Certain Foreign Assets Require More Reporting

The IRS has increased its efforts to identify sources of offshore taxable income by U.S. persons by imposing a new foreign asset reporting requirement. Those affected are required to file Form 8938 – Statement of Specified Foreign Financial Assets for the 2011 tax year (with certain exceptions) to report ownership of specified financial assets if the aggregate value of those assets exceed applicable thresholds amounts.  The threshold amounts vary depending on a variety of factors, including the U.S. person’s filing status and country of residency.

“Specified foreign financial assets” generally include any financial account maintained by a foreign financial institution and other investments not held in an account, such as stock and securities that were issued by a non-U.S. person.  Also included are any interest in a foreign entity and any financial instrument or contract with an issuer or counterparty who is not a U.S. person.

The new Form 8938 is filed with the individual taxpayer’s annual income tax return and does not replace the requirement to file the annual FBAR report (due by June 30 of the filing year).

Form 8938 imposes new failure-to-file and accuracy-related penalties, which may be severe.  Additionally, failure to file an accurate Form 8938 may extend the statute of limitations for all or a part of your income tax return until three years after the date on which you file Form 8938.

You are not required to file Form 8938 if you did not have an obligation to file a tax return for the tax year, regardless of the value of your specified foreign assets.

Refer to Form 8938 instructions here for more information on assets that do not have to be reported.

You must file Form 8938 if:

1. You are a specified individual.  

A spedified individual is:

  • 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
  • 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

2. You have an interest in specified foreign financial assets required to be reported. 

A specified foreign financial asset is:

  • Any financial account maintained by a foreign financial institution, except as indicated above
  • 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.

Refer to the Form 8938 instructions here for more information on the definition of a specified foreign financial assets and when you have an interest in such an asset.

AND

3. The aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you: 

  • Unmarried taxpayers living in the U.S.: The total value of your 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.
  • Married taxpayers filing a joint income tax return and living in the U.S.: The total value of your 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.
  • Married taxpayers filing separate income tax returns and living in the U.S.: The total value of your 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.
  • Taxpayers living abroad.  You are 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 U.S. 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.

If you are a taxpayer living abroad you must file if:

  • 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.

Refer to the Form 8938 instructions here for information on how to determine the total value of your specified foreign financial assets.

Reporting specified foreign financial assets on other forms filed with the IRS.

If you are required to file a Form 8938 and you have a specified foreign financial asset reported on Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, or Form 8891, you do not need to report the asset on Form 8938.  However, you must identify on Part IV of your Form 8938 which and how many of these form(s) report the specified foreign financial assets.

Even if a specified foreign financial asset is reported on a form listed above, you must still include the value of the asset in determining whether the aggregate value of your specified foreign financial assets is more then the reporting threshold that applies to you.

If you have questions about how this new information affects your business or personal tax situation, please contact your Meaden & Moore representative or Karen McCarthy at (216) 241-3272 or kmccarthy@meadenmoore.com.