Foreign Financial Assets - New IRS Reporting Required Under FATCA

By Lisa Gentile, Senior Tax Accountant

Background

In U.S. efforts to combat tax evasion by U.S. persons holding investments in offshore accounts, the Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act.

Under FATCA, certain U.S. taxpayers holding financial assets outside the U.S. must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. In addition, FATCA will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

Reporting applies for assets held in taxable years beginning after March 18, 2010. Form 8939 is attached to your annual Federal income tax return and filed by the due date (including extensions) for that return.

Disclosure

Currently, only draft versions of Form 8938 and its instructions have been released by the IRS. Significant changes may be made to the form and instructions. Regulations and/or other guidance are expected by the year end 2011. All of the information below has been compiled from the most recent draft instructions to Form 8938, therefore are subject to change.

Who will need to file?

Individuals (who meet the reporting threshold as discussed below) required to file include:

• A U.S. Citizen.
• A resident alien of the United States for any part of the tax year.
• 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 bonafide resident of American Samoa or Puerto Rico.

The IRS anticipates issuing regulations that will require a U.S. entity to file Form 8938, too.  Until such regulations (or other guidance) is issued, only individuals must file Form 8938.

Reporting Threshold

The reporting threshold varies depending on whether an individual lives in the United States, is married, or files a joint income tax return. For example, if you are married and you and your spouse file a joint income tax return and do not live abroad, you satisfy the reporting threshold only if the value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $200,000 at any time during the tax year. However, if you are not married and not living abroad,  you satisfy the reporting threshold if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $100,000 at any time during the tax year (this threshold also applies to married individuals filing separate income tax returns).

If you jointly own an asset with someone else, the value that you use to determine the total value of all of your specified foreign financial assets depends on whether the owner is your spouse and, if so, whether your spouse is a specified individual and whether you file a joint or separate return.  If you are in joint ownership with someone other than a spouse, each joint owner includes the entire value of the jointly owned asset to determine the total value of all of your specified foreign financial assets

Specified Foreign Financial Assets

Specified foreign financial assets (SFFA) include the following assets:

• Any financial account maintained by a foreign financial institution.
• Other foreign financial assets, which include any of the following assets that are held for investment and not held in an account maintained by a financial institution.
  • Stock or securities issued by someone other than a U.S. person,
  • Any interest in a foreign entity, and
  • Any financial instrument or contract that has an issuer or counterparty that is other than a U.S. person.

A few examples of other SFFA's include the following, if they are held for investment.

• Stock issued by a foreign corporation.
• A capital or profits interest in a foreign partnership.
• A note, bond, debenture, or other form of indebtedness issued by a foreign person.
• An interest rate swap, currency swap, basis swap, equity swap, or similar agreement with a foreign counterparty.

You hold an asset, including stock or a partnership interest, for investment if you do not use it in, or hold it for use in, the conduct of any trade or business.  You have an interest in a SFFA if any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the asset are or would be required to be reported, included, or otherwise reflected on your income tax return.

Also consider:

• If you are the owner of a disregarded entity, you have an interest in any SFFA owned by that entity.
• If you report your interest in a financial account, you do not need to report an interest in the assets held in that financial account.
• In most cases, you do not own an interest in any SFFA held by a partnership, corporation, trust, or estate solely as a result of your status as a partner, shareholder, or beneficiary.

Penalties & Other Requirements

If you are required to file this new Form 8939 and fail to do so, or if you have an understatment of tax or omission of income relating to a specified foreign financial asset, you may owe a penalty. Penalties begin at $10,000.

It is also important to note that filing this form does not relieve you of the requirement to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), if applicable.