New IRS Form 8938 (Statement of Specified Foreign Financial Assets) requires reporting by U.S. taxpayers with foreign assets in excess of specified value thresholds. Reporting is required of U.S. Citizens, Green Card Holders, and persons in the U.S. for more than 183 days a year or over a three year period according to formula, with few exceptions. U.S. taxpayers have for years been required to report foreign bank accounts and other financial accounts on the "FBAR" form. (Treasury Form TD 90-22.1). Other reporting forms include, for example, Form 5471 to report interests in certain foreign corporations, and Form 5472 to report on a 25% foreign-owned U.S. corporation with related company business transactions, and Form 8300 to report cash payments over $10,000 received by a U.S. trade or business. U.S. grantors to foreign trusts, beneficiaries of foreign trusts and gifts from foreign sources must be reported on Form 3520.
New IRS Form 8938 imposes an even more burdensome filing requirement. This Form, effective for tax years beginning after March 18, 2010 (to be filed with the 2012 tax return) requires reporting of overseas assets, with few exceptions, if the assets have a value above of $50,000 at the end of the tax year, or $75,000 at any time during the tax year. Higher dollar thresholds can apply for married couples and for U.S. taxpayers living out of the country.
Regardless of whether foreign assets are reported on any other Treasury or IRS Form, such as foreign financial accounts on the FBAR, those assets must also be included on Form 8938, but with less detail.
Foreign assets to be reported on Form 8938 include:
- Any stock or security issued by a person other than a U.S. person;
- Any interest in a foreign entity;
- Any financial instrument or contract held for investment that has an issuer or counterparty that is other than a U.S. person;
- Any financial account maintained by a foreign financial institution;
Note that the filing requirement does not yet apply to individual ownership of foreign real estate, but if there is a lease agreement with a foreigner, that lease is a contract with a foreign person which should apparently be reported.
This new Form currently applies only to individuals, but Treasury will be publishing additional regulations to extend the reporting requirement to domestic entities "formed ...for holding, directly or indirectly, specified foreign assets..."
Form 8938 requires valuation of foreign assets, which is often problematic. A "reasonable estimate" with explanations may be acceptable.
The IRS issued an updated Guidance in June 2012, which should be reviewed. The Guidance added further definitions, to include, for example, an interest in a foreign pension or deferred compensation plan.
Form 8938 is complex and the Guidance and instructions must be carefully reviewed to determine applicable definitions, monetary thresholds, valuation rules, and exceptions.
As is always the case, failure to file a required Form can incur substantial civil and criminal penalties.