Today, December 15, 2011, the U.S. Treasury just released their “Guidance on Foreign Financial Asset Reporting” for years beginning with 2011 and subsequent. Yes, that’s right; years beginning with 2011. Although it is rare, it is not unusual for the Internal Revenue Service to retroactively implement tax reporting requirements. As in this case, you will really need to scramble in the next few weeks to ensure that you do not fall within the reporting limits and requirements of Federal Form 8938 “Statement of Specified Foreign Financial Assets”. Don’t let the name label fool you, this is not just a statement. This Form 8938 has teeth, large teeth.
As a practicing tax attorney, I was wondering when this type of form would be implemented to account for foreign assets held by U.S. Citizens, Green-Card Holders and Resident Aliens that were not covered by Federal Form 90-22.1, Report of Foreign Bank Accounts. There were a myriad of concerns and comments from tax practitioners concerned about what should be reported on the FBAR report. Now that question has been answered in the negative. Bank accounts are to be reported on Federal Form 90-22.1, but other investment accounts and even valuation of inheritances, trusts, gifts (currently and years subsequent) are required to be reported on the newly created Federal Form 8938.
Even for seasoned tax professionals and Americans with investments and overseas entities, this Form 8938 is frightening in the invasive and intrusive nature of its requirements and the penalties are considerable. Lets take a look at who is required to report their financial information on the Form 8938:
The reporting threshold varies depending on whether an individual lives in the United States, is married, or files a joint income tax return with his or her spouse; specifically U.S. citizens and resident aliens, nonresidents who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory.
Now, lets see what is types of financial information is required on Form 8938?
Specified foreign financial assets include any financial account maintained by a foreign financial institution and, to the extent held for investment, any stock, securities, or any other interest in a foreign entity and any financial instrument or contract with an issuer or counterparty that is not a U.S. person.
If you fail to file this form, what is the Statute of Limitations?
If you fail to file Form 8938, the statute of limitations for the tax year may remain open for all or a part of your income tax return until 3 years after the date on which you file Form 8938.
What if you file the form, but forgot completely list all of the foreign financial assets?
If you fail to report a specified foreign financial asset that you are required to report, the statute of limitations for the tax year may remain open for all or a part of your income tax return until 3 years after the date on which you file Form 8938.
How is this form to be filed?
You will be required to file this Form 8938 with your annual tax return, which (depending on your particular situation) will be as in integral part of these tax returns:
- • Form 1040, U.S. Individual Income Tax Return
- • Form 1120, U.S. Corporate Income Tax Return
- • Form 1065, U.S. Partnership Tax Return
- • Form 1041, Fiduciary Income Tax Return
- • Form 1120-F, Foreign Corporate Income Tax Return
- • Form 1120-S, S Corporation Tax Return
- • Form 1040NR of a nonresident alien who is a bona fide resident of Puerto Rico or American Samoa.
Just in case you are thinking that your particular tax return is not required to be file, such as an Individual income tax returns where you are not making enough taxable income to have a tax liability: the IRS has conflicting thoughts on whether 8938 must be filed. However, if you are thinking that filing from 8938 relieves you of filing Federal Form 90-22.1, it does NOT.
Is there a threshold of when you are required to file this form?
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.
Married taxpayers filing separate income tax returns and living in the United States. If you are married, file a separate income tax return from your spouse, and do not live abroad, you satisfy the reporting threshold if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $100,000 at any time during the tax year.
Taxpayers living abroad.
If you are a bona fide resident 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, you satisfy the reporting threshold if you are not filing a joint return and the value of your 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.
If you are married and file a joint income tax return, you satisfy the reporting threshold only if the value of all specified foreign financial assets you or your 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.
Should I be concerned about Foreign grantor trusts?
If you are treated as an owner of any portion of a foreign grantor trust, you may be required to file Form 8938 to report specified foreign financial assets held by the trust. If you are also a beneficiary of the foreign trust, you may be required to file Form 8938 to report your interest in the trust. You do not have to report on Form 8938 any specified foreign financial asset held by the trust or your interest in the trust if you report the trust on a Form 3520 filed for the tax year and the trust files Form 3520-A for the tax year.
Does Form 8938 have teeth?
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. If your errors or failure to disclose assets equates to an underpayment of tax wherein a tax fraud penalty can be assessed; then a penalty of 75 percent will be imposed. In addition to the above penalties, your case may be transferred to Criminal Investigation Department of the U.S. Treasury for criminal fines and penalties.
Between the FBAR and now the FFAR, the IRS will have privy to almost all of a person’s financial activities that are foreign related. The only area not touched, yet, is real estate. Remember, you may still have time to be excused from filing this Form 8938, but time is quickly running out.