New IRS paperwork for US taxpayers to report foreign assets

The United States Internal Revenue Service has released a new information reporting form that taxpayers will use to report specified foreign financial assets for tax year 2011.

Beginning this tax filing season, the new Form 8398 (Statement of Specified Foreign Financial Assets) will be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts, according to a news release from the IRS.

The form is the newest mechanism for the US to enforce the Financial Account Tax Compliance Act of 2010, which requires individuals to file a statement with their income tax return to report interests in specified foreign financial assets.

The law imposes significant penalties on taxpayers who fail to comply.

Assets, thresholds, penalties

“Specified foreign financial assets include foreign financial accounts, and foreign non-account assets held for investment (as opposed to held for use in a trade or business), such as foreign stock and securities, foreign financial instruments, contracts with non-US persons, and interests in foreign entities. The regulations include a list of examples, such as swaps, options, and derivative contracts,” according to the IRS.

According to the temporary regulations issued by the IRS, for US citizens and green-card holders who have established residence in Cayman, the thresholds for filing Form 8938 are if the value of specified foreign assets is more than US$200,000 on the last day of the tax year or exceeds US$300,000 at any time during the year. (For married couples filing jointly, the thresholds are US$400,000 or US$600,000 respectively. Those thresholds apply even if only one spouse lives abroad.)

The thresholds for taxpayers living in the US are lower – US$100,000 or US$150,000 for an individual.

Individuals who do not have to file an income tax return do not have to file Form 8938. The new Form 8938 filing requirement does not replace or affect obligations to file a Report of Foreign Bank and Financial Accounts. US persons with assets of more than US$10,000 in foreign financial accounts are required to file an FBAR on 30 June of each year.

“Failing to file Form 8938 when required could result in a US$10,000 penalty, with an additional penalty up to US$50,000 for continued failure to file after IRS notification. A 40 per cent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed,” according to the IRS.

Depending on the nature of the violation, the statute of limitations applying to failure to disclose adequate information concerning Form 8938 is up to six years after the date the form is filed.

Exceptions

Exceptions to the threshold and reporting requirements for Form 8938 include assets reported on certain other tax forms, assets related to certain trusts, and interests in foreign governments’ social programmes. Additionally, taxpayers are not required to report a financial account maintained by a US branch of a foreign bank or a foreign branch of a US bank.

“Certain key definitions of terms in the regulations, such as “financial account” and “financial institution,” will be further defined by regulations under FATCA Chapter 4,” according to the IRS.

While the IRS has not yet implemented a Form 8938 filing requirement for US domestic entities (such as domestic corporations, domestic partnerships and domestic trusts), it has issued proposed regulations relating to domestic entities that will apply to taxable years beginning after 31 December, 2011.