Key Issue 39J: Reporting Foreign Assets

Transcription

1 Checkpoint Contents Key Issue 39J: Reporting Foreign Assets Reporting Foreign Financial Assets (Form 8938) A specified person must file Form 8938 (Statement of Specified Foreign Financial Assets) with Form 1040 if the person has an interest in one or more specified foreign financial assets and those assets have an aggregate fair market value (FMV) exceeding either $50,000 on the last day of the tax year or $75,000 at any time during the tax year or $100,000 and $150,000, respectively, for married specified individuals filing a joint annual return [Temp. Reg D-2T(a)]. Preparation Pointer: The Form 8938 filing requirement does not replace or otherwise affect a taxpayer's obligation to file Form TD F (Report of Foreign Bank and Financial Accounts) also known as the "FBAR" (IR ). See discussion later in this key issue for more information on the offshore bank account reporting (FBAR) requirements. See Table T303 for a side-by-side comparison of Form 8938 and Form TD F , along with a list of different types of assets and where they are reportable. A specified person includes any specified individual or a specified domestic entity if it is formed or availed of to hold specified foreign financial assets [IRC Sec. 6038D(f); Temp. Reg D-1T(a)(1)]. Generally, a specified individual is a U.S. citizen; a resident alien of the U.S. for any part of the tax year; a nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return; or a nonresident alien who is a bona fide resident of Puerto Rico, Guam, American Samoa, the rthern Mariana Islands, and the U.S. Virgin Islands [Temp. Regs D-1T(a)(2) and D-1T(a)(5)]. Preparation Pointer: Specified persons are not required to file Form 8938 for any tax year for which they are not required to file an annual return [Temp. Reg D-2T(a)(7)(i)]. Specified foreign financial assets are (1) depository or custodial financial accounts maintained at foreign financial institutions, and (2) to the extent not held in an account at a financial institution, (a) stocks or securities issued by foreign corporations, (b) any other financial instrument or contract held for investment that is issued by or has a

2 counterparty that is not a U.S. person, and (c) any interest in a foreign entity [IRC Sec. 6038D(b); Temp. Reg D-3T]. If the value of the specified foreign financial assets is more than the appropriate reporting threshold and no exception applies, taxpayers must file Form 8938 even if none of the specified foreign financial assets affect their tax liability for the tax year [Temp. Reg D-2T(a)(8)]. In general, a specified person has 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 the specified foreign financial asset are or would be required to be reported, included, or otherwise reflected by the specified person on an annual return. A specified person has an interest in a specified foreign financial asset even if no income, gains, losses, deductions, credits, gross proceeds, or distributions are attributable to the holding or disposition of the specified foreign financial asset for the tax year [Temp. Reg D-2T(b)(1)]. Generally, the determination as to whether a specific asset is a specified foreign financial asset depends on whether the asset is held directly by the client, in a financial account at a U.S. financial institution, or in a financial account at a foreign financial institution. A financial account that is held in a U.S. financial institution (including those held in a foreign branch of the institution) is not a specified foreign financial asset, nor are any of the assets it holds. On the other hand, if the financial account is held in a foreign financial institution (other than at a U.S. branch of that institution), the entire account is a specified foreign financial asset even if its contents include nonforeign (U.S.) investment assets. If the reporting threshold is met, the entire value of all the assets in the foreign account is reported on Part I of Form Individual assets held in the account are not specified foreign financial assets and are not reported separately in Part II of Form For Form 8938 purposes, the value of a specified financial asset is the asset's FMV. If the asset is denominated in foreign currency, it must be valued in the foreign currency and then converted to U.S. dollars using the U.S. Treasury Department's Financial Management Service foreign exchange rate for the last day of the year (even if the asset was disposed of before the end of the year) [Temp. Reg D-5T(c)]. This exchange rate can be found at Appraisals are not required to estimate the asset's FMV. Generally, reasonable estimates are allowed [Temp Reg D-5T(b)(1)]. See the Form 8938 instructions for guidance on valuing various assets. In determining whether the reporting threshold has been met, each owner of a joint interest in a specified foreign financial asset generally includes the asset's full FMV. However, for a married specified individual that files a separate return and whose spouse is a specified individual, the threshold determination includes only half of the FMV of assets jointly owned with his or her spouse [Temp. Reg D-2T(c)]. Married specified individuals who file a joint return file a single Form 8938 that reports all of the specified foreign financial assets in which either spouse has an interest. Specified foreign financial assets held by a child are

3 included in the parents' Form 8938 if the parents make a kiddie-tax election on Form 8814 (Parent's Election To Report Child's Interest and Dividends) to report the child's income on their joint return (see Key Issue 32D) [Temp. Regs D-2T(b)(2) and D-2T(c)(2)(i)]. A married specified individual who files a separate return files a separate Form 8938 that reports all of the specified foreign financial assets in which the married specified individual has an interest, including the full value of assets jointly owned with his or her spouse [Temp. Reg D-2T(c)(2)(ii)]. Example 39J-1: Filing requirement for an unmarried individual. Brenda is not married and does not live abroad. She sold her only specified foreign financial asset on October 15, 2013, when its value was $125,000. Brenda has to file Form 8938 since she satisfies the reporting threshold. Even though she does not hold any specified foreign financial assets on the last day of the tax year, she did own specified foreign financial assets of more than $75,000 during the tax year. Example 39J-2: Filing requirement for joint filers. Mark and Julie file a joint income tax return and do not live abroad. They jointly own a single specified foreign financial asset valued at $60,000. They do not have to file Form 8938 because they do not meet the reporting threshold 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. Caution: A specified person who fails to provide required information for any tax year is subject to a penalty of up to $10,000 [Temp. Reg D-8T(a)]. A failure continuing for more than 90 days after the day on which the IRS mails a notice of the failure to the specified person subjects the specified person to an additional penalty of $10,000 for each 30 day period (or fraction thereof) during which the failure continues after the 90 day period has expired, up to a maximum penalty of $50,000 for each such failure [IRC Sec. 6038D(d); Temp. Reg D-8T(c)]. penalty applies if the failure was due to reasonable cause and not willful neglect [Temp. Reg D-8T(e)]. Also, unless there is reasonable cause, failure to file Form 8938 (or include a specified foreign financial asset required to be reported on Form 8938) causes the statute of limitations for the tax year to remain open for all or a part of the income tax return until three years after the date the Form 8938 is filed [IRC Sec. 6501(c)(8)].

4 Filing Requirements for Individuals Living AbroadHigherreporting thresholds apply to a taxpayer living abroad, i.e., whose tax home is in a foreign country and who is (1) a U.S. citizen who has been a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year, or (2) a U.S. citizen or resident who is present in a foreign country at least 330 full days during any period of 12 consecutive months that ends in the tax year being reported [IRC Sec. 911(d)(1)]. A taxpayer living abroad who does not file a joint return satisfies the reporting threshold if the total value of his or her specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year [Temp. Reg D-2T(a)(3)]. A married taxpayer living abroad who files a joint income tax return satisfies the reporting threshold only if the total value of all specified foreign financial assets either spouse owns is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year [Temp. Reg D-2T(a)(4)]. Reporting Foreign Bank and Financial Accounts U.S. persons, which include U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest of at least $10,000 at any time during the calendar year in foreign financial accounts, are required to report the interest in the applicable account on Form TD F (Report of Foreign Bank and Financial Accounts), also known as "FBAR." te: The FBAR form and Form 8938 are easily confused. They are used to report similar, sometimes the same, and sometimes different information. Essentially, Form 8938 reports foreign financial assets whereas the FBAR reports foreign financial accounts; the term assets is generally broader than accounts. The FBAR is not filed with the taxpayer's Form 1040; it is filed with the U.S. Department of the Treasury separately from the Form 1040 and must be received (not filed) by June 30 (no extensions) of the following year. Effective July 1, 2013, FBARs must be filed electronically (according to the IRS website). A taxpayer is considered to have an interest in an account if the taxpayer has either a financial interest in the account or signature authority over the account. A taxpayer has a financial interest in an account if the taxpayer (including the taxpayer's agent or representative) is the owner of record or holder of legal title, or has a sufficient interest in the entity that is the owner of record or holder of legal title. A taxpayer has signature authority over an account if the taxpayer has authority to control the disposition of the assets in the account by direct communication with the financial institution maintaining the account.

5 te: The IRS is authorized under the Internal Revenue Code to use taxpayer information obtained in a prior tax investigation to open an FBAR investigation (Hom). For purposes of determining the account values for reporting, taxpayers must use periodic account statements to determine the maximum value in the currency of the account. Then they must convert that amount to U.S. dollars using the U.S. Treasury Department's Financial Management Service foreign exchange rate for the last day of the year. This exchange rate can be found at Caution: A taxpayer who fails to report the required information for any tax year is subject to a penalty of up to $10,000 if the failure is not due to willful neglect. If the failure is willful, the penalty can be up to the greater of $100,000 or 50% of the account balance; criminal penalties may also apply. See Table T303 for a side-by-side comparison of Form 8938 and Form TD F , along with a list of different types of assets and where they are reportable Thomson Reuters/PPC. All rights reserved Thomson Reuters/Tax & Accounting. All Rights Reserved.

6 TABLE T303: Reporting Foreign Assets (See Key Issue 39J) Comparing Forms 8938 and TD F Form 8938, Statement of Specified Foreign Financial Assets Form TD F , Report of Foreign Bank and Financial Accounts (FBAR) Who Must File? Specified individuals, which include U.S citizens, resident aliens, and certain nonresident aliens who have an interest in specified foreign financial assets and meet the reporting threshold. U.S. persons, which include U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold. Does the United States include U.S. territories?., resident aliens of U.S. territories and U.S. territory entities are subject to FBAR reporting. Reporting Threshold (Total Value of Assets) If living in the U.S., $50,000 ($100,000 if $10,000 at any time during the calendar MFJ) on the last day of the tax year or year. $75,000 ($150,000 if MFJ) at any time during the tax year. Higher threshold amounts apply to individuals living abroad. (See Key Issue 39J.)

7 When Does a Taxpayer Have an Interest in an Account or Asset? If any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included or otherwise reflected on the taxpayer's income tax return. Financial interest: Taxpayer is the owner of record or holder of legal title; the owner of record or holder of legal title is the taxpayer's agent or representative; taxpayer has a sufficient interest in the entity that is the owner of record or holder of legal title. Signature authority: Taxpayer has authority to control the disposition of the assets in the account by direct communication with the financial institution maintaining the account. What Is Reported? Maximum value of specified foreign financial assets, which include financial accounts with foreign financial institutions and certain other foreign nonaccount investment assets. Maximum value of financial accounts maintained by a financial institution physically located in a foreign country. Determining and Reporting Account and Asset Values FMV in U.S. dollars in accord with the Form 8938 instructions for each account and asset reported. Convert to U.S. dollars using the end of the taxable year exchange rate and report in U.S. dollars. Use periodic account statements to determine the maximum value in the currency of the account. Convert to U.S. dollars using the end of the calendar year exchange rate and report in U.S. dollars. When and How to File By due date, including extension, if any, for income tax return. Attach form to income tax return. Treasury must receive the form by June 30 of the following year (no extensions). Form filed separately from tax return.

8 Penalties Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of nonfiling after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply. If nonwillful, up to $10,000; if willful, up to the greater of $100,000 or 50% of account balances; criminal penalties may also apply. Types of Foreign Assets and Whether They Are Reportable Asset Form 8938 FBAR Financial (deposit and custodial) accounts held at a foreign financial institution (includes savings, checking, and brokerage) Financial account held at a foreign branch of a U.S. financial institution Financial account held at a U.S. branch of a foreign financial institution Foreign financial account for which taxpayer has signature authority, unless taxpayer otherwise has an interest in the account as described above, subject to exceptions

9 Foreign stock or securities held in a financial The account itself is subject account at a foreign financial institution to reporting, but the contents of the account do not have to be separately reported The account itself is subject to reporting, but the contents of the account do not have to be separately reported Foreign stock or securities not held in a financial account Foreign partnership interests Indirect interests in foreign financial assets through an entity, if sufficient ownership or beneficial interest (greater than 50% interest) in the entity Foreign mutual funds Domestic mutual fund investing in foreign stocks and securities Foreign accounts and foreign nonaccount investment assets held by foreign or domestic grantor trust for which the taxpayer is the grantor, as to both foreign accounts and foreign nonaccount investment assets, as to foreign accounts Foreign-issued life insurance or annuity contract with a cash-value Foreign hedge and private equity funds

10 Foreign real estate held directly Foreign real estate held through a foreign entity, but the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate Foreign currency held directly Precious metals held directly Personal property, held directly, such as art, antiques, jewelry, cars, and other collectibles Social security-type program benefits provided by a foreign government te: This is not an all-inclusive list. See respective form instructions for additional assets or search for "foreign asset reporting" at Thomson Reuters/PPC. All rights reserved Thomson Reuters/Tax & Accounting. All Rights Reserved.