New Reporting Requirement for Foreign Bank Accounts and Assets

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1 TAX & BUSINESS PLANNING IN THE NEWS February 2012 New Reporting Requirement for Foreign Bank Accounts and Assets A Polsinelli Shughart Update What is a Foreign Financial Asset Who Must File... 2 Filing Thumbnails Penalties 3 Other Information Conclusion 4 T he new foreign financial asset reporting requirement was enacted in 2010 as part of the Foreign Asset Tax Compliance Act, or FATCA, which was included in the HIRE Act of The primary objectives of FATCA were to improve tax compliance by U.S. taxpayers with offshore foreign financial accounts and assets. The IRS initially suspended the reporting requirement pending the issuance of regulations and the release of IRS Form The IRS released Form 8938 and corresponding instructions on December 20, 2011, less than one week after the IRS issued temporary and proposed regulations covering the reporting requirement. Accordingly, there is a Form 8938 filing obligation with respect to 2011 tax returns for certain individuals who meet the requirements. Code Section 6038D and the regulations there under provide the framework for the Form 8938 reporting requirement. A Form 8938 is required for certain taxpayers that have an interest in specified foreign financial assets where the aggregate value of such assets exceed the applicable filing threshold. Below we describe the types of foreign financial assets subject to the new reporting requirement, the affected taxpayers and applicable filing thresholds. Chicago Dallas Denver Edwardsville Jefferson City Los Angeles New York Overland Park Phoenix St. Joseph St. Louis Springfield Topeka Washington DC Wilmington DE Redefining the Business of Law SM

2 TAX & BUSINESS PLANNING IN THE NEWS What is a Foreign Financial Asset Specified foreign financial assets include bank accounts and other financial accounts maintained with foreign financial institutions and certain other foreign financial assets or instruments. Foreign financial accounts maintained in U.S. possessions (American Samoa, Guam, the Northern Mariana Islands, Puerto Rico or the U.S. Virgin Islands) are treated as foreign financial accounts for these purposes. person counterparty; or 3) certain interests in a foreign entity (i.e. foreign trusts, foreign partnerships). For this purpose, 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 asset are or would be required to be reported, included, or otherwise reflected on the person s annual return filed with the IRS, regardless of whether any such items are attributable to the asset for a particular tax year. The definition of a specified foreign financial asset is broad. The term includes any depository, custodial or other financial account maintained by a foreign financial institution. This includes investments in foreign mutual funds, foreign hedge funds and foreign private equity funds. The term foreign financial institutions generally includes non-u.s. financial institutions; however, financial institutions organized under the laws of the U.S. possessions identified above are included. Significantly, accounts maintained by U.S. payors (and assets held in such accounts) are excepted from the reporting requirement. Included within the definition of U.S. payor are U.S. persons, such as brokerage houses (including a foreign branch or office of such person) and U.S. branches of foreign banks and insurers. Foreign investments held through certain U.S. payors should not be subject to the reporting requirement nor should they be taken into account for purposes of determining whether the taxpayer satisfies the filing thresholds detailed below. Who Must File The reporting requirement applies to a specified person, generally defined under Code Section 6038D to include specified individuals who are U.S. citizens or resident aliens or certain nonresident aliens. In addition, certain residents of U.S. territories may be subject to the Form 8938 reporting requirement if such residents are required to file a federal income tax return for the year. The reporting requirement also applies to domestic entities; however, until regulations in this regard are finalized, no domestic entity is subject to the Form 8938 reporting requirement. Accordingly, for the 2011 tax filing season, only individuals should be subject to the Form 8938 filing requirement. Included within the other foreign financial asset category identified above are investment assets not held in an account maintained by a financial institution that consists of: 1) certain stock or securities issued by a foreign person; 2) certain financial instruments or contracts issued by a foreign person or that has a foreign Page 2 of 6

3 TAX & BUSINESS PLANNING IN THE NEWS Filing Thumbnails The filing thresholds vary depending on whether an individual lives in the United States or files a joint income tax return with his or her spouse: Marital Status Filing Status Where Living Value of Foreign Financial Assets Unmarried Single United States Greater than (i) $50,000 on last day of tax year or (ii) $75,000 at any time during tax year. Married Joint United States Greater than (i) $100,000 on last day of tax year or (ii) $150,000 at any time during tax year. Married Filing Separate United States Greater than (i) $50,000 on last day of tax year or (ii) $75,000 at any time during tax year. Unmarried Single Abroad Greater than (i) $200,000 on last day of tax year or (ii) $300,000 at any time during tax year. Married Joint Abroad Greater than (i) $400,000 on last day of tax year or (ii) $600,000 at any time during tax year. Married Filing Separate Abroad Greater than (i) $200,000 on last day of tax year or (ii) $300,000 at any time during tax year. Code Section 6038D and the regulations provide rules for calculating value for purposes of whether the aggregate value of a foreign financial asset exceeds the applicable reporting threshold. Generally the value is fair market value; however, assets with negative values should be treated as having zero value. There are special rules for hard to value assets such as interests in foreign trusts, interests in a foreign estate, foreign pension plan, foreign deferred compensation plan, or joint interests. Penalties A failure to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. Page 3 of 6

4 TAX & BUSINESS PLANNING IN THE NEWS A 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed. In addition, criminal penalties may apply. Other Information There are certain assets that are exempt from the Form 8938 reporting requirement and various other reporting exceptions that may be applicable. In addition, if a taxpayer does not have an income tax return requirement for the tax year, he or she is not required to file Form 8938, even if the value of the taxpayer s specified foreign financial assets exceeds the applicable reporting threshold The new Form 8938 reporting requirement does not replace or otherwise affect a taxpayer s obligation with respect to FBAR filings on Form TD F Report of Foreign Bank and Financial Accounts. Accordingly, if required, both forms must be filed. For More Information If you would like to discuss any of the items covered in this e-alert, or discuss other matters, please contact one of the members of the Tax & Business Planning group listed below: Susan F. Klein sklein@polsinelli.com William J. Sanders wsanders@polsinelli.com J. Harlan Stamper hstamper@polsinelli.com Eric R. Edwards eedwards@polsinelli.com D. Scott Lindstrom slindstrom@polsinelli.com Conclusion The rules and regulations regarding the Form 8938 reporting requirement are new and complex. As noted, failure to properly file the Form 8938 may result in significant penalties. If you have any foreign bank accounts or other foreign financial assets, we recommend that you contact a Polsinelli Shughart tax attorney or your current tax advisor well in advance of the filing deadline for your personal income tax return so that the necessary information may be compiled and your particular facts and circumstances may be reviewed in order to assist you in the filing of the Form 8938 on a timely basis. For other e-alerts dealing with foreign bank account and asset reporting, please click the following link: Page 4 of 6

5 TAX & BUSINESS PLANNING ATTORNEYS About our Tax and Business Planning Group The Tax and Business Planning practice group provides these e-alerts periodically to keep our clients, taxpayers and businesses updated on recently adopted legislation and key changes in tax laws. We intend to provide these alerts to you as new developments warrant. This Tax Alert focuses on a variety of issues impacting businesses and individuals at the federal and state level. If you have questions about any of the information contained in this e-alert, please contact your legal or tax advisor or a member of the Polsinelli Shughart PC Tax & Business Planning practice group at All companies, organizations and individuals can expect to encounter issues in the tax arena. The Tax Group of Polsinelli Shughart PC provides creative solutions and legal guidance on international, federal, state and local tax laws to entities in all major industries and tax status classifications. Our attorneys partner with our clients to develop business solutions for both shortterm and long-term planning. The Tax Group s strong reputation is built on its skills in sound and effective planning, in-depth analysis and favorable resolutions and outcomes, particularly in complex tax matters involving diverse businesses. Our attorneys pride themselves on innovative thinking and expertise in structuring business formation, combinations, reorganizations, mergers and acquisitions, and liquidations in the most tax-advantageous manner. To learn more about our services, visit us online at William J. Sanders, Chair wsanders@polsinelli.com David N. Zimmerman Vice-Chair Overland Park dzimmerman@polsinelli.com Christopher S. Abrams cabrams@polsinelli.com John F. Crawford jcrawford@polsinelli.com Erik R. Edwards eedwards@polsinelli.com Virginia C. Gross vgross@polsinelli.com Susan F. Klein Chicago sklein@polsinelli.com D. Scott Lindstrom Overland Park slindstrom@polsinelli.com Lauren K. Mack Chicago lmack@polsinelli.com S. Patrick O Bryan pobryan@polsinelli.com William B. Prugh wprugh@polsinelli.com Thomas J. Schenkelberg tschenkelberg@polsinelli.com J. Harlan Stamper hstamper@polsinelli.com Tommy W. Taylor ttaylor@polsinelli.com Carl R. Desenberg St. Louis cdesenberg@polsinelli.com Page 5 of 6

6 TAX & BUSINESS PLANNING ABOUT About Polsinelli Shughart With 570 attorneys, Polsinelli Shughart is a national law firm that is a recognized leader in the areas of business law, financial services, real estate and business litigation. Serving corporate, institutional and individual clients, Polsinelli Shughart is redefining the business of law by sharing ideas, goals and outcomes with its clients. The firm builds enduring relationships by creating value through legal services with passion, ingenuity and a sense of urgency. The firm can be found online at Polsinelli Shughart PC. In California, Polsinelli Shughart LLP. About This Publication If you know of anyone who you believe would like to receive our updates, or if you would like to be removed from our e-distribution list, please contact Therese O Shea via at toshea@polsinelli.com. Polsinelli Shughart provides this material for informational purposes only. The material provided herein is general and is not intended to be legal advice. Nothing herein should be relied upon or used without consulting a lawyer to consider your specific circumstances, possible changes to applicable laws, rules and regulations and other legal issues. Receipt of this material does not establish an attorney-client relationship. Polsinelli Shughart is very proud of the results we obtain for our clients, but you should know that past results do not guarantee future results; that every case is different and must be judged on its own merits; and that the choice of a lawyer is an important decision and should not be based solely upon advertisements. Polsinelli Shughart PC. In California, Polsinelli Shughart LLP. Polsinelli Shughart is a registered trademark of Polsinelli Shughart PC. Page 6 of 6