The US Department of the Treasury (the "IRS") recently released temporary and proposed regulations (the "Temporary Regulations"), effective December 19, 2011, to implement the provisions of the Hiring Incentives to Restore Employment (HIRE) Act that require individuals to report specified foreign financial assets ("SFFAs") to the IRS. The Temporary Regulations apply to individuals required to file Form 1040, "US Individual Income Tax Return," and to certain individuals required to file Form 1040-NR, "Nonresident Alien Income Tax Return." The reporting required under the Temporary Regulations must be made on Form 8938, Statement of Specified Foreign Financial Assets.

Background

The HIRE Act, enacted on March 18, 2010, added new section 6038D, "Information with Respect to Foreign Financial Assets," to the US Internal Revenue Code. Section 6038D requires individuals to report specific information relating to their ownership of SFFAs with their US income tax returns, to the extent the total value of those SFFAs exceeds US$50,000 for the taxable year, or such higher dollar amounts as the IRS may prescribe. Although section 6038D applies to taxable years beginning after March 18, 2010, the IRS in Notice 2011-55 suspended the reporting requirements until the IRS released the applicable form, Form 8938. Thus, with the release of Form 8938 on December 17, 2011, taxpayers subject to the reporting requirements of section 6038D must file Form 8938 this filing season (i.e., file a Form 8938 in 2012 for the 2011 tax year).

Key Provisions of the Temporary Regulations

General Filing Requirement

An individual must file Form 8938 if he or she meets three requirements:

  • The taxpayer is a Specified Individual. Generally, a Specified Individual is a US citizen; a US resident alien for any part of the tax year; a nonresident alien who makes an election to be treated as a US resident alien for purposes of filing a joint income tax return; or a nonresident alien who is a bona fide resident of American Samoa or Puerto Rico. For this purpose, a US resident alien who is treated as a nonresident alien under the tie-breaker rules of a US income tax treaty is a Specified Individual that may have to file Form 8938, if required.
  • The taxpayer has an interest in a Specified Foreign Financial Asset. A SFFA includes a financial account maintained by a foreign financial institution and certain other foreign financial assets that are not held in an account at a financial institution, such as stock, securities, or other interests in a non-US entity. Foreign assets held in a financial account maintained by a US payor (such as a US brokerage firm) are not SFFAs. An individual is generally considered to have an interest in a SFFA if the individual is required to report on a US tax return any income, gains, losses, deductions, credits, gross proceeds, or distributions attributable to the holding or disposition of the asset, even if no such items are attributable to the asset in the specific taxable year. For this purpose, the owner of a disregarded entity is treated as having an interest in any SFFA held by the disregarded entity, and the owner of a trust (such as the grantor of a grantor trust) is treated as having an interest in any SFFA held by the trust.
  • The aggregate value of the taxpayer's Specified Foreign Financial Assets exceeds the applicable reporting threshold amounts contained in the table below:

Filing Status Country Where Taxpayer Lives Aggregate Value of all SFFAs on the Last Day of the Tax Year is: Aggregate Value of all SFFAs on Any Day of the Tax Year is:
Unmarried or Married filing Separately US > US$50,000 > US$75,000
Married Filing Jointly US > US$100,000 > US$150,000
Unmarried or Married filing Separately Foreign Country > US$200,000 > US$300,000
Married Filing Jointly Foreign Country > US$400,000 > US$600,000

An individual is considered to live in a foreign country if (i) the individual is a US citizen whose tax home is in a foreign country and the individual is either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire year, or (ii) the individual is a US 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 for at least 330 days. The Temporary Regulations also supply detailed rules regarding how to determine the value of an asset for purposes of the thresholds and how to treat assets that are jointly held.

Exceptions from Filing Requirements

  • Exempted Assets. The Temporary Regulations specifically exempt certain assets from being treated as SFFAs:
    • assets subject to mark-to-market accounting;
    • an interest in a social security, social insurance, or other similar program of a foreign government; and
    • a beneficial interest in a foreign trust or a foreign estate, unless the taxpayer knows or has reason to know of the interest. Receipt of a distribution from the foreign trust or foreign estate is deemed to be actual knowledge of the interest.
  • Assets Reported on Another Specified Tax Form. A taxpayer that is required to file Form 8938 is not required to report a SFFA on Form 8938 if the asset is reported on Forms 3520, 3520–A, 5471, 8621, 8865, or 8891 and timely filed with the IRS for the tax year, and the Form 8938 indicates the filing of the form on which the asset is reported. Importantly, the FBAR form, TD F 90-22.1, Report of Foreign Bank and Financial Accounts, is not one of the listed forms. Therefore, Form 8938 and the FBAR must both be filed, if required.
  • Certain Trusts. A taxpayer that is treated as the owner of a domestic liquidating trust or a domestic widely held fixed investment trust (or any portion thereof) is not required to file Form 8938 to report any SFFA held by the trust.
  • Residents of Certain US Territories. Certain exceptions apply to residents of US territories who hold assets or accounts related to the territory in which they are a resident.

Future Guidance

Contemporaneous with the release of the Temporary Regulations, the IRS issued proposed regulations that address domestic entities that are formed or availed of to hold, directly or indirectly, SFFAs. The proposed regulations generally would require these domestic entities ("specified domestic entities") to report SFFAs in the same manner as an individual. Although a specified domestic entity is not required to file Form 8938 to report SFFAs until the proposed regulations are finalized, the IRS stated that it anticipates that the proposed regulations will be finalized during 2012 and will apply to taxable years beginning after December 31, 2011.

Penalties

The initial penalty for non-compliance is US$10,000. If a taxpayer fails to comply for more than 90 days after the IRS notifies the taxpayer of the failure to comply, an additional penalty of US$10,000 for each 30-day period (or fraction thereof) applies, with a maximum penalty of US$50,000, unless the taxpayer shows that the failure to report is due to reasonable cause and not willful neglect.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.