Are You Ready For New Form 8938 to Report Specified Foreign Financial Assets? The Hiring Incentives to Restore Employment ( HIRE ) Act, signed into law in 2010, included modified provisions of the previously proposed Foreign Account Tax Compliance Act of 2009 ( FATCA ). These provisions involve two broad categories of tax compliance: reporting by foreign financial institutions on accounts held by U.S. persons, and reporting by U.S. individuals on specified foreign financial assets. It is the latter category that led to the new Form 8938 Statement of Specified Foreign Financial Assets, to be filed in 2012 as part of an individual s 2011 federal income tax return. Unlike Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts ( FBAR ), which is filed with the U.S. Treasury by June 30 of each year to report on accounts with respect to the previous calendar year, IRS Form 8938 is part of an individual s federal income tax return. What follows is a general summary of the basics, comparing the two reporting obligations, along with some examples illustrating the rules. A tax advisor should be consulted about the specifics of any filing requirements and the information to be reported. FBAR (Form TD F 90-22.1) FATCA (IRS Form 8938) WHO has responsibility to file? U.S. persons: U.S. individuals (including resident Specified persons including specified individuals aliens), as well as corporations, partnerships, (U.S. citizens and a resident alien of the U.S. for trusts, estates, limited liability companies (including any part of the tax year, including a nonresident entities disregarded for U.S. tax purposes) created alien electing to be treated as a resident of the U.S. or organized in the U.S. or under U.S. law. for purposes of filing a joint return). Specified domestic entities do not need to report for the 2011 tax year but may need to report for subsequent years. Financial interest or signature authority over a foreign financial account if the aggregate value of accounts exceeds $10,000 at any time during 2011. A financial interest includes a person s direct interest, as well as any indirect interest in a foreign financial account through a corporation (more than 50% of voting power or value) or partnership (more WHAT is being reported? Any interest in a specified foreign financial asset if the total value of such assets exceeds the applicable threshold: Single or Married Filing Separately: $50,000 on the last day of the taxable year or $75,000 at any time during the year. Married filing jointly: $100,000 on the last day of the year or $150,000 at any time during the year. If resident outside the U.S., the $50,000 and $75,000 thresholds are increased to $200,000 and $300,000, respectively. The $100,000 and $150,000 thresholds are increased to $400,000 and $600,000 respectively. There are two types of specified foreign financial assets: (1) Any financial account maintained by a foreign financial institution (including bank accounts, 1
than 50% of profits or capital), a trust (as the grantor or as a beneficiary with a greater than 50% beneficial interest). A foreign financial account is an account maintained with a financial institution outside the U.S. and includes a checking, savings, demand, deposit, securities, or brokerage account as well as shares in a mutual fund or similar pooled fund. An insurance policy or annuity policy with a cash value is also included in the definition. FBAR must be received by the U.S. Treasury on or before June 30, 2012. The Treasury has indicated that the postmark date is not considered the filing date; rather the FBAR must be received by Treasury on or before the due date. Because June 30 falls on a Saturday in 2012, it is recommended to arrange for delivery to U.S. Treasury no later than June 29, 2012. U.S. Mail: Department of the Treasury PO Box 32621 Detroit, MI 48232-0621 Private delivery service: IRS Enterprise Computing Center ATTN: CTR Operations Mailroom, 4 th Floor 985 Michigan Avenue Detroit, MI 48226 The Bank Secrecy Act of 1970 authorized the U.S. Treasury to issue regulations requiring U.S. persons to keep records and file reports concerning transactions with foreign financial agencies. Authority was delegated to the Financial Crimes WHEN is it due? WHERE is it filed? WHY is there a requirement to file? foreign mutual funds, foreign hedge funds, foreign private equity funds). (2) To the extent held for investment and not included in (1), any stock or securities issued by a non-u.s. person, any interest in a foreign entity (e.g., company, partnership, trust, or estate), any financial instrument or contract with an issuer or counterparty that is not a U.S. person including any interest in a foreign pension plan or foreign deferred compensation plan. A person has an interest in a specified foreign financial asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions attributable to holding or disposing of the asset would be required to be reported, included, or otherwise reflected on the person s annual return, even if it generates no income in the year for which the asset is being reported. Treasury Regulations and Form 8938 contain detailed rules on what information to report about each asset on Parts I and II of the form, including the value of assets denominated in foreign currency. Part III of Form 8938 requires reporting of tax items (e.g., income, gains, losses, deductions) attributable to specified foreign financial assets with respect to both foreign financial accounts and other foreign financial assets. It is likely that fulfilling this reporting requirement and tracing specific tax items will be one of the most time consuming aspects of completing Form 8938. Form 8938 is included with the annual return of the person obligated to report. The due date is that of the person s annual income tax return. If a person is not required to file an income tax return, Form 8938 does not have to be filed, even if the value of specified foreign financial assets exceeds the appropriate threshold. IRS Service Center where taxpayer files his or her applicable annual return. The HIRE Act included new IRC 6038D. Treasury Regulations related to that Code section were issued in December of 2011, when Form 8938 was published. 2
Enforcement Network ( FinCEN ) in 1994, whose updated regulations in February of 2011 formed the basis for the FBAR form currently in use (issued in March of 2011). The FBAR is filed by each U.S. person having an interest (direct or indirect) in or signature authority over the foreign financial account. Some opportunities to eliminate duplicate filings are available for assets jointly held and for indirect interests in accounts involving multiple U.S. persons. The Treasury has announced optional electronic filing and has posted instructions on its website.* Nonwillful violations are subject to a $10,000 penalty. The civil penalty for willful failure to file is up to $100,000 or 50% of the balance in the account. Criminal penalties may also apply. HOW to report? WHAT IF there is a failure to file? Form 8938 is filed with the annual income tax return for each specified U.S. individual holding an interest in specified foreign financial assets. To the extent that information about assets is reported on other forms filed by the taxpayer, such as 3520, 5471, 8621, or 8865, the specified foreign financial asset is not reported again on Form 8938 but Part IV of that form must still be completed. There is a $10,000 penalty with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40% accuracy- related penalty on unreported income from undisclosed foreign financial assets may also apply. It is important to review completely the filing requirements for both the FBAR and Form 8938 as some persons may be required to file only one of the forms while some persons may have to file both or may have no filing requirement at all. The following are examples illustrating the differences in the filing requirements for the two forms (assuming the financial thresholds for each have been exceeded and that the assets described in each example are the only foreign assets involved). 1. Individual A has signature authority but no financial interest in foreign financial accounts owned by foreign subsidiaries of the privately-held U.S. corporation for which he works. A has to file the FBAR but would not have to file Form 8938 with regard to those accounts because he holds no financial interest in the accounts. 2. Individual B and his wife, who reside in the U.S., have invested $200,000 in a resort property in a foreign country. To pay bills related to the property, B opened a checking account at a bank in the foreign country but the balance has never exceeded US$5,000. B will not have to file Form 8938 to report the resort property because it is not a specified foreign financial asset. While the bank account is a specified foreign financial asset, it is B s only such asset and its value has not exceeded the threshold for reporting on Form 8938. In the alternative, if B holds the resort property through a foreign limited liability company, B would file Form 8938 to report the shares of that foreign company and the checking account as specified foreign financial assets because the aggregate value of the specified foreign financial assets, $205,000, exceeds the threshold for reporting. B has no requirement to file the FBAR because the value of the checking account has not exceeded the threshold of $10,000. 3. Individual C owns an 80% interest in the capital and profits of a partnership formed under foreign law and engaged in an active trade or business in a foreign country where C is actively involved in the business. C is required to report the foreign financial accounts of the partnership on an FBAR because he is considered to have a financial interest in the accounts owned by the partnership he controls. He would not report those accounts on Form 8938, provided that his interest in them is 3
solely as a result of his status as a partner in the partnership. Because the partnership is engaged in an active trade or business and C reports about it on a Form 8865 included with his annual income tax return, C s interest in the partnership would be reported in Part IV of Form 8938 indicating he has reported about the partnership on Form 8865. 4. Individual D owns 100% of a U.S. S corporation that has set up a Texas limited liability company to operate a branch in a foreign country where that company has a bank account. The Texas limited liability company is treated as a disregarded entity for U.S. federal income tax purposes. D s S corporation may have to file Form 8938 as a specified domestic entity in future years, but not for 2011, to report the foreign financial account held through the Texas limited liability company/disregarded entity. For FBAR purposes, the Texas limited liability company will have a filing requirement (even though it is disregarded for federal income tax purposes). D as well as the S corporation will also have to file the FBAR to report their indirect interests in the bank account of the Texas limited liability company (although the Texas limited liability company may be able to file a consolidated FBAR with the S corporation). 5. Individual E has invested in a private equity fund, organized as a partnership outside the U.S., which invests in green energy projects in developing countries. E s interest in the fund is less than 1%. Under the 2011 rules clarifying FBAR filing requirements, the private equity fund is not considered a foreign financial account if it is not a pooled fund that is available to the general public with a regular net asset value determination and regular redemptions. Because E s interest is 50% or less in the fund, he is not considered to have a financial interest in any foreign financial accounts of the fund and does not have to file an FBAR to report about them. However, E must report his investment in Part I of Form 8938 as a foreign financial account because investment vehicles such as foreign private equity funds are included in the definition of a foreign financial institution for purposes of reporting a financial account maintained by a foreign financial institution. 6. Individual F is a resident alien, for U.S. federal income tax purposes, whose relatives all reside in a foreign country. To help his cousin start a new business in the foreign country, F loaned him $100,000 in 2011 and wired that amount from F s U.S. bank account to his cousin s bank account in the foreign country after his cousin signed a promissory note. F did not acquire any interest in his cousin s business. Because F has no financial interest in the foreign bank account of his cousin and has acquired no interest in his cousin s business (which has its own foreign bank accounts), F has no requirement to file an FBAR. However, because a foreign person, F s cousin, is a party to the contract, F is required to file Form 8938 to report the promissory note as a specified foreign financial asset. 7. Individual G is a citizen of a foreign country but is a resident alien of the U.S. on a long-term assignment as an employee of the U.S. subsidiary of a foreign, publicly traded parent company. G has always contributed to the deferred compensation plan offered by the foreign parent company but is not yet eligible to take distributions from the plan. The interest G has accumulated in the foreign deferred compensation plan is a specified foreign financial asset that G must report on Form 8938. The rules enacted by the HIRE Act add a new level of complexity to identifying, tracking, and valuing specified foreign financial assets, and the tax items attributable to them, for purposes of reporting on new Form 8938. The foregoing is not a comprehensive analysis of all the types of assets that may need to be reported and so U.S. persons should consult their tax advisors about obligations in their cases. For more information on FBAR and Form 8938, contact Meril Markley (mmarkley@uhy-us.com) or Mesa Hodson (mhodson@uhy-us.com). 4
*http://www.fincen.gov/news_room/nr/html/20110717.html The statements contained herein are provided for information purposes only, are not intended to constitute tax advice which may be relied upon to avoid penalties under any federal, state, local or other tax statutes or regulations, and do not resolve any tax issues in your favor. Furthermore, such statements are not presented or intended as, and should not be taken or assumed to constitute, legal advice of any nature, for which advice it is recommended that you consult your own legal counselors and professionals. 5