New guidance on foreign financial asset reporting
In IR-2011-117, the IRS released new information about Form 8938, Statement of Specified Foreign Financial Assets, which will be used by taxpayers to report specified foreign financial assets for the 2011 tax year. Form 8938 must be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. Covered taxpayers that fail to file Form 8938 will be subject to a $10,000 penalty, with an additional penalty of up to $50,000 for continued failure to file after IRS notification. A 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.
The Form 8938 filing requirement was enacted in 2010 to improve tax compliance by U.S. taxpayers with offshore financial accounts. Form 8938 is required when the total value of specified foreign assets exceeds the following thresholds:
- A married couple living in the U.S. and filing a joint tax return must file if the value of their specified foreign assets exceeds $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year (different thresholds apply for unmarried taxpayers and married taxpayers filing separate returns).
- A married couple residing abroad and filing a joint return must file if the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year (different thresholds apply for unmarried taxpayers living abroad).
Instructions for Form 8938 explain the thresholds, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempted and what information must be provided. Importantly, the new Form 8938 filing requirement does not replace or otherwise affect a taxpayer's obligation to file an FBAR, Report of Foreign Bank and Financial Accounts. Under the temporary regulations, U.S. citizens, residents and certain non-resident aliens are required to complete and attach Form 8938 to their income tax returns for tax years starting after March 18, 2010, which for most people will be their 2011 tax returns filed during the 2012 filing season. However, no entity is required to file Form 8938 until the proposed regulations are issued as a final regulation, which Treasury and the IRS anticipate will occur during 2012 for application to taxable years beginning after Dec. 31, 2011. More information is available on the Foreign Account Tax Compliance Act page of the IRS website.