“FATCA” Tax Reporting
Under the Foreign Account Tax Compliance Act (“FATCA”) for tax years beginning after March, 18, 2010, specified persons (i.e. U.S. Citizens, resident aliens), who have an ownership interest in specified foreign financial assets (i.e. foreign financial accounts, foreign stock, any interest in a foreign entity) must file Form 8938 (attached to their form 1040 tax return) if the value of the foreign financial assets exceeds applicable “reporting threshold”.
The value of a specified foreign financial asset, for Form 8938 reporting purposes is the asset’s fair market value.
For Individuals: more than $50,000 on the last day of the tax year, more than $75,000 at any time during the tax year. If living abroad; $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.
For Married Taxpayers: more than $100,000 on the last day of the tax year, more than $150,000 at any time during the tax year, if living abroad: $400,000 on the last day of the tax year, or more than $600,000 at any time during the tax year.
The IRS anticipates issuing regulations that will require domestic entity to file Form 8938, if it holds specified foreign financial assets whose value exceeds the applicable reporting threshold. Until the IRS issues such regulation, only individuals must file Form 8938.
The value of an interest in a foreign trust, during the tax year, (if taxpayer doesn’t know its fair market value is the Maximum Value of the interest in the foreign trust calculated as the sum of the following amounts:
1) The value of all of the cash (or other property) distributed during the tax year from the trust to the beneficiary, plus
2) The value (using the IRC§7520 Valuation Tables) to receive mandatory distributions as of the last day of the tax year;
Foreign Grantor Trusts
A U.S. Taxpayer, who is the owner of a foreign grantor trust, does not have to report specified financial assets, held by the trust if:
1) The US Taxpayer reports the trust on a timely filed form 3520 for the same tax year;
2) The trust timely files Form 3520-A (Annual Information Return of Foreign Trust with a U.S. owner) for the same tax year;
3) Taxpayer identified on form 8938 how many of these forms they filed.
Specified Foreign Financial Assets
Foreign financial accounts include any depository (or custodial) account maintained by a foreign financial institution, any equity or debt interest in a foreign financial institution including any financial account maintained by a financial institution organized under the laws of a U.S. possession (America Samoa, Guam, The Northern Mariana Islands, Puerto Rico or the U.S. Virgin Islands)
A foreign financial institution is any financial institution that is not a U.S. entity, and satisfies one of the following conditions:
1) It accepts deposits;
2) It holds financial assets for the account of others;
3) It is engaged in the business of investing or trading in securities, partnership interests, or commodities;
4) It includes investment vehicles such as foreign mutual funds, hedge fund and private equity funds.
Interests in Specified Foreign Financial Assets
A U.S. Taxpayer:
1) has an interest in a specified financial asset if any income, gains, losses, deductions, credits, gross proceeds, or distribution from asset dispositions is required to be reported on U.S. income tax returns;
2) who is the owner of a disregarded entity, has an interest in any specified foreign financial assets owned by the disregarded entity;
3) who has an interest in a financial account that holds specified foreign financial assets, do not have to report the assets held in the account;
4) does not own an interest in any specified foreign financial asset held by a partnership, corporation or estate, as a result of their status as a partner, shareholder or beneficiary;
5) who is the owner, under the grantor trust rules of any part of a trust, has an interest in any specified foreign financial asset held by that part of the trust;
6) does not have an interest in a foreign trust or a foreign estate specified foreign financial asset, unless they know (or have reason to know) of the interest. If they receive a distribution from the foreign trust or foreign estate, they are considered to know of the interest.
Exceptions to Tax Reporting (Form 8938)
U.S. Taxpayers do not have to report a specified foreign financial asset on Form 8938:
1) If the financial account is maintained by a U.S. payer which includes: a U.S. financial institution, a domestic branch of a foreign bank or insurance company, a foreign branch or subsidiary of a U.S. financial institution;
2) If the U.S. Taxpayer reports the specified Foreign financial asset on timely filed IRS forms:
a) Form 3520: Annual Return to Report Transactions with Foreign Trusts and Receipt of certain foreign Gifts
b) Form 5471: Information Return of U.S. Persons with Respect to Certain Foreign Corporations
c) Form 8865: Return of U.S. Persons with Respect to Certain Foreign Partnerships
Civil Penalties (Form 8938)
1) Failure to File Penalty: A penalty of $10,000 for each 30 day period not filed, (within 90 days after the IRS notifies of the failure to file) after the 90 day period has expired, up to $50,000 maximum penalty.
2) Accuracy-Related Penalty: A 40% penalty on a tax underpayment as a result of an undisclosed, specified foreign financial asset.
3) Fraud: A 75% penalty on a tax underpayment, due to fraud.
Criminal Penalties (Form 8938)
Criminal penalties may be imposed for:
1) Failure to file Form 8938;
2) Underpayment of tax;
3) Failure to report asset.
Statute of Limitations
1) For failure to file Form 8938, failure to report a specified foreign financial asset, the statute of limitations remains open until 3 year after the date Form 8938 is filed.
2) For failure to include in gross income, an amount relating to one or more specified foreign financial assets, and the amount omitted in more than $5,000, any tax owed for the tax year, can be assessed at any time within 6 years after the tax return is filed.
If you have any questions regarding IRS Form 8938 please contact Gary Wolfe at 323-782-9139.