The HIRE Act of 2010 enacted Section 6038D as part of the
Foreign Account Tax Compliance Act. Drafts of the Form 8938 were
issued by the IRS last year, and temporary and proposed regulations
were issued late in the year. This Tax Bulletin summarizes
the requirements of Section 6038D and the recent regulations as
well as the Form. The Form is applicable for tax years
beginning after March 18, 2010, which for most individuals will be
the 2011 tax year.
Note that Form 8938 is a tax form to be filed with an
individual's U.S. income tax return; there are overlaps between
the information to be reported on Form 8938 and Form 90-22.1, which
is a Treasury Department form. Form 8938 does not replace or
supplant Form 90-22.1, and individuals may now be required to file
both forms. Recall that the Form 90-22.1 is filed with the
Treasury Department on or before June 30 with respect to the
preceding taxable year, while Form 8938 is filed with the IRS along
with the individual's income tax return.
Specified Foreign Financial Assets: Section
6038D requires an individual who holds any interest in a specified
foreign financial asset during the taxable year to report certain
information to the IRS if the aggregate interests exceed
$50,000. For these purposes, a specified foreign financial
asset includes a finance account maintained by a foreign financial
institution, or, if not held at a financial institution, any stock
or security issued by a foreign person, a financial instrument or
contract that has a foreign issuer or counterpart, or an interest
in any foreign entity where such instrument is held for
investment. A financial instrument or contract includes
interest and currency swaps, other swap contracts, options and
other derivative contracts. Gold held in a safety deposit box,
artworks, interests in a social security, social insurance or other
similar program, and real estate do not constitute specified
foreign financial assets. However, gold held by a custodian,
interests in foreign trusts, foreign estates, foreign pension plans
and foreign deferred compensation plans do constitute a specified
foreign financial asset.
Note that for purposes of Section 6038D and reporting on Form 8938,
a U.S. branch of a foreign financial institution is not considered
to be a foreign financial institution and thus assets held at the
US branch need not be reported on Form 8938.
Who Must File: Section 6038D applies to U.S.
citizens, a person who is a resident alien at any time during the
taxable year, and a person who is a resident alien but elects to be
taxed as a resident of a foreign country under the relevant income
tax treaty residency tie-breaker tests. This leads to a
requirement that a person who might not otherwise be required to
file a U.S. tax return, now has to file the U.S. tax return in
order to report their interests in specified foreign financial
assets.
At present, only individuals must file Form 8938; domestic entities
are not required to file Form 8938, although they remain subject to
the other numerous international information reporting forms.
Once the proposed regulations are finalized, certain domestic
entities will be required to file Form 8938. A U.S.
individual who is otherwise treated as the owner of a foreign trust
is not required to report any specified assets held by the foreign
trust provided the individual timely files Form 3520, the trust
timely files Form 3520-A, and the filing of those returns is
reported on the individual's Form 8938.
What Constitutes an "Interest": An
individual is considered to have an interest in a specified foreign
financial asset if any income, gains, losses, deductions, credits,
gross proceeds or distributions attributable to the holding or
disposition of such asset is or would be required to be reported by
the individual on a U.S. income tax return.
Reporting Thresholds; Valuation of Assets:
The temporary regulations increase the statutory reporting
threshold of $50,000 to $50,000 on the last day of the taxable
year, or $75,000 at any time during the taxable year for most
individuals. The threshold is further increased to $100,000
or $150,000 in the case of married individuals filing joint
returns, $200,000 or $300,000 for individuals who live abroad and
qualify under Section 911(d)(1), and $400,000 or $600,000 for
married individuals who live abroad, qualify under Section
911(d)(1) and file a joint return.
The reporting threshold is tested by valuing the specified foreign
financial assets at the end of the taxable year, and converting
foreign currency denominated assets into U.S. Dollars using the
U.S. Treasury Department's Financial Management Service
exchange rates. If the $50,000 threshold is met, then the
amount reported on Form 8938 is the maximum fair market value of
the asset at any time during the taxable year. Accordingly,
there are two separate valuation dates for each specified foreign
financial asset. If an asset is owned jointly with a person other
than that person's spouse, then the full value of that asset is
taken into account in determining whether the reporting thresholds
are met.
Duplicative Reporting: In order to avoid
duplicative reporting on other information returns, assets reported
on Form 3520, 5471, 8621, 8865 or 8891 need not be reported on Form
8938, although the individual must report on Form 8938 the number
of such other form filed by the individual.
Information to be Reported: Form 8938
requires that the name, address and account number, type of
account, and maximum value be reported for each interest in a
specified foreign financial asset. With respect to assets other
than foreign deposit or custodial accounts, the date the asset was
acquired or disposed of must also be reported as well.
Lastly, the income, deductions and credits resulting from each
asset must be separately reported on Form 8938 including a listing
of where those amounts were reported on the income tax return filed
by the individual.
Foreign Trusts and Estates: 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. If a person receives a distribution from the
foreign trust or estate, they are considered to have actual
knowledge of the interest. The maximum value of an interest
in a foreign trust is equal to the amounts actually received by the
individual during the taxable year plus the value on the last day
of the taxable year of any mandatory distributions. In the
case of foreign estates, pension plans and deferred compensation
plans, the maximum value is either the fair market value of
the individual's beneficial interest in such plan, or if the
individual does not know such information, then the value of the
amounts received from such plan during the taxable year.
Penalties; Statute of Limitations: A $10,000
penalty applies for failure to file a Form 8938; the penalty is
increased by an additional $10,000 (up to a maximum of $50,000) for
each 30 day period the failure continues for more than 90 days
after the IRS mails a notice of failure to file the Form. The
penalty will not be imposed if the failure to file was due to
reasonable cause and not willful neglect.
A separate accuracy related penalty applies if a person underpays
his or her U.S. tax liability as a result of a transaction which is
not disclosed on Form 8938. The amount of the penalty is 40% of the
underpayment.
If Form 8938 is not filed with the required U.S. income tax return,
or a specified foreign financial asset is not reported on a filed
Form 8938, then the statute of limitations remains open with
respect to the unreported assets until 3 years after the date a
Form 8938 reporting that asset is filed. In addition, if
amounts relating to one or more specified foreign financial assets
are not included in gross income, then the tax on that unreported
income can be assessed at any time with 6 years from the date the
income tax return was filed. This extends the normal 3 year
statute by an additional 3 years.
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.