Additional Reporting for Foreign Financial Assets Begins with 2011 Returns
The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, created a new Internal Revenue Code section which mandates additional reporting of foreign assets. In December 2011 the IRS released the final version of Form 8938, Statement of Specified Foreign Financial Assets, and its instructions.
Certain taxpayers must now report information related to their foreign financial assets on Form 8938 and file it along with their tax returns. This requirement is effective for tax years beginning after March 18, 2010—which for most people will be their 2011 tax returns filed during the 2012 filing season.
Who Must File?
United States citizens, residents, and certain non-resident aliens must file Form 8938 if the aggregate value of certain specified foreign financial assets exceeds the reporting thresholds described below.
Defining Specified Foreign Assets
Taxpayers must disclose information related to foreign financial accounts and other foreign assets held for investment, such as foreign stocks and bonds, financial instruments, contracts with non-U.S. persons, and interests in foreign entities.
However, the following types of assets are excepted from the reporting requirements:
- foreign assets held in accounts maintained with U.S. financial institutions
- assets reported on other U.S. income tax forms (but not excluding assets also included on the Treasury Department’s Foreign Bank Account Report, or FBAR)
- assets held in certain trusts
- interests in foreign trusts or estates that are unknown to the taxpayer, and
- interests in social security or another similar program of a foreign government.
Reporting thresholds vary based on whether the taxpayer resides in the U.S. or abroad and whether the return is filed jointly. In general, thresholds are higher for married couples and taxpayers who qualify for foreign residency.
For taxpayers living in the U.S., the following reporting thresholds apply. A Form 8938 must be filed when:
- unmarried taxpayers, or married taxpayers filing separately, have foreign financial assets of more than $50,000 on the last day of the tax year (or more than $75,000 at any time during the tax year), or
- married taxpayers filing a joint income tax return have foreign financial assets of more than $100,000 on the last day of the tax year (or more than $150,000 at any time during the tax year).
For taxpayers living abroad, the following thresholds apply (even if only one spouse lives abroad). A Form 8938 must be filed when:
- unmarried taxpayers, or married taxpayers filing separately, have foreign assets of more than $200,000 on the last day of the tax year (or more than $300,000 at any time during the year), or
- married taxpayers filing a joint return have foreign assets of more than $400,000 on the last day of the tax year (or more than $600,000 at any time during the year).
Married individuals who file joint returns will file a single Form 8938 that reports all of the specified foreign financial assets in which either spouse has an interest.
Penalties for Failure to Report
Taxpayers who fail to report under these rules will be fined $10,000 for failure to file, and an additional penalty of up to $50,000 for continued failure to file after IRS notification. Taxpayers are also subject to a 40% percent penalty for underpayments of tax related to the undisclosed foreign assets.
Failure to file Form 8938 may also cause the tax year’s statute of limitations to remain open until 3 years after the form is filed.
For more information about the new reporting requirements related to your foreign financial assets, please contact Michael Chojnacki at Frank, Rimerman + Co. LLP.
Any tax advice in this communication is not intended or written by Frank, Rimerman + Co. LLP to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein. With this communication, Frank, Rimerman + Co. LLP is not rendering any specific advice to the reader.