Many U.S. taxpayers are familiar with the requirement to annually file a foreign bank account report (FBAR) . However, it’s important to note that the Foreign Account Tax Compliance Act (FATCA) adds another filing requirement for certain taxpayers who hold foreign financial assets. These taxpayers must report these assets on Form 8938, Statement of Specified Foreign Financial Assets. Below are seven things to know.
1. Who Must File Form 8938?
Generally, a specified individual who has an interest in specified foreign financial assets and the value is more than the applicable thresholds must file Form 8938 if the applicable threshholds are exceeded.
Earlier this year, the IRS and U.S. Treasury finalized regulations that require certain specified domestic entities to report specified foreign financial assets. These regulations are effective for taxable years beginning after December 31, 2015, meaning that calendar-year domestic entities must include these assets in their 2016 tax returns.
2. Specified Individual
A specified individual is one of the following:
- A U.S. citizen;
- A resident alien of the United States for any part of the tax year; and
- Certain nonresident aliens, such as those who make an election to be treated as a resident alien, and those who are bona fide residents of American Samoa or Puerto Rico.
3. Specified Domestic Entity
A specified domestic entity is defined as a domestic corporation, domestic partnership or domestic trust formed or used, directly or indirectly, for holding specified foreign financial assets. The determination of whether a domestic entity is a specified domestic entity is made annually. A corporation or partnership is treated as a specified domestic entity if:
- the corporation or partnership is closely held by a specified individual, i.e., greater than 80% of the total vote or value of a corporation or 80% of the total capital or profit interest of a partnership is held by a specified individual; and
- at least 50% of the corporation or partnership’s gross income is passive or at least 50% of the assets produce or are held for the production of passive income.
4. Specified Foreign Financial Asset
Specified foreign financial assets include the following assets:
- Financial accounts maintained by a foreign financial institution.
- The following foreign financial assets if they are held for investment and not held in an account maintained by a financial institution:
- Stock or securities issued by someone who is not a U.S. person;
- Any interest in a foreign entity; and
- Any financial instrument or contract that has an issuer or counterparty that is not a U.S. person.
5. Reporting Thresholds
The reporting thresholds depend on whether the taxpayers live in or outside of the United States and their filing status.
- Taxpayers living in the United States
- Unmarried taxpayers: 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: 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: 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 outside the United States
- Unmarried taxpayers: More than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.
- Married taxpayers filing a joint income tax return: More than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.
- Married taxpayers filing separate income tax returns: More than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.
6. When and How to File
Taxpayers must attach Form 8938 to their annual return and file it by the due date (including extensions) for that return.
Taxpayers who fail to report information on specified foreign financial assets may be subject to a penalty of $10,000. If the taxpayer does not file a correct and complete Form 8938 within 90 days after the IRS issues a failure-to-file notice, the taxpayer may be subject to an additional penalty of $10,000 for each 30-day period during which they continue to fail to file Form 8938 (not to exceed $50,000).
For taxpayers who fail to file Form 8938 or fail to report a specified foreign financial asset, the statute of limitations for the tax year may remain open for all or a part of your income tax return until three years after Form 8938 is filed.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.