Congress and the IRS have determined that taxpayers need yet an
additional form to file in order to report foreign held assets. This
latest filing requirement will add to the Form TD F 90-22.1 - Report of Foreign Bank and Financial Accounts (FBAR), Form 8865 - Return of U.S. Persons With Respect to Certain Foreign Partnerships, Form 5471 - Information Return of U.S. Persons With Respect To Certain Foreign Corporations, and
the plethora of other foreign asset reporting requirements. Holding
foreign assets has never been more difficult and potentially very costly
from a tax perspective.
As part of the Hiring Incentives to Restore Employment (HIRE) Act, The Foreign Account Tax Compliance Act (FATCA) was
enacted March 18, 2010. The IRS states that "The Foreign Account Tax
Compliance Act (FATCA) is an important development in U.S. efforts to
improve tax compliance involving foreign financial assets and offshore
accounts." In order to implement the reporting requirements under FATCA
the IRS has just recently released the final Form 8938.
Although FATCA has been in effect since enactment in 2010, its
implementation has been delayed until the final form was published. As
such, the 2011 tax return is the first return that will require this
form to be attached.
The Form 8938 increases the scope of reportable assets and persons
required to report foreign assets. For instance, certain private equity
assets held through hedge funds that were exempted under the FBAR rules
will now have to be reported on the Form 8938. Section 511 of FATCA
creates a new IRC code section, Section 6038D. This code section sets
forth the threshold filing requirements. Additionally, the IRS has
published guidance on their website on who will be required to file the Form 8938.
Generally, you must file a Form 8938 if you are a specified individual. A specified individual is defined as:
- A U.S. citizen;
- A resident alien of the United States for any part of the tax year (see Pub. 519 for more information);
- A nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return; or
- A nonresident alien who is a bona fide resident of American Samoa or
Puerto Rico (See Pub. 570 for definition of a bona fide resident) and
- Any such person holds an interest in a specified foreign financial asset required to be reported.
A specified foreign financial asset is defined as:
- Any financial account maintained by a foreign financial institution, (with some exceptions)
- Other foreign financial assets held for investment that are not in
an account maintained by a US or foreign financial institution, namely:
- Stock or securities issued by someone other than a U.S. person
- Any interest in a foreign entity, and
- Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person.
It should be noted that this will not encompass international equity
assets held in a US-based mutual fund or issued through a US broker.
Though, it ostensibly would apply to a non-US based mutual fund or
There are filing thresholds such that not everyone that qualifies above will have to file this form. For unmarried taxpayers living in the US,
the threshold will be if the total value of all 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. For married taxpayers filing a joint income tax return and living in the US,
the threshold will be if the total value of all 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. For married taxpayers filing separate income tax returns and living in the US, the
threshold will be if total value of all 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.
There are special rules if you are a US taxpayer living abroad. These
rules need to be reviewed carefully as they set forth a different
standard of residency than found elsewhere in the IRC and regulations.
Under the FATCA rules, a person is a taxpayer living abroad if:
- You are a U.S. citizen whose tax home is in a foreign country and
you are either a bona fide resident of a foreign country or countries
for an uninterrupted period that includes the entire tax year, or
- You are a US citizen or resident, who during a period of 12
consecutive months ending in the tax year is physically present in a
foreign country or countries at least 330 days.
Note the second definition for US citizens living abroad and not
qualifying under the first definition - you will have a requirement to
file if you are present in the US for more than 35 days (or 36 this
year). For US citizens living abroad, this could catch a few persons
The thresholds are also different for a taxpayer living abroad with a
filing requirement. The IRS states that you will be required to report
- You are filing a return other than a joint return and the
total value of your 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
- You are filing a joint return and the value of your
specified foreign asset is more than $400,000 on the last day of the
tax year or more than $600,000 at any time during the year.
FATCA also added, as would be expected, draconian penalties similar
to the FBAR penalties. IRC § 6662 allows the IRS to impose a 20% penalty
on a substantial understatement of income tax for negligence and other
non-fraudulent behavior. FATCA amended this section and added a
potential penalty of 40% for any underpayment attributable to financial
assets required to be disclosed pursuant to IRC § 6038D. Additionally,
there is a stiff failure to file penalty of $10,000.00 for failing to
file by the required filing date for the tax return. After being
notified of the failure to file, the taxpayer will be fined an
additional $10,000.00 for each 30 day period during which they fail to
file the return (capped at $50,000.00).
Additionally, FATCA has extended the statute of limitations with
respect to returns which contained errors in the filing of the Form
8938. Generally, if all the tax is paid and a Form 8938 filed timely,
the statute of limitations will remain at the usual 3 year period.
However, if a Form 8938 is not filed, the statute of limitations will
not start to run on any income attributable to assets which should have
been reported on the form. Even after filing the Form 8938 and paying
the tax due, the statute of limitations which respect to the form and
the tax liability attributable thereto will be extended to 6 years if
the amount of under-reporting of income from the reportable foreign
assets was greater than $5,000.00.
This tax season it is imperative to alert your tax professional if
you have foreign held assets. Even if you consider them exempt from
reporting, it best to let your tax preparer know about those assets. The
penalties for improper reporting are quite severe and therefore foreign
assets warrant increased attention.
My name is Christopher James. I practice corporate law and tax law at
Davis Brown Law Firm. I focus mainly on tax controversy matters with
both state and local governments and the IRS. I have a BS in accounting
from the University of North Carolina-Greensboro, a J.D. from Drake
University, and a LL.M in taxation from Northwestern University.