As recently announced in IR 2011-117, IRS has released the final version of Form 8938 (Statement of Specified Foreign Financial Assets) and its Instructions, which individuals must use to report specified foreign financial assets under Code Sec. 6038D for tax year 2011. Until IRS issues regs in the future, only individuals, and not specified domestic entities, must file Form 8938. The Instructions carry a number of examples of who does and doesn't have to file Form 8938.

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 higher dollar amount 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))

A specified person who fails to provide required information for any tax year is subject to a $10,000 penalty. A failure continuing for more than 90 days after the day on which IRS mails a notice of the failure to the specified person subjects the specified person to an additional penalty of $10,000 for each 30-day period (or fraction thereof) during which the failure continues after the 90-day period has expired, up to a maximum penalty of $50,000 for each such failure. (Code Sec. 6038D(d)) No penalty applies if the failure was due to reasonable cause and not willful neglect. (Code Sec. 6038D(g))

In Notice 2011-55, 2011-29 IRB 53, IRS suspended the Code Sec. 6038D reporting requirements until it releases Form 8938. 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.

In October of 2011, IRS released a draft version of Form 8938, see Weekly Alert ¶  1010/06/2011.

For recently issued temporary and proposed regs on the Code Sec. 6038D reporting requirement, see ¶ 7.

Who must file Form 8938. Unless an exception applies, a taxpayer must file Form 8938 if: (1) they are a specified person that has an interest in specified foreign financial assets; and (2) the value of those assets is more than the applicable reporting threshold.

Observation: The Instructions note that specified persons aren't required to file Form 8938 for any tax year for which they aren't required to file an annual return, even if the value of their specified foreign financial assets is more than their applicable reporting threshold.

A specified person includes any specified individual or—to the extent provided in future regs—a specified domestic entity if it is formed or availed of to hold specified foreign financial assets. If the value of the specified foreign financial assets is more than the appropriate reporting threshold and no exception applies, taxpayers must file Form 8938 even if none of the specified foreign financial assets affect their tax liability for the tax year. Generally, a specified individual is: a U.S. citizen; a resident alien of the U.S. for any part of the tax year; a nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return; or a nonresident alien who is a bona fide resident of American Samoa or Puerto Rico.

If a taxpayer and his spouse file a joint return (and so would file one combined Form 8938 for the tax year), he must include the value of the asset jointly owned with his spouse only once to determine the total value of all of the specified foreign financial assets that they own. If a taxpayer and his spouse are specified individuals and each files a separate return, he includes one-half of the value of the asset jointly owned with his spouse to determine the total value of all of his specified foreign financial assets. If a taxpayer has joint ownership with a spouse who isn't a specified individual or someone other than a spouse, each joint owner includes the entire value of the jointly owned asset to determine the total value of all of that joint owner's specified foreign financial assets.

Individuals living in the U.S. The following reporting thresholds apply to taxpayers living in the U.S.:

An unmarried taxpayer satisfies the reporting threshold only if the total value of his specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Illustration 1: Bev isn't married and doesn't live abroad. She sold her only specified foreign financial asset on October 15, when its value was $125,000. Held: Bev has to file Form 8938. She satisfies the reporting threshold even though she doesn't hold any specified foreign financial assets on the last day of the tax year because she did own specified foreign financial assets of more than $75,000 at any time during the tax year. (Instructions for Form 8938, page 3)

Illustration 2: Anne isn't married and doesn't live abroad. Anne and an unrelated U.S. resident jointly own a specified foreign financial asset valued at $60,000. Held: Each has to file Form 8938 because each satisfies the reporting threshold of more than $50,000 on the last day of the tax year. (Instructions for Form 8938, page 3)

Married taxpayers filing a joint income tax return satisfy the reporting threshold only if the total value of their specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 any time during the tax year.

Illustration 3: Carl and his wife file a joint income tax return and do not live abroad. They jointly own a single specified foreign financial asset valued at $60,000. Held: They do not have to file Form 8938 cause they do not satisfy the reporting threshold of more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. (Instructions for Form 8938, page 3)

Illustration 4: David and Cindy do not live abroad. They file a joint income tax return, and jointly and individually own specified foreign financial assets. On the last day of the tax year, they jointly own a specified foreign financial asset with a value of $90,000. Cindy also has a separate interest in a specified foreign financial asset with a value of $10,000, while David has a separate interest in a specified foreign financial asset with a value of $1,000. Held: David and Cindy must file a combined Form 8938. They have an interest in specified foreign financial assets in the amount of $101,000 on the last day of the tax year—i.e., ($90,000, the entire value of the specified foreign financial asset that they jointly own, + $10,000, the value of the asset that Cindy separately owns, + $1,000, the value of the asset that David separately owns). David and Cindy satisfy the reporting threshold of more than $100,000 on the last day of the tax year. (Instructions for Form 8938, page 3)

A married taxpayer filing a separate income tax return satisfies the reporting threshold only if the total value of his specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Illustration 5: Fred and Ethel do not live abroad. They file separate returns, and jointly own a specified foreign financial asset valued at $60,000 for the entire year. Held: Neither has to file Form 8938. They each use one-half of the value of the asset, $30,000, to determine the total value of specified foreign financial assets that they each own. Neither satisfies the reporting threshold of more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. (Instructions for Form 8938, page 3)

Individuals living abroad. The following reporting thresholds apply to a taxpayer living abroad—i.e., whose tax home is in a foreign country and who is (1) a U.S. citizen who has been a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year; or (2) a U.S. citizen or resident who is present in a foreign country at least 330 full days during any period of 12 consecutive months that ends in the tax year being reported:

A taxpayer who doesn't file a joint return satisfies the reporting threshold if the total value of his specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.

Illustration 6: Dan and Betty live abroad and file separate income tax returns. Betty isn't a specified individual. On the last day of the tax year, Betty and Dan jointly own a specified foreign financial asset with a value of $150,000. Betty has a separate interest in a specified foreign financial asset with a value of $10,000, while Dan has a separate interest in a specified foreign financial asset with a value of $60,000. Held: Dan has to file Form 8938 but Betty, who isn't a specified individual, doesn't. Dan has an interest in specified foreign financial assets in the amount of $210,000 on the last day of the tax year—i.e., $150,000, the entire value of the asset that he jointly owns, + $60,000, the entire value of the asset that he separately owns). He satisfies the reporting threshold for a married individual living abroad and filing a separate return of more than $200,000 on the last day of the tax year. (Instructions for Form 8938, page 3)

A married taxpayer who files a joint income tax return satisfies the reporting threshold only if the total value of all specified foreign financial assets he or his spouse owns is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.

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ews Release 2011-117, 12/12/2011, IRC Sec(s). 6038D

Information reporting requirements—foreign financial assets.

Headnote:

IRS announced release of new Form 8938, Statement of Specified Foreign Financial Assets, with instructions, to be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. IRS noted that Form 8938 doesn't replace or affect taxpayers' obligation to file FBAR (Report of Foreign Bank and Financial Accounts), and that failure to file Form 8938 could result in significant penalty.

Reference(s): ¶ 60,38D4; Code Sec. 6038D;

Full Text:

IRS Releases Guidance on Foreign Financial Asset Reporting

The Internal Revenue Service in coming days will release a new information reporting form that taxpayers will use starting this coming tax filing season to report specified foreign financial assets for tax year 2011.

Form 8938 (Statement of Specified Foreign Financial Assets) will be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. It is important for taxpayers to determine whether they are subject to this new requirement because the law imposes significant penalties for failing to comply.

The Form 8938 filing requirement was enacted in 2010 to improve tax compliance by U.S. taxpayers with offshore financial accounts. Individuals who may have to file Form 8938 are U.S. citizens and residents, nonresidents who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory.

Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds. For example, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

The thresholds for taxpayers who reside abroad are higher. For example in this case, a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

Instructions for Form 8938 explain the thresholds for reporting, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempted, and what information must be provided.

Form 8938 is not required of individuals who do not have an income tax return filing requirement.

The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer's obligation to file an FBAR (Report of Foreign Bank and Financial Accounts). For more on the FBAR requirement, please go to page link here.

Failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed. Special statute of limitation rules apply to Form 8938, which are also explained in the instructions.

Form 8938, the form's instructions, regulations implementing this new foreign asset reporting, and other information to help taxpayers determine if they are required to file Form 8938 can be found on the FATCA page of irs.gov.

See TD 9567.

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§ 6038D Information with respect to foreign financial assets.

 (a) New Law AnalysisWG&L Treatises 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) New Law Analysis Specified foreign financial assets.

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

(1) New Law Analysis 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) New Law Analysis 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) New Law Analysis any stock or security issued by a person other than a United States person,

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

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

 (c) New Law Analysis Required information.

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

(1) New Law Analysis 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) New Law Analysis 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) New Law Analysis In the case of any other instrument, contract, or interest—

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

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

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

 (d) Penalty for failure to disclose.

(1) New Law Analysis 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) New Law Analysis 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) New Law Analysis Presumption that value of specified foreign financial assets exceeds dollar threshold.

If—

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

 (2) New Law Analysis 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) New Law Analysis 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) New Law Analysis 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) New Law Analysis 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) New Law Analysis 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) New Law Analysis nonresident aliens, and

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

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