The act imposes a new reporting requirement for foreign financial assets, in addition to the requirement of filing an FBAR.
The new law applies to specified persons with specified foreign financial assets which satisfy the reporting threshold.
Internal Revenue Code Section 6038D now requires individuals to report interests in specified foreign financial assets (SFFAs) when filing their federal income tax returns for tax years beginning after March 18, 2010, using Form 8938, Statement of Specified Foreign Financial Assets.
SFFAs include, among other things, interests in:
- Foreign bank and financial accounts;
- Foreign trusts and foreign estates;
- Stock issued by foreign corporations;
- Foreign partnerships;
- Notes, bonds, debentures, or other debt issued by a foreign person;
- Interest rate swaps, currency swaps, and other similar agreements with a foreign counterparty; and
- Certain foreign derivatives.
Those with $50,000 in aggregate value of specified foreign financial assets during the tax year are required to filed form 8938; however the IRS is authorized to set higher amounts. The regulations in tax code provide two sets of thresholds for United States Taxpayers as follows:
Taxpayers living in the United States:
- For single taxpayers and married taxpayers filing separately: $50,000 on the last day of the year or $75,000 anytime during the year; and
- For married taxpayers filing jointly: $100,000 on the last day of the year or $150,000 anytime during the year.
Taxpayers living abroad:
- For single taxpayers and married taxpayers filing separately: $200,000 on the last day of the year or $300,000 anytime during the year; and
- For married taxpayers filing jointly: $400,000 on the last day of the year or $600,000 anytime during the year.
The value of foreign assets is its fair market value. The IRS is clear that “an appraisal by a third party is not necessary to estimate the maximum fair market value during the year.” Instead the maximum value of the interest is the fair market value of the interest on the last day of the tax year. Failure to properly assess foreign assets and file Form 8938 subjects the tax payer to a civil penalty of $10,000 and an additional penalty of $10,000 for every 30 days the failure to file continues after the initial 90 days, up to a maximum penalty of $50,000. Further penalties may be assessed for underpayment of fraud. The statute of limitations for failure to report income from a foreign financial assess whose value exceeds $5,000 is six years.
As always, please consult with your tax professional and seek legal advice from a lawyer specializing in tax law and foreign taxable transactions before making any decisions regarding the reporting or lack of reporting of foreign assets.