New International Tax Information Reporting Requirement
11/29/11
Beginning with their 2011 tax return, individuals that hold foreign financial assets have a new filing requirement, Form 8938 – Statement of Specified Foreign Financial Asset. For those individuals that already file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”), this return will be required in addition to the FBAR filing if the higher filing thresholds are met. At this time, the IRS has issued only draft forms. If final forms are not issued prior to the time the taxpayer files their income tax return, the filing requirement is delayed (but not eliminated) until the IRS issues final forms.
Background
The Hiring Incentives to Restore Employment Act (HIRE) created the information reporting requirement that resulted in the need for Form 8938. Form 8938 is required for individuals for tax years beginning after March 18, 2010. For calendar year taxpayers, 2011 will be the first covered year. The reporting requirements were added as revenue raisers in the HIRE Act as the reporting is anticipated to increase compliance with U.S. tax laws through the disclosure of certain foreign financial assets and penalty provisions.Form 8938 was issued in draft form on June 21, 2011, and instructions were issued in draft form on September 28, 2011.
It should be noted that “certain domestic entities” will also be required to file Form 8938 (or similar form) when the IRS issues Regulations. The IRS has indicated that the filing requirements will be delayed but filing requirements for any prior years will not be eliminated. “Certain domestic entities” are defined as “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.”
Who is Required to File
Individuals that are subject to U.S. income taxation that hold “foreign financial assets” greater than “reporting thresholds” must file Form 8938 annually.
Individuals subject to U.S. income taxation include:
- U.S. citizens
- Resident aliens (including aliens with green cards or those meeting substantial presence tests)
- Nonresident aliens that elect to be treated as a resident alien for joint returns
Foreign Financial Assets include:
- Any financial account maintained by a foreign financial institution
- Other foreign financial assets held for investment:
- Stock or securities issued by someone other than a U.S. person
- Any equity interest in a foreign entity
- Any financial instrument or contract issued by someone other than a U.S. person
The Reporting Thresholds are based on the filing status of the individual and are based on the end year values or on the highest value during the year. If either threshold is met, the individual must file the Form.
Observation: The value of a specified foreign financial asset is generally its fair market value. The IRS allows a reasonable estimate of fair market value and has indicated that a third party appraisal is not required.
Form 8938 vs FBAR – Foreign Bank Account Reporting
The foreign financial accounts that are required to be reported on Form 8938 parallel the financial accounts reported on the FBAR (Form TD F 90-22.1). There are differences in some of the definitions attached to foreign financial accounts for Form 8938 in addition to the higher thresholds. Form 8938 also looks only at direct ownership of foreign financial accounts and does not require disclosure of signature or other authority.
Foreign Real Estate – if you hold foreign real estate directly, there is no reporting requirement. However, certain countries like Mexico, require that foreign citizens cannot hold property directly and must hold real estate through trusts (a fideicomiso in Mexico) or a local entity. If held through such an entity it would appear that a filing requirement would exist. Foreign real estate held through a foreign trust or entity would not be reportable on the FBAR.
Foreign life insurance or annuity policies – would appear to require reporting as they would be considered a financial contract issued by someone other than a U.S. person.
Precious Metal Investments held through a foreign financial account also would require reporting. However, precious metals held in a foreign safe deposit box, private vault, or buried abroad would not be reportable.
Duplicate Reporting
Individuals will not be required to report foreign assets reported on other forms. Assets reported elsewhere may include interests in foreign trust or estates (reported on Form 3520), interest in foreign partnerships (reported on Form 8865), or ownership of foreign corporations (reported on Forms 5471 or 8621).
When individuals meet the filing threshold but already report the financial assets on other forms, Form 8938 must still be filed, and Part IV must be completed to identify the other forms filed by the individual. (Note that Form TD F 90.22-1, Report of Foreign Bank and Financial Accounts, is not included on this list, as it is a Treasury form, not an Internal Revenue Service form.)
Penalties
Penalties for failing to file Form 8938 are $10,000 per year plus penalties related to any understatement of income tax. Penalties for failing to respond to IRS inquiries increase the maximum penalty to $50,000 per year.
In addition to the penalties, the statute of limitations for assessing tax will not begin to run until Form 8938 is filed and the statute increases from three years to six years if gross income is understated by $5,000 or more.
Conclusion
The IRS is looking closely at taxpayers that underpay their U.S. tax liability by hiding assets abroad. Taxpayers that have accumulated assets abroad must be careful to report income associated with those assets and to comply with the myriad of information reporting requirements set forth by the IRS. Penalties for non-compliance are significant and statute of limitations do not start until foreign information returns are filed.
If you have any questions regarding this alert, please contact your Plante Moran client services representative.
The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC is not rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.
