IRS releases draft version of Instructions to Form 8938 for foreign financial asset holders.

http://www.irs.gov/pub/irs-dft/f8938--dft.pdf

IRS has released on its website a draft version of the 2011 Instructions to Form 8938, “Statement of Specified Foreign Financial Assets.” Form 8938 will be used by individuals to report an interest in one or more specified foreign financial assets under Code Sec. 6038D . The instructions indicate that under a transitional rule most taxpayers won't have to file the form until 2012.

Background. For tax years beginning after Mar. 18, 2010, the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act, P.L. 111-147 ) provides that individuals with an interest in a “specified foreign financial asset” during the tax year must attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets is greater than $50,000 (or a dollar amount higher than $50,000 as IRS may prescribe). ( Code Sec. 6038D(a) ) In addition, to the extent provided by IRS in regs or other guidance, Code Sec. 6038D applies to any domestic entity formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if the entity were an individual. ( Code Sec. 6038D(f) )

“Specified foreign financial assets” are: (1) depository or custodial accounts at foreign financial institutions, and (2) to the extent not held in an account at a financial institution, (a) stocks or securities issued by foreign persons, (b) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (c) any interest in a foreign entity. ( Code Sec. 6038D(b) )

Recent guidance. In Notice 2011-55, 2011-29 IRB 53 , IRS suspended the Code Sec. 6038D reporting requirements until it releases Form 8938. After new Form 8938 is released in its final form, individuals for whom the filing of Form 8938 was suspended for a tax year will have to attach the form for the suspended tax year to their next income tax return required to be filed with IRS.

Notice 2011-55 , further stated that the Code Sec. 6501(c)(8) limitations period for tax assessments for periods for which reporting is required under Code Sec. 6038D won't expire before three years after the date on which the IRS receives Form 8938.

In June of 2011, IRS released a draft version of Form 8938 without instructions  06/30/2011 .

Draft Instructions to Form 8938. The draft Instructions to Form 8938 (Draft as of 9/28/2011) provides that for tax years beginning after Mar. 18, 2010, taxpayers must use new Form 8938 to report their interest in specified foreign financial accounts if the total value of all the specified foreign financial assets in which they have an interest exceeds the appropriate reporting threshold. However, in a “Transitional rule for 2011,” the Instructions also take note of the relief in Notice 2011-55 , and state that an individual's obligation to file Form 8938 is deferred until 2012 if he or she: (1) had a tax year that began after Mar. 18, 2010; (2) was required to file Form 8938; and (3) filed an annual return (e.g., Form 1040, Form 1041, etc.) before Form 8938 was released.

The Instructions provide that individuals satisfy the reporting thresholds if they have specified foreign financial assets of more than $100,000 at any time during the year or if the total value of their specified foreign financial assets on the last day of the tax year is more than $50,000 for unmarried taxpayers living in U.S., $100,000 for married taxpayers filing a joint return and living in the U.S., and $50,000 for married taxpayers filing separate returns and living in the U.S.

The Instructions also provide the reporting threshold for taxpayers living abroad, i.e., taxpayers who are bona fide residents of a foreign country or countries for an uninterrupted period that includes the entire tax year, or are present in a foreign country or countries during at least 330 full days during any period of 12 consecutive months ending in the tax year. They satisfy the reporting threshold if they are not filing a joint return and the value of their specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $400,000 at any time during the tax year.

The Instructions also caution that filing Form 8938 does not relieve a taxpayer of the requirement to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), if he or she is otherwise required to file Form TD F 90-22.1.

Failure-to-file penalty. The Instructions explain that if an individual fails to file a correct and complete Form 8938, he or she may be subject to a penalty of $10,000. If this failure continues for more than 90 days after the day on which IRS mails a notice of the failure to the individual, he or she will be penalized $10,000 for each 30-day period (or fraction of the 30-day period) during which the failure continues after the expiration of the 90-day period. The penalty imposed for any failure can't exceed $50,000. For married taxpayers filing a joint return, the failure-to-file penalty applies as if the taxpayer and his or her spouse were a single person. However, the taxpayer's and spouse's liability for all penalties remains joint and several.

IRS also notes in the Instructions that if it determines that a taxpayer has an interest in one or more specified financial assets and it asks for information about the value of any asset, but the taxpayer fails to provide sufficient information for IRS to determine the value, the taxpayer is presumed to own specified foreign assets with a value of more than the applicable reporting threshold.

--------------------------------------------------------------------------------------------------------------------------------------

Any individual who, during the tax year, holds any interest in a “specified foreign financial asset” must attach to his or her income tax return for that tax year the “required information” for each specified foreign financial asset if the aggregate value of all the individual's specified foreign financial assets exceeds $50,000 (or a dollar amount higher than $50,000 as the IRS may prescribe). Code Sec. 6038D(a).

 Under the rules regarding reports of foreign bank and financial accounts (FBAR), a report must be made for each calendar year during any part of which the aggregate value of the accounts exceeds $10,000. Presumably, this means that if at any time the threshold is exceeded during the year, the requirement applies. Code Sec. 6038D(a) , which imposes the foreign asset reporting requirement discussed above, doesn't include the language "during any part of which." However, this is presumably Congress's intent, as opposed to a requirement that the threshold amount be exceeded for the entire year. Presumably, a technical correction will be enacted, or regs will be issued, making this clear.

IRS is developing guidance for filing the annual reports. IRS has announced that the annual reports will be filed on Form 8938 (Statement of Specified Foreign Assets), which will have to be attached to the individual's income tax return for the tax year. IRS has announced that the obligation to file Form 8938 is suspended for individuals who have to file an income tax return for a tax year before IRS releases Form 8938. Following the release of Form 8938, individuals for which the filing of Form 8938 was been suspended under these rules for a tax year (suspended tax year) will have to attach Form 8938 for the suspended tax year to their next income tax return that has to be filed with IRS. Notice 2011-55, 2011-29 IRB .

To the extent provided by the IRS in regs or other guidance, the Code Sec. 6038D reporting requirement discussed above and below applies to any domestic entity formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if the entity were an individual. Code Sec. 6038D(f) .

Specified foreign financial assets defined for purposes of the reporting requirement for individuals with foreign assets.

For purposes of the reporting requirement for individuals with foreign assets, a “specified foreign financial asset” is:

(1)    any “financial account” (as defined in Code Sec. 1471(d)(2) ) maintained by a “foreign financial institution” (as defined in Code Sec. 1471(d)(4) ), and

(2)    any of the following assets which are not held in an account maintained by a “financial institution” (as defined in Code Sec. 1471(d)(5) ):  any stock or security issued by a person other than a U.S. person, any financial instrument or contract held for investment that has an issuer or counterparty that is other than a U.S. person, and any interest in a “foreign entity” (as defined in Code Sec. 1473 ). Code Sec. 6038D(b) .

Thus, specified foreign financial assets are depository or custodial accounts at foreign financial institutions. Joint Comm Staff, Tech Expln of the Revenue Provisions Contained in Senate Amendment 3310, theHiring Incentives To Restore Employment Act, Under Consideration by the Senate (JCX-4-10), 2/23/2010, p. 60.

Information which must be reported under the reporting requirement for individuals with foreign assets.

For purposes of the reporting requirement for individuals with foreign assets (see above), the information that must be included in the required statement for any asset is:

(1) In the case of any account, the name and address of the financial institution in which the account is maintained and the number of the account.

(2) In the case of any stock or security, the name and address of the issuer, and whatever information is necessary to identify the class or issue of which the stock or security is a part.

(3) In the case of any other instrument, contract or interest:

whatever information is necessary to identify the instrument, contract or interest, and

the names and addresses of all issuers and counterparties with respect to the instrument, contract or interest.

(4) The maximum value of the asset during the tax year. Code Sec. 6038D(c) .

Although the nature of the information required under Code Sec. 6038D(c) , discussed above, is similar to the information disclosed on a report of foreign bank and financial accounts (FBAR), it's not identical. For example, a beneficiary of a foreign trust who isn't within the scope of the FBAR reporting requirements because his interest in the trust is less than 50% may nonetheless be required to disclose the interest in the trust with his tax return under Code Sec. 6038D(c) if the value threshold is met. Nothing in Code Sec. 6038D(c) is intended as a substitute for compliance with the FBAR reporting requirements, which are unchanged by Code Sec. 6038D(c) . Joint Comm Staff, Tech Expln of the Revenue Provisions Contained in Senate Amendment 3310, the Hiring Incentives To Restore Employment Act, Under Consideration by the Senate (JCX-4-10), 2/23/2010, p. 60 , see ¶60,38.

An individual isn't required under these rules to disclose interests that are held in a custodial account with a U.S. financial institution nor is an individual required to identify separately any stock, security instrument, contract, or interest in a foreign financial account disclosed under Code Sec. 6038D(c) . Joint Comm Staff, Tech Expln of the Revenue Provisions Contained in Senate Amendment 3310, the Hiring Incentives To Restore Employment Act, Under Consideration by the Senate (JCX-4-10), 2/23/2010, p. 61 .

Penalty for failure to disclose information required under the reporting requirement for individuals with foreign assets.

For purposes of the reporting requirement for individuals with foreign assets, if any individual fails to furnish the information described in Code Sec. 6038D(c)for any tax year at the time and in the manner described in Code Sec. 6038D(a) (see above), he or she must pay a penalty of $10,000. Code Sec. 6038D(d)(1) . If this failure continues for more than 90 days after the day on which the IRS mails notice of the failure to the individual, the individual will be penalized (in addition to the penalties imposed under Code Sec. 6038D(d)(1) , discussed above) $10,000 for each 30-day period (or fraction of the 30-day period) during which the failure continues after the expiration of the 90-day period. The penalty imposed for any failure can't exceed $50,000. Code Sec. 6038D(d)(2) .

The computation of the penalty is similar to that applicable to failures to file reports for certain foreign corporations under Code Sec. 6038 . Joint Comm Staff, Tech Expln of the Revenue Provisions Contained in Senate Amendment 3310, the Hiring Incentives To Restore Employment Act, Under Consideration by the Senate (JCX-4-10), 2/23/2010, p. 61 .

Example 1. An individual who is notified of his failure to disclose for a single tax year under Code Sec. 6038D(d)(2) and who takes remedial action on the 95th day after the notice is mailed incurs a penalty of $20,000 comprising the base amount of $10,000, plus $10,000 for the fraction (i.e., the five days) of a 30-day period following the lapse of 90 days after the notice of noncompliance was mailed. Joint Comm Staff, Tech Expln of the Revenue Provisions Contained in Senate Amendment 3310, the Hiring Incentives To Restore Employment Act, Under Consideration by the Senate (JCX-4-10), 2/23/2010, p. 61.

Example 2. An individual who postpones remedial action until the 181st day is subject to the maximum penalty of $50,000: the base amount of $10,000, plus $30,000 for the three 30-day periods, plus $10,000 for the one fraction (i.e., the single day) of a 30-day period following the lapse of 90 days after the notice of noncompliance was mailed. Joint Comm Staff, Tech Expln of the Revenue Provisions Contained in Senate Amendment 3310, the Hiring Incentives To Restore Employment Act, Under Consideration by the Senate (JCX-4-10), 2/23/2010, p. 61 , see ¶60,38D1.9 .

If:

the IRS determines that an individual has an interest in one or more specified foreign financial assets, and

the individual doesn't provide sufficient information to demonstrate the aggregate value of those assets,

the aggregate value of the assets is treated as being in excess of $50,000 (or any higher dollar amount as the IRS prescribes under Code Sec. 6038D(a) , see above) for purposes of assessing the penalties imposed under Code Sec. 6038D . Code Sec. 6038D(e) .

 OBSERVATION: Instead of Code Sec. 6038D , the reference immediately above presumably should have been to Code Sec. 6038D(d) ; i.e., “subsection (d) of this section” instead of “this section” .

Thus, to the extent the IRS determines that the individual has an interest in one or more foreign financial assets but he or she doesn't provide enough information to enable the IRS to determine the aggregate value of those assets, the aggregate value of those assets will be presumed to have exceeded $50,000 for purposes of assessing the penalty. Joint Comm Staff, Tech Expln of the Revenue Provisions Contained in Senate Amendment 3310, the Hiring Incentives To Restore Employment Act, Under Consideration by the Senate (JCX-4-10), 2/23/2010, p. 61 .

No penalty will be imposed by Code Sec. 6038D on any failure that is shown to be due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information isn't reasonable cause. Code Sec. 6038D(g) .

For when the Code Sec. 6038D reporting requirement (and, thus, the penalty for failing to satisfy that requirement) applies, see above.

IRS authority to issue regs to carry out the purposes of the reporting requirement for individuals with foreign assets.

The IRS is directed to prescribe regs or other guidance as may be necessary or appropriate to carry out the purposes of the Code Sec. 6038D reporting requirement for individuals with foreign assets (see above), including regs or other guidance which provide appropriate exceptions from the application of Code Sec. 6038D in the case of:

classes of assets identified by the IRS, including any assets as to which the IRS determines that disclosure under Code Sec. 6038D would duplicate other disclosures,

nonresident aliens, and bona fide residents of any possession of the U.S. Code Sec. 6038D(h) .

Thus, the regs can include exceptions for those assets that the IRS determines are subject to reporting requirements under Code provisions other than Code Sec. 6038D . In particular, Congress anticipates regulatory exceptions to avoid duplicative reporting requirements. Joint Comm Staff, Tech Expln of the Revenue Provisions Contained in Senate Amendment 3310, the Hiring Incentives To Restore Employment Act, Under Consideration by the Senate (JCX-4-10), 2/23/2010, p. 61 .

 Because the reporting requirements under Code Sec. 6038D are part of the Internal Revenue Code, and cover most of the same ground as the rules regarding reports of foreign bank and financial accounts (FBAR), the disclosure and enforcement problems discussed above should be for the most part eliminated. The same procedures that apply to other tax penalties apply to penalties imposed under Code Sec. 6038D , and IRS personnel responsible for enforcing Code Sec. 6038D will have access to other income tax return information.

Prior Law.

For tax years beginning before Mar. 19, 2010 ( Sec. 511(c), PL 111-147, 3/18/2010 ), the Code Sec. 6038D reporting requirements discussed above didn't apply.

Information reporting suspended for foreign financial asset holders & PFIC shareholders

Notice 2011-55, 2011-29 IRB

A new Notice suspends information reporting required under the Hiring Incentives to Restore Employment Act (HIRE Act, P.L. 111-147 ), for certain individuals with an interest in a “specified foreign financial asset,” as well as for shareholders of a passive foreign investment company (PFIC). The information reporting is suspended until IRS issues the forms necessary to report the requisite information.

Once the requisite forms become available, affected taxpayers will have to disclose the information for the suspended period with their next income tax or information return.

Background. For tax years beginning after Mar. 18, 2010, the HIRE Act provides that individuals with an interest in a “specified foreign financial asset” during the tax year must attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets is greater than $50,000. ( Code Sec. 6038D(a) ) In addition, to the extent provided by IRS in regs or other guidance, Code Sec. 6038D will apply to any domestic entity formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if the entity were an individual. ( Code Sec. 6038D(f) )

“Specified foreign financial assets” are: (1) depository or custodial accounts at foreign financial institutions, and (2) to the extent not held in an account at a financial institution, (a) stocks or securities issued by foreign persons, (b) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (c) any interest in a foreign entity. ( Code Sec. 6038D(b) )

The HIRE Act also added new Code Sec. 1298(f) which, effective Mar. 18, 2010, requires U.S. persons who are shareholders of a PFIC to file an annual report containing such information as IRS may require. Before the enactment of Code Sec. 1298(f) , PFIC shareholders had to file Form 8621 (Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund) under certain circumstances.

In Notice 2010-34, 2010-17 IRB 612 , IRS said that until it issued guidance on Code Sec. 1298(f) , those required to file Form 8621 before the enactment of Code Sec. 1298(f) should continue to file it as provided in the instructions (e.g., upon disposition of stock of a PFIC, or with respect to a qualified electing fund under Code Sec. 1293 ). IRS also said PFIC shareholders not otherwise required to file Form 8621 annually before Mar. 18, 2010, won't have to file an annual report as a result of Code Sec. 1298(f) for tax years beginning before Mar. 18, 2010.

Regs on the way. Notice 2011-55 says that IRS will issue:

... new regs on Code Sec. 6038D and Code Sec. 1298(f) ;

... new Form 8938, “Statement of Specified Foreign Financial Assets,” to be used to report an interest in one or more specified foreign financial assets under Code Sec. 6038D . Individuals will have to attach this form to their income tax return for the tax year; and

... a revised Form 8621 modified to reflect Code Sec. 1298(f) . Affected PFIC shareholders will be required to attach the revised Form 8621 to their income tax return or information return (e.g., Form 1065, “U.S. Return of Partnership Income”) for the tax year.

Filing suspended till forms become available. Notice 2011-55 suspends the Code Sec. 6038D reporting requirements until IRS releases Form 8938. Similarly, PFIC shareholders that would not be required to file Form 8621 under the current instructions to this form may, under Code Sec. 1298(f) , have to file an income tax return or information return (e.g., Form 1065) for a tax year beginning on or after Mar. 18, 2010, but before the IRS releases revised Form 8621. Pending the release of the revised Form 8621, the Code Sec. 1298(f) reporting requirement is suspended for tax years beginning on or after Mar. 18, 2010, for PFIC shareholders not otherwise required to file Form 8621. PFIC shareholders with Form 8621 reporting obligations as provided in the current instructions to Form 8621 (e.g., upon disposition of stock of a PFIC or with respect to a qualified electing fund under Code Sec. 1293 ) must continue to file the current Form 8621 with an income tax or information return filed before the release of revised Form 8621.

After new Form 8938 or revised Form 8621 is released, individuals and PFIC shareholders for which the filing of Form 8938 or 8621 is suspended for a tax year will have to attach Form 8938, Form 8621, or both, as appropriate, for the suspended tax year to their next income tax or information return required to be filed with the IRS.

When assessment period begins to run. Under Code Sec. 6501(c)(8) , the limitations period for tax assessments for periods for which reporting is required under sections Code Sec. 6038D or Code Sec. 1298(f) doesn't expire before three years after the date on which the IRS receives Form 8938 or 8621, as appropriate, for the tax year. A Form 8938 or 8621 filed for a suspended tax year with a timely filed income tax or information return (taking into account extensions) as required by Notice 2011-55 will be treated as having been filed on the date that the income tax or information return for the suspended tax year was filed. Failure to furnish Forms 8938 and 8621 for the suspended tax year may result in the extension of the limitations period for the suspended taxable year under Code Sec. 6501(c)(8) , and penalties may apply.

Notice 2011-55 reminds taxpayers that compliance with Code Sec. 6038D or Code Sec. 1298(f) doesn't relieve them of the responsibility to file Form TD F 90-22.1, “Report of Foreign Bank and Financial Accounts,” (FBAR) if the FBAR is otherwise required to be filed.

References: For reporting requirement for individuals with foreign assets, see FTC 2d/FIN ¶  S-3650.1 ; United States Tax Reporter ¶  60,38D4 ; TaxDesk ¶  815,516 ; TG ¶  60613 . For annual information reporting by PFIC shareholders, see FTC 2d/FIN ¶  O-2201.1 ; United States Tax Reporter ¶  12,984 ; TG ¶  30301 .

---------------------------------------------------------------------------------------------

§ 6038D Information with respect to foreign financial assets.

 (a) In general.

Any individual who, during any taxable year, holds any interest in a specified foreign financial asset shall attach to such person's return of tax imposed by subtitle A for such taxable year the information described in subsection (c) with respect to each such asset if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amount as the Secretary may prescribe).

 (b) Specified foreign financial assets.

For purposes of this section , the term “specified foreign financial asset” means—

(1) any financial account (as defined in section 1471(d)(2) ) maintained by a foreign financial institution (as defined in section 1471(d)(4) ), and

 (2) any of the following assets which are not held in an account maintained by a financial institution (as defined in section 1471(d)(5) )—

(A) any stock or security issued by a person other than a United States person,

 (B) any financial instrument or contract held for investment that has an issuer or counterparty which is other than a United States person, and

 (C)  any interest in a foreign entity (as defined in section 1473 ).

 (c) Required information.

The information described in this subsection with respect to any asset is:

(1)In the case of any account, the name and address of the financial institution in which such account is maintained and the number of such account.

 (2)In the case of any stock or security, the name and address of the issuer and such information as is necessary to identify the class or issue of which such stock or security is a part.

 (3) In the case of any other instrument, contract, or interest—

(A) such information as is necessary to identify such instrument, contract, or interest, and

 (B) the names and addresses of all issuers and counterparties with respect to such instrument, contract, or interest.

 (4) The maximum value of the asset during the taxable year.

 (d) Penalty for failure to disclose.

(1) In general.

If any individual fails to furnish the information described in subsection (c) with respect to any taxable year at the time and in the manner described in subsection (a) , such person shall pay a penalty of $10,000.

 (2) Increase in penalty where failure continues after notification.

If any failure described in paragraph (1) continues for more than 90 days after the day on which the Secretary mails notice of such failure to the individual, such individual shall pay a penalty (in addition to the penalties under paragraph (1) ) of $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of such 90-day period. The penalty imposed under this paragraph with respect to any failure shall not exceed $50,000.

 (e)  Presumption that value of specified foreign financial assets exceeds dollar threshold.

If—

(1) the Secretary determines that an individual has an interest in one or more specified foreign financial assets, and

 (2) such individual does not provide sufficient information to demonstrate the aggregate value of such assets, then the aggregate value of such assets shall be treated as being in excess of $50,000 (or such higher dollar amount as the Secretary prescribes for purposes of subsection (a) ) for purposes of assessing the penalties imposed under this section .

 (f) Application to certain entities.

To the extent provided by the Secretary in regulations or other guidance, the provisions of this section shall apply to any domestic entity which is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if such entity were an individual.

 (g) Reasonable cause exception.

No penalty shall be imposed by this section on any failure which is shown to be due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information is not reasonable cause.

 (h) Regulations.

The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section , including regulations or other guidance which provide appropriate exceptions from the application of this section in the case of—

(1) classes of assets identified by the Secretary, including any assets with respect to which the Secretary determines that disclosure under this section would be duplicative of other disclosures,

 (2) nonresident aliens, and

 (3) bona fide residents of any possession of the United States.

www.irstaxattorney.com 888-712-7690