My prior blog post gave details about how the Form 8938, an important “Foreign Account Tax Compliance Act” (FATCA) enforcement weapon, is currently failing. IRS enforcement efforts are soon on the upswing. This is because the Treasury Inspector General for Tax Administration issued a report over the summer pointing out the IRS’ failures with regard to enforcement efforts using this Form and made suggestions for the IRS to follow. Now is a good time to review the requirements of this Form. Thanks to FATCA, the statute of limitations will not start to run for the relevant tax year until the IRS receives this Form. This point will be revisited, below.
Who Must File Form 8938?
Assuming a dollar threshold for the total value of SFFAs held during the tax year is met, the following so-called “specified individuals” must file Form 8938:
- A US citizen (sounds simple enough, but who can be a US citizen may surprise you).
- A “resident alien” of the United States for any part of the tax year (this means the individual meets either the so-called “green card” test or “substantial presence” test). Read about these tests here and here.
- A nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return.
- A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico.
Filing becomes mandatory once certain dollar thresholds in aggregate fair market value of the SFFAs are exceeded during the tax year. The thresholds depend on one’s filing status and whether the “specified individual” is living abroad or in the United States. The IRS is authorized to set higher dollar threshold amounts; the current thresholds are set out below.
For taxpayers living in the United States the filing thresholds for aggregate value of SFFAs are:
- Single taxpayers and married taxpayers filing separately: $50,000 on the last day of the tax year or $75,000 anytime during the tax year;
- Married taxpayers filing jointly: $100,000 on the last day of the tax year or $150,000 anytime during the tax year.
For taxpayers living abroad, the thresholds are:
- Single taxpayers and married taxpayers filing separately: $200,000 on the last day of the tax year or $300,000 anytime during the tax year; and
- Married taxpayers filing jointly: $400,000 on the last day of the year or $600,000 anytime during the year.
What is a Specified Foreign Financial Asset?
A SFFA includes a financial account maintained by a foreign financial institution (e.g., a non-US bank account or stock trading account) and certain other foreign financial assets that are not held in an account at a financial institution, such as stock, securities, or any other interests in a non-US entity (e.g., units in a foreign mutual funds; interests in foreign trusts and foreign estates; foreign partnership interests). It includes notes, bonds, debentures, or other debt issued by a foreign person; interest rate and currency swaps, as well as other agreements with a foreign counterparty (such as foreign life insurance contracts).
Certain assets are exempt such as an interest in a social security, social insurance, or other similar program of a foreign government. On the other hand, US individuals are required to report on the Form 8938, their interest in a non-United States employee benefit plan – this could include foreign retirement and pensions and equity compensation plans, deferred compensation plans, stock awards, stock options and the like.
Questions remain as to the precise parameters as to what constitutes a SFFA. The IRS has also issued some basic Questions and Answers regarding Form 8938. Instructions to Form 8938 are also very helpful.
Some Important Points to Note About Form 8938
- Jointly Owned Assets
When joint owners of a SFFA are not married, each of the joint owners must include the full value of the asset (rather than only the value of the specified person’s interest in the asset) in determining whether the aggregate value of such specified individual’s SFFAs exceeds the applicable reporting thresholds. In addition, each such joint owner must report the full value of the asset on his or her Form 8938.
When both spouses are “specified individuals” and each files a separate tax return, the individuals are to include only one-half of the value of the asset jointly owned with the spouse in order to determine the total value of all SFFAs for determining the reporting threshold. However, when joint owners are married but file separate tax returns each joint owner of a SFFA must report the full value of the asset (rather than only the value of the specified person’s interest in the asset) on the individual’s Form 8938, even if both spouses are specified individuals and even though only one-half of the value of the asset is considered in determining the applicable reporting thresholds.
- Exception for Dual-Resident Taxpayers
Special rules apply for so-called dual-resident taxpayers. A dual-resident taxpayer is a foreign individual who is treated as a US “resident” alien and “non-resident alien” in the same tax year. This may typically occur, for example, in the year the individual acquires or gives up US permanent resident status (green card). An exception from filing Form 8938 is provided in the final regulations for certain dual-resident taxpayers. In order to qualify for the exception, such individuals must claim to be taxed as residents of a treaty partner country by timely filing Form 1040NR, U.S. Nonresident Alien Income Tax Return, and attaching a Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b). See pages 1 and 2 of the Instructions to Form 8938.
- Owning an Interest in a Disregarded Entity
Taxpayers who own so-called “disregarded entities” must include the value of any assets held by the entities both to determine whether they meet the SFFA filing threshold, and if they do meet the threshold, to determine the amount they must report on Form 8938. Typically, a “disregarded entity” is a single-owner US LLC or a foreign entity owned by one person that makes what is called a “check the box” election to treat that foreign entity as “disregarded” for US tax purposes. In these cases, the taxpayer-owner must treat the assets owned by the entity as directly owned by him for purposes of the SFFA rules.
- Relief from Duplicative Reporting
A taxpayer does not have to report any asset on Form 8938 if he or she reports it on one or more of the following timely filed forms for the same tax year. Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations; Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund; Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. Instead, the taxpayer must identify on Form 8938 the form(s) on which he has reported the specified foreign financial asset and how many of these forms were filed. A list of forms is provided in Treasury Regulation §1.6038D-7(a) which is intended to relieve duplicative reporting.
Taxpayers included on a jointly filed Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, or Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, who notify the IRS of the joint filing will not be required to file Form 8938.
Please note there is no duplicative reporting exemption for filers of FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), from filing Form 8938 because the forms serve different purposes. The IRS has prepared a useful chart comparing the Form 8938 and FBAR requirements.
Significantly, the duplicative reporting exemptions do not apply with respect to Form 8854, “Initial and Annual Expatriation Statement” The Treasury Department and IRS considered this issue carefully and concluded that the nature of the information collected on Form 8854 and Form 8938 would not be duplicative. Further, Treasury and IRS stated that filing of Form 8938 is expected to “substantially enhance” IRS compliance programs with respect to Form 8854 filers.
- Foreign Currency Conversions
If the taxpayer’s SFFA is denominated in a foreign currency during the tax year, the maximum value of the asset must be determined in the foreign currency and then converted to US dollars. In most cases, the US Treasury Bureau of the Fiscal Service foreign currency exchange rate for purchasing U.S. dollars must be used. If an exchange rate is not available there, taxpayers must use another publicly available foreign currency exchange rate for purchasing US dollars and disclose the rate on Form 8938. Use the currency exchange rate on the last day of the tax year to figure the maximum value of a SFFA or the value of a SFFA for the purpose of determining the total value of SFFAs to determine if the reporting threshold is met. Use this rate even if you sold or otherwise disposed of the SFFA before the last day of the tax year. If a financial account statement is issued at least annually by a financial institution maintaining the taxpayer’s account he may rely on the foreign currency conversion rate reflected in a financial account statement.
- Statute of Limitations Remains Open
Make no mistake. Form 8938 is a very important filing. If it is not filed, aside from the imposition of monetary penalties, the statute of limitations will not start to run for the relevant tax year until the IRS receives the Form. Only when proper reporting is made will the statute of limitations begin. Furthermore, even though the statute starts to run, the entire tax return will remain open for IRS adjustments for a period of three years rather than only for the portions of the return relating to the foreign reporting that had been missing.
Posted October 30, 2018
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