Ready or Not - Foreign Asset Reporting is Here!

On December 16, 2011, the Internal Revenue Service issued temporary and proposed regulations relating to provisions that require foreign financial assets to be reported to the IRS for tax years beginning after March 18, 2010. The actual proposed and temporary regs provide that:

1. The foreign asset reporting requirement applies to individuals required to file 1040 or 1040-NR and to domestic entities, although only the individual form, Form 8938, is available now.

2. The taxpayer characteristics for the filing is in some respects more favorable, than the statute.

a. Unmarried taxpayers living in the US: The total value of specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year

b. Married taxpayers filing a joint income tax return and living in the US: The total value of specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year

c. Married taxpayers filing separate income tax returns and living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

d. Taxpayers living abroad.

i. Status is other than a joint return and the total value of specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or

ii. Married filing joint return and the value of specified foreign assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year. These thresholds apply even if only one spouse resides abroad.

e. Married individuals who file a joint annual return for the taxable year will file a single Form 8938 that reports all of the specified foreign financial assets in which either spouse has an interest.

3. Assets Covered. 

a. Both foreign financial and non-financial assets are covered.

b. Exceptions from reporting are made for assets reported on certain other tax forms. These include: Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, or Form 8891. The value of specified foreign financial assets reported on these forms are included in determining the total value of assets for Form 8938 purposes, but the assets do not need to be reported on Form 8938. In this situation, the taxpayer identifies on Form 8938 which and how many of these form(s) report the specified foreign financial assets.

c. A beneficial interest in a foreign trust or a foreign estate is not a specified foreign financial asset of a specified person unless the specified person knows or has reason to know of the interest.

d. For Section 6038D purpose, an individual has an interest in the financial account if potential tax attributes or transactions related to the account would be reported on the individual’s tax return. The concept of signature authority does not apply for Section 6038D purposes.

4. Noncompliance.

a. Taxpayers required to file Form 8938 who do not are subject to penalties – a $10,000 failure to file penalty, an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40 percent penalty on an understatement of tax attributable to non-disclosed assets.

b. The statute of limitations is extended to six years after a taxpayer’s return is filed if the taxpayer omits $5,000 from gross income attributable to a specified foreign financial asset, without regard to the reporting threshold or any reporting exceptions.

c. If the taxpayer fails to file or properly report an asset on Form 8938, the statute of limitations for the taxable year is extended until the taxpayer provides the required information. If the failure is due to reasonable cause, the statute of limitations is extended only with regard to the item or items related to such failure and not the entire tax year.


5. FBAR filing is required.

6. Entity filing is required pursuant to the proposed regs. There is no form yet to make the filing.