|
Summary. The Internal Revenue Service ("IRS") has issued temporary (and proposed) regulations providing insight into the requirement for individuals to attach a statement to their income tax return to provide information on foreign financial assets in which they have an interest. They are effective for tax years ending after December 19, 2011, but taxpayers can apply them to earlier years. IRS will soon release the final version of Form 8938 (Statement of Specified Foreign Financial Assets), which taxpayers will use starting this coming tax filing season to report specified foreign financial assets for tax year 2011.
Background. For tax years beginning after March 18, 2010, the Hiring Incentives to Restore Employment Act of 2010 provided 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). In addition, this 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.
"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.
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. No penalty applies if the failure was due to reasonable cause and not willful neglect.
The IRS suspended 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. The IRS further stated that the limitations period for tax assessments for periods for which reporting is required won't expire before three years after the date on which the IRS receives Form 8938.
Who is a specified individual.A specified individual is a U.S. citizen, a U.S. resident alien, or a nonresident alien who has elected to be taxed as a U.S. resident. A resident alien who elects to be taxed as a resident of a foreign country under a U.S. income tax treaty's residency tie-breaker rules is also a specified individual. In addition, certain nonresident aliens who are treated as residents under other Code sections are specified individuals.
Dollar amounts that trigger Form 8938 filing. A specified person must file Form 8938 if the person has an interest in one or more specified foreign financial assets and those assets have an aggregate fair market value (FMV) exceeding either $50,000 on the last day of the tax year or $75,000 at any time during the tax year ($100,000 and $150,000, respectively, for married specified individuals filing a joint annual return.
This reporting threshold is increased for a specified individual who has a tax home in a foreign country and who is: (1) a U.S. citizen and establishes to IRS's satisfaction that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire tax year; or (2) a U.S. citizen or resident who is physically present in a foreign country for at least 330 full days during any period of 12 consecutive months. Such an individual isn't required to file Form 8938 unless the aggregate value of the specified foreign financial assets in which he or she has an interest exceeds $200,000 ($400,000 is a joint return is filed) on the last day of the tax year or $300,000 ($600,000 if a joint return is filed) at any time during the tax year.
How to handle various interests in specified foreign financial assets. A joint interest in a specified foreign financial asset is subject to reporting by each specified person that is a joint owner of the asset. In general, each joint owner includes the full value of the jointly owned asset for purposes of determining whether the aggregate value of all specified foreign financial assets in which the joint owner has an interest exceeds the reporting thresholds.
Married specified individuals who file a joint annual return for the tax year file a single Form 8938 that reports all of the specified foreign financial assets in which either married specified individual has an interest. A specified foreign financial asset that is jointly owned by married specified individuals, or a specified foreign financial asset held by a child for which the married specified individuals have made a kiddie-tax election, is reported once on the single Form 8938.
A married specified individual who files a separate annual return for the tax year files a separate Form 8938 that reports all of the specified foreign financial assets in which the married specified individual has an interest, including assets jointly owned with the married specified individual's spouse. A married specified individual that files a separate annual return and whose spouse is a specified person includes only one-half of the value of a specified foreign financial asset that the married specified individual jointly owns with his or her spouse in determining whether the married specified individual has an interest in specified foreign financial assets the aggregate value of which exceeds the reporting threshold.
Annual return triggering reporting obligation. A specified person isn't required to file Form 8938 for any tax year for which he isn't required to file an annual return. A specified person's annual return includes an annual federal income tax return of a specified individual or an annual federal income tax return or information return of a specified domestic entity filed with IRS. Thus, a partnership that is a specified domestic entity must attach Form 8938 to its Form 1065, U.S. Return of Partnership Income. If a specified domestic entity is a member of an affiliated group of corporations that files a consolidated return, the Form 8938 of the specified domestic entity must be filed with the consolidated federal income tax return of the affiliated group.
Who has an interest in specified foreign financial assets. A specified person is generally considered to have an interest in a specified foreign financial asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions attributable to the holding or disposition of the asset are or would be required to be reported, included, or otherwise reflected on the specified person's annual return filed with IRS (even if no income, gains, losses, deductions, credits, gross proceeds, or distributions are attributable to the asset for a particular tax year). The owner of a disregarded entity or grantor trust is generally treated as having an interest in any specified foreign financial assets held by the disregarded entity or trust. A parent that makes an election to include certain unearned income of a child in the parent's gross income required to be reported for the tax year has an interest in any specified foreign financial asset held by the child. A specified person isn't generally treated as having an interest in any specified foreign financial assets held by a partnership, corporation, trust (with some exceptions), or estate solely as a result of the specified person's status as a partner, shareholder, or beneficiary.
Penalties. Married specified individuals who file a joint annual return and fail to file a Form 8938 that includes the required information for any tax year, in the prescribed time and manner, are subject to penalties as if the married specified individuals are a single specified person. The liability of married specified individuals who file a joint annual return for penalties is joint and several. Whether a failure to disclose a specified foreign financial asset on Form 8938 was due to reasonable cause and not due to willful neglect is made on a case-by-case basis, taking into account all pertinent facts and circumstances. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the specified person (or any other person) for disclosing the required information isn't reasonable cause. | 
