Section 511 of the Hiring Incentives to Restore Employment
(HIRE) Act added Section 6038D to the Internal Revenue
Code, which imposes new reporting requirements on a U.S.
individual whose ownership interests in specified foreign financial
assets exceed $50,000. Section 6038D is effective for taxable years
beginning after March 18, 2010; thus, for calendar-year taxpayers,
2011 is the first year for which the new rules are in effect. On
December 19, the IRS published temporary regulations implementing
the new reporting requirements. These rules are in addition to the
longstanding foreign bank account (FBAR) reporting requirements,
which also apply to some of the same foreign assets, and taxpayers
who comply with the new rules will not be excused from filing FBARs
for the same assets. Following are some highlights of the new
The IRS has issued a new form, Form 8938, which is to be
attached to the taxpayer's federal income tax return.
Initially, the new section 6038D reporting requirement will only
apply to U.S. individuals, not to entities. (Future regulations may
expand the requirements to cover certain domestic entities formed
or availed of for the purpose of holding specified financial
Reporting is required for foreign financial accounts (which are
already subject to FBAR reporting), and to the following other
assets held outside of a financial account: stock or securities
issued by a foreign person, a financial instrument issued by a
foreign person or that has a counterparty who is a foreign person,
and any other interest in a foreign entity. Importantly, stocks or
securities that are held through a domestic financial institution,
such as a domestic brokerage account, do not have to be reported.
Assets held for use in a trade or business rather than for
investment also do not have to be reported.
A beneficial interest in a foreign trust or estate is not a
specified foreign financial asset unless the individual knows or
has reason to know of the interest based on readily accessible
information. Receipt of a distribution from the foreign trust or
estate is deemed to be actual knowledge for this purpose.
Generally, reporting is required if the aggregate value of the
taxpayer's specified foreign financial assets exceeds either
$50,000 on the last day of the taxable year or $75,000 at any time
during the taxable year. For married individuals filing jointly
these thresholds are increased to $100,000 and $150,000,
respectively. For certain individuals residing outside the United
States, the thresholds are increased to $200,000 and $300,000
respectively (or $400,000 and $600,000 if the foreign resident
individual is married filing jointly).
No reporting on Form 8938 is required for assets that are
properly reported on a Form 3520 (for certain foreign gifts and
trusts), Form 5471 (for certain foreign corporations), Form 8621
(for passive foreign investment companies), Form 8865 (for certain
foreign partnerships), or Form 8891 (for Canadian RRSPs). However,
as noted above, accounts that are reported on the taxpayer's
FBAR (Form TD F 90-22.1) are also required to be reported on Form
8938 if they meet the reporting threshold amount. A taxpayer who
fails to comply with section 6038D may be subject to a $10,000
penalty unless reasonable cause exists for the failure.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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