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.
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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 .
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§ 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.
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