NEW IRS FORM 8938 REQUIRES DISCLOSURE BY APRIL 17, 2012
Over the last few years, the U.S. government has enacted a series of laws and regulations designed to create greater transparency of assets held overseas by U.S. taxpayers. In order to track and tax those foreign assets, the IRS has created Form 8938, Statement of Specific Foreign Financial Assets, a new form which requires taxpayers who own certain specified foreign assets to disclose these assets annually to the IRS. Many taxpayers who own such specified foreign assets are now required to file Form 8938, or risk being penalized by the IRS. The requirement to file new Form 8938 is already effective. The form is due by April 17, 2012, along with your Form 1040, for calendar year 2011.
The new form is broad in its coverage of foreign assets that require disclosure. Foreign assets required to be reported include:
- foreign bank and brokerage accounts (which are already reportable on Form TD 90-22.1, Report of Foreign Bank and Financial Accounts, known as the “FBAR”);
- stock of foreign corporations and interests in foreign limited liability companies (LLCs), partnerships and other entities, whether publicly traded or privately held;
- interests in foreign Exchange Traded Funds (ETFs) (but interests in Passive Foreign Investment Companies [PFICs] that are reported on IRS Form 8621 need not be repeated on new Form 8938);
- interests in a foreign entity such as a trust or foundation;
- ownership of investment instruments and contracts issued by a foreign entity, including foreign annuity contracts and insurance policies (also already subject to FBAR disclosure);
- interests in a foreign investment fund, hedge fund, mutual fund and private equity fund (but note the PFIC exemption above);
Note that even though certain foreign assets may not be reportable on new Form 8938, these assets may still be reportable on other IRS forms and on the FBAR. Note also that even though an asset is already reportable on, e.g., the FBAR, it may be reportable on Form 8938 as well, notwithstanding the resulting redundancy. It is also important to note that even if a foreign asset is not reportable if directly owned (e.g., real estate or bullion), if such asset is owned by a foreign entity, a U.S. taxpayer’s interest on the foreign entity is reportable.
Form 8938 requires details of the foreign assets, along with their values. Form 8938 is required if the total value of all foreign assets exceeds certain predefined threshold amounts, depending on the taxpayer’s residency during the tax year. In general, reporting is required for assets valued in excess of $50,000 for a single U.S. taxpayer and $100,000 for a married couple filing jointly, living in the U.S. If the U.S. taxpayer lives abroad, he or she must report any assets in excess of $200,000 for a single taxpayer and $400,000 for a married couple filing jointly. Financial accounts, and the assets in those accounts, held at a foreign branch of a U.S. financial institution or a U.S. branch of a foreign financial institution are not subject to reporting on Form 8938.
If a taxpayer has reported the foreign assets on another IRS form (e.g., Form 3520 for foreign trusts, Form 5471 for foreign corporations, etc.), he or she need not report these assets on Form 8938, but must still complete Part IV of Form 8938 and specify on which other tax form the assets were reported. The amounts reported on the other IRS forms will count towards the aggregate threshold amount for Form 8938. Therefore, if the amounts reported by the taxpayer on the other IRS forms meet the Form 8938 threshold amount, then any other foreign assets not reported on the other forms must be disclosed on Form 8938.
There are numerous IRS penalties associated with a failure to report foreign assets, as well as potential fines and criminal prosecution. Taxpayers who own foreign assets and are unsure whether they must file new Form 8938 should seek guidance from an experienced offshore tax compliance attorney.
Additional Important Points
- The disclosure requirements for Form 8938 are already effective. While FATCA regulations are coming into effect over time, this new Form 8938 is due this year, i.e., with your 2011 tax return, due April 17, 2012, or later if you receive an extension.
- Form 8938 is an informational return, whereby ownership interests in foreign assets are reported. However, Form 8938 does not assess tax on foreign income. Income from foreign assets is reported on other forms such as Form 1040, Form 8621, etc. The U.S. Internal Revenue Code assesses income from all sources world wide. Income includes interest, capital gains, dividends, royalties, etc., from all foreign sources.
- Any interest in social security, social insurance or other similar foreign government program need not be reported on Form 8938.
However, an interest in a foreign pension plan or foreign retirement account requires reporting.
- A mere signatory authority (e.g., power of attorney, co-signatory) over a foreign account does not require disclosure via Form 8938. However, the FBAR form is still required for a power of attorney or co-signatory authority.
- Taxpayers filing Form 8938 may still be required to file an FBAR in addition.
- Form 8938 requires the reporting of the value of foreign assets. Many cases, e.g., ownership of a fraction of a foreign entity or investment fund, may require complex valuation and obtaining financial information from foreign sources.
- With respect to beneficiaries of foreign trusts, whereas such beneficiaries are required to file an FBAR if they have a “present” beneficial interest (defined as the right to receive a mandatory distribution, or actual receipt of 50% of trust income or assets), Form 8938 is required if the trust beneficiary receives a distribution that, together with other specified foreign assets, meets the Form 8938 specified threshold (e.g., $50,000 for a single taxpayer; see supra). If the foreign trust is a discretionary trust and the U.S. taxpayer does not receive a distribution (or receives a distribution that, when combined with his/her other specified foreign assets, does not exceed his/her reporting threshold), the value of his/her interest in the trust is zero and therefore not subject to reporting.
- For the time being (until the IRS issues additional regulations), Form 8938 reporting requirements apply only to U.S. individuals. U.S. corporations and other entities are not required to report ownership or interest in foreign assets on Form 8938. (Note, however, that the FBAR does apply to entities like corporations).
- Form 8938 applies to various components of offshore asset protection structures (e.g., foreign trusts). However, the offshore asset protection is still intact, because Form 8938 is for IRS reporting purposes only and does not impact the integrity of a foreign asset protection structure. This form merely makes an already reportable offshore entity or asset more transparent to the government. As we have long counseled, foreign asset protection structures do not rely on secrecy and give no expectation of tax secrecy. However, vis-a-vis private civil creditors, tax complaint offshore strategies still offer concrete asset protection.
Taxpayers who own or have interests in specified foreign financial assets may have to report the existence and value of those assets on new IRS Form 8938, or face penalties. We have long assisted clients with the many compliance and disclosure requirements for offshore assets. We can assist in determining whether you are subject to new Form 8938, and can answer any other questions you have regarding U.S. tax compliance for foreign assets.