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IRS Form 8938 – Foreign Financial Asset Reporting

by | Jun 13, 2012 | Uncategorized

Form 8938 – Foreign Financial Asset Reporting

The IRS has released new information about assets that must be reported on Form 8938, Statement of Specified Foreign Financial Assets, This form is part of the Obama Administration’ attack on taxpayers with undisclosed foreign assets.

Individuals with an interest in a foreign financial assets during the tax year must attach a disclosure statement, Form 8938 to their income tax return for any year in which the aggregate value of all such assets is greater than $50,000 (or a dollar amount higher than $50,000 as IRS may prescribe). Specified foreign financial assets are:
(1) depository or custodial accounts at foreign financial institutions, and
 (2) to the extent not held in an account at a financial institution,
             (a) stocks or securities issued by foreign persons,
             (b) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and
             (c) any interest in a foreign entity. (Code Sec. 6038D(b))

The Obama IRS imposes a $10,000 penalty. A failure continuing for more than 90 days after the day on which IRS mails a notice of the failure to the specified person subjects the specified person to an additional penalty of $10,000 for each 30-day period (or fraction thereof) during which the failure continues after the 90-day period has expired, up to a maximum penalty of $50,000 for each such failure, each year.

This reporting applies to an individual who is:

  •  a U.S. citizen,
  •  a U.S. resident alien, or
  •  a nonresident alien who has elected under Code Sec. 6013(g) or Code Sec. 6013(h), to be taxed as a U.S. resident.
  •  A resident alien who elects to be taxed as a resident of a foreign country under a U.S. income tax treaty’s residency tie-breaker rules is also a specified individual.
  •  certain nonresident aliens who are treated as residents under other Code sections are specified individuals. (Reg. § 1.6038D-1T(a))

The person must file Form 8938 if the person has an interest in one or more specified foreign financial assets and those assets have an aggregate fair market value (FMV) exceeding either $50,000 on the last day of the tax year or $75,000 at any time during the tax year ($100,000 and $150,000, respectively, for married specified individuals filing a joint annual return).

Assets that must be reported on Form 8938 if the dollar reporting threshold is exceeded include:

  • Financial accounts maintained by a foreign financial institution, such as savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer. Such an account must be reported even if its contents include, in whole or in part, investment assets issued by a U.S. person (e.g., U.S. stocks or securities). (Q&A 1 and 9)
  • If held for investment but not in a financial account, stock or securities issued by someone who is not a U.S. person, any other interest in a foreign entity, and any financial instrument or contract held for investment with an issuer or counterparty that is not a U.S. person. Examples: stock or securities issued by a foreign corporation; a note, bond or debenture issued by a foreign person; an interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap or similar agreement with a foreign counterparty; and a partnership interest in a foreign partnership. (Q&A 1)
  • An interest in a foreign pension or deferred compensation plan, valued as of the last day of the year. If the taxpayer doesn’t know, or have reason to know, based on readily accessible information the end-of-year fair market value, the maximum value is the value of the cash and/or other property distributed to him during the year (and if there were no distributions, the value of the interest in the plan is zero). (Q&A 12 and 13)
  • A contract to sell precious metals held for investment to a foreign person. (Q&A 21)

Assets that do not have to be reported on Form 8938 include:

  • Foreign real estate (e.g., personal residence or rental property). But if held through a foreign entity (e.g., partnership, or estate), then the interest in the entity is a specified foreign financial asset that is reported on Form 8938. (Q&A 3)
  • Foreign currency holdings. (Q&A 4)
  • Directly held shares of a U.S. mutual fund that owns foreign stocks and securities (neither the fund nor its holdings are reported). (Q&A 7)
  • A financial account maintained by a U.S. financial institution that holds foreign stocks and securities. Examples of financial accounts maintained by U.S. financial institutions include: U.S. Mutual fund accounts IRAs, 401(k) plans, qualified U.S. retirement plans, and brokerage accounts maintained by U.S. financial institutions. (Q&A 8)
  • A financial account maintained by a U.S. branch or U.S. affiliate of a foreign financial institution (any specified foreign financial assets in that account also do not have to be reported). (Q&A 10)
  • A financial account (e.g., depository, custodial or retirement account) held through a foreign branch or foreign affiliate of a U.S.-based financial institution. (Q&A 11)
  • Payments or the rights to receive the foreign equivalent of social security, social insurance benefits or another similar program of a foreign government. (Q&A 14)
  • Directly held tangible assets, such as art, antiques, jewelry, cars and other collectibles. (Q&A 19)
  • Directly held precious metals, such as gold (but gold certificates issued by a foreign person are reportable). (Q&A 20)

This was reported in RIA Checkpoint.