Financial Services Insights - Nov 2011 - IRS Issues Draft Form 8938 (Statement of Specified Foreign Financial Assets)

Edo PollackOn June 21, 2011, the IRS released their latest draft of Form 8938, Statement of Specified Foreign Financial Assets. The reporting requirements thus far apply only to specified individuals and not partnerships or corporations. The IRS anticipates issuing regulations or other guidance that will require a U.S. entity to file Form 8938 if the entity is formed or availed of to hold specified foreign financial assets and the value of those assets exceeds the appropriate reporting threshold. Upon completion of a final draft of the form, reporting will need to be done for tax years beginning after March 18, 2010. It is important to note that Form 8938 does not relieve a taxpayer of the requirement to file Form TDF 90-22.1 (Report of Foreign Bank and Financial Accounts).

Per the draft instructions, Form 8938 will be filed along with Form 1040 and Form 1040NR. Should there be no tax filing required for any given tax year, then Form 8938 would also not be required to be filed.

The general filing requirement is on any specified individual -- a U.S. citizen, resident alien or nonresident alien who has elected to be treated as a resident alien, who owns specified foreign financial assets during the tax year that exceed the reporting threshold. The reporting threshold can be exceeded in two manners: either by exceeding a year end maximum or by exceeding a slightly inflated maximum at any time during the tax year. The reporting thresholds are as follows:

Filing status    Residing in  At year end       At any time during the tax year 
Single U.S. >$50k     >$100k
Married filing Joint U.S. >$100k >$200k
Married filing Separate U.S. >$50k >$100k
Single Foreign country >$200k >$400k
Married filing Joint Foreign country >$400k >$600k
Married filing Separate    Foreign country    >$200k >$400k


A foreign asset's value should be determined in U.S. dollars. If the asset is valued in a foreign currency, the value should be converted at the respective rate using the U.S. Treasury Department's Financial Management Service conversion rate on the last day of the tax year. The reporting period is the same as the taxpayer's tax year.

In situations of joint ownership, the entire value of the asset should be included in the threshold test if the joint ownership is with a spouse filing jointly or anyone other than a spouse. If the filing status is married filing separately, then only one-half the value of the asset would be included in the threshold test.

Specified foreign financial assets include any financial account maintained by a foreign financial institution, as well as assets held for investment not by an institution -- stocks or securities of foreign corporations; capital or profit interest in foreign entity (partnership, trust, estate); financial instrument or contract that has an issuer or counterparty that is other than a U.S. person. A foreign financial institution includes investment vehicles such as foreign mutual funds, foreign hedge funds, and foreign private equity funds. If an interest in a foreign financial account is already reported on Form 8938, then there is no need to further report the foreign assets held in that financial account.

An individual that owns foreign assets that are held by a U.S. partnership, corporation, trust or estate would not be considered to own a specified foreign financial asset. If the assets are held by a foreign estate or trust, the individual would only be considered to be an owner if they knew or should have known of the interest (e.g., if they received distributions from the foreign trust or estate). Foreign assets that are held through a grantor trust or disregarded entity would be considered as owned by an individual.

Certain financial accounts are exempt from reporting. If a financial account is maintained by a U.S. payer (including a domestic branch of a foreign bank or insurance company, or a foreign branch of a U.S. bank), there would be no filing requirement. Another exemption from reporting requirements is an account that is maintained by a dealer or trader in securities or commodities and all of the holdings in the account are subject to the mark-to-market accounting rules for dealers in securities or an election under section 475(e) or (f) is made for all of the holdings in the account.
In order to avoid duplicative reporting, any account or asset reported on Form 3520, 5471, 8621, 8865, or 8891 should not be reported again on Form 8938.

The penalty for failure to file is $10,000. Continuing failure to file within 90 days of an IRS notice is an additional $10,000 for each 30-day period, up to a maximum of $50,000. Accuracy-related penalties could also be assessed up to 40% of any underpayment of tax related to the foreign assets. Fraud penalties could also be assessed up to 75% of any underpayment as well.

Financial Services Insights - November 2011 

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