The Internal Revenue Service (IRS) recently issued guidance
relating to the new requirement for individuals to report ownership
of "specified foreign financial assets." This
reporting requirement is part of the Hiring Incentives to Restore
Employment (HIRE) Act, which became law on March 18, 2010.
2011 will mark the first year for which reporting is
required. Those required to make the disclosures must file a
new IRS form, Form 8938, with their 2011 Form 1040. In short,
foreign investment-type assets must be disclosed if the value of
such assets owned by the taxpayer exceeds certain thresholds, which
vary depending upon whether the taxpayer files a joint return and
whether the taxpayer lives in the United States or abroad.
To Whom do the New Reporting Requirements
Individuals who are required to report ("specified
persons") include U.S. citizens, resident aliens, and certain
foreign individuals. When final treasury regulations are
issued, reporting also will be required by certain closely held
domestic corporations, partnerships and trusts.
What Types of Assets Must be Disclosed?
The scope of assets required to be reported, called
"specified foreign financial assets," is extremely
broad. These assets include, but are not limited to, foreign
bank and brokerage accounts, interests in offshore hedge
funds, mutual funds and private equity funds, and, to the extent
held for investment and not held in an account maintained
by a financial institution, foreign stocks and securities,
financial instruments issued by a non-U.S. person, and any other
interest in a foreign entity. There are a few exceptions to
these far-reaching disclosure requirements for assets used in a
specified person's trade or business and assets subject to
In general, for 2011, specified foreign financial assets held by
a domestic corporation, partnership, trust or estate do
not need to be reported by the specified persons who own interests
in those entities. However, once regulations are finalized,
those domestic entities may have to report such assets under
Disclosure of specified foreign financial assets is required
regardless of the specified person's ownership percentage of
such assets, in contrast to reporting requirements already in
effect that, for example, might only apply if a taxpayer owned 10%
of the foreign entity.
The Form 8938 filing requirement does not take the place of a
specified person's obligation to file an FBAR (Foreign Bank
Account Report, Treasury Form TD F 90-22.1) to report a financial
interest in or signature authority over a foreign financial
account. There will be duplicate reporting for the same
foreign bank account or brokerage account, for example, or for the
same foreign entity if certain ownership requirements (for purposes
of the FBAR) are met. There are special rules in place
to deal with duplicative IRS reporting, such as reporting on Forms
8865, 5471, 8621 and 3520.
The reporting requirements apply to individuals who hold, in the
aggregate, specified foreign financial assets whose value exceeds
$50,000 on the last day of the taxable year, or $75,000 at any time
during the taxable year. These thresholds are doubled for
married taxpayers filing jointly.
For individuals living abroad who meet certain requirements, the
threshold is increased to $200,000 on the last day of the taxable
year, or $300,000 at any time during the taxable year. Those
increased thresholds are, in turn, doubled in the case of
joint filers who live abroad.
If a specified person is a joint owner of a specified foreign
financial asset, then the entire value of the asset
– not 50% - is included in the determination of whether
the filing thresholds are met. This rule does not apply to a
married couple that jointly files Form 8938; in that case, the
jointly held asset in that case is counted only once. Special
valuation rules apply to interests in foreign trusts, estates,
pension plans and deferred compensation plans.
Penalties for Failure to Report
A $10,000 penalty applies for failure to report specified
foreign financial assets on Form 8938. Increased penalties
apply if the IRS notifies the taxpayer of the failure and the
taxpayer does not respond. The penalty does not apply in the
case where the taxpayer can show the failure to report was due to
reasonable cause. Accuracy-related penalties of up to
40% may also apply if a specified person underpays his or her tax
as a result of a transaction involving a specified foreign
financial asset not reported on Form 8938. In addition,
failure to report on Form 8938 may extend the statute of
limitations for the relevant tax year. These penalties are in
addition to any penalties that might apply for failure to report on
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What’s the Option? We’re all still waiting for a final decision in Gillette.1 In the meantime, taxpayers have an option for the returns due this fall. They may compute their apportionment using one of the following two methods: