
  • Any interest in a foreign entity, such as a foreign corporation, foreign partnership, or foreign limited liability company;
  • A note, bond, debenture or other form of indebtedness issued by a foreign
    person;
  • An interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap or similar agreement with a foreign counterparty;
  • An option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer;
  • An interest in a foreign retirement/pension plan or foreign deferred compensation plan; and
  • An interest in a foreign trust or foreign estate.

Information Reported on Form 8938

Form 8938 requires detailed information about a taxpayer’s foreign financial assets, including a description of each asset, account or identifying number, address, maximum value in the year, if the asset was acquired during the year or disposed of during the year, as well as how much income from the asset was reported on the taxpayer’s income tax return.

When to File Form 8938

Taxpayers subject to the Form 8938 filing requirements must submit the form with their Form 1040 individual tax return. Filing an extension for Form 1040 also extends the time to file Form 8938.

Relationship to Form TD F 90-22.1 ("FBAR”)

Form 8938 does not replace or otherwise affect a taxpayer’s obligation to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”). If a U.S. taxpayer owns or has authority over a foreign financial account, including a bank account, brokerage account, mutual fund, unit trust, or other types of financial accounts, then they are required to report the account(s) annually to the IRS on a Form TD F 90-22.1, FBAR, if the aggregate value of all their foreign financial accounts exceeds $10,000 at any time during the year.

The FBAR is due by June 30th, and is not filed with an income tax return but rather it is filed separately with the Department of Treasury in Detroit. As we have previously written, the penalties for failure to file an FBAR may be severe.

Form 8938 is a separate and distinct tax filing obligation in addition to, and not in place of, the FBAR. Accordingly, many taxpayers with interests in foreign banks and financial accounts who report those on an FBAR, will likely be required to also file Form 8938.

Penalties for Failing to File Form 8938

The penalty for failing to file Form 8938 by the due date (including extensions), or for filing an incomplete or inaccurate Form 8938, is $10,000. If Form 8938 has not been filed within 90 days of a formal notice by the IRS, then the IRS can assess additional penalties of $10,000 for each 30-day period that the Form 8938 continues to be unfiled, up to a maximum penalty of $50,000.

A separate accuracy related penalty applies if the taxpayer underpays their U.S. tax liability as a result of a transaction which is not disclosed on Form 8938. The amount of the penalty is 40% of the underpayment. If Form 8938 is not filed with Form 1040, or a specified foreign financial asset is not reported on a filed Form 8938, then the statute of limitations remains open until 3 years after the complete Form 8938 is filed.

Conclusion

The IRS is strictly enforcing compliance on reporting interests in foreign assets, and devoting significant resources to this effort. Foreign governments are also expressing a greater willingness to share information on bank accounts with the U.S. If you have interests in foreign financial assets, you should immediately consult with your tax adviser about your reporting requirements for 2011.

The members of the Burns & Levinson Tax Group are experienced in this area, and can help you determine your tax and reporting obligations relating to your ownership of foreign assets or investments.

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