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 reporting requirements.
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 assets.)
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.
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