Press Room: Tax Release

January 05, 2012

New Requirement: Individual Taxpayers to Report Foreign Financial Assets

New Temporary Regulations Require Individual Taxpayers to Report Foreign Financial Assets on New Form 8938 with 2011 Tax Returns.

On December 15, 2011, IRS published temporary and proposed regulations under 6038D, which requires individual taxpayers to report certain information with respect to foreign financial assets (FFA) to IRS with their U.S. income tax return. Failure to report under these rules could result in the imposition of a $10,000 failure to file penalty. In addition, any underpayment of tax related to an undisclosed foreign financial asset may be subject to a penalty of 40%.

Under these new regulations, individual taxpayers who have FFA with an aggregate value in excess of $50,000 at the end of the taxable year (or $75,000 at any time during the year) are generally required to file Form 8938 reporting certain information with respect to their FFA.  FFA include accounts maintained with foreign financial institutions (FFI) other than the U.S. branches of an FFI. Subject to exceptions set out in the following paragraph, FFA also includes directly held stock or securities issued by foreign companies, other financial instruments and contracts with foreign persons, and any interest in a foreign entity where those items are not maintained with a FFI. For example, bank accounts, derivative contracts and stock certificates held with an FFI must be reported. In addition, interests in foreign partnerships (e.g., foreign hedge funds), loans to foreign persons and certain assets held in trust are reportable while a direct interest in certain physical assets is not reportable. While not entirely clear at this time, leases may also be reportable. Taxpayers must report detailed information relating to their FFA including, for example, the name and address of financial institutions where FFA are held along with relevant account numbers and asset values (in U.S. dollars).

Various exceptions to reporting may apply. For example, taxpayers who hold foreign assets in accounts maintained with U.S. financial institutions are not generally required to file under these rules. In addition, taxpayers not otherwise required to file a U.S. income tax return are generally exempt. Taxpayers who report FFA on another U.S. tax form may simply indicate on Form 8938 the other form that contains the relevant FFA data. However, taxpayers who report foreign accounts on the Federal FBAR must nonetheless report such accounts on Form 8938, even if such reporting is duplicative.

Under previous guidance, taxpayers were not required to file under Section 6038D for the 2011 tax year if Form 8938 was not released before the taxpayer files a 2011 U.S. income tax return (See Notice 2011-55). Under this rule, taxpayers were permitted to file Form 8938 with respect to their 2011 tax year with their 2012 return. However, on December 17, 2011, IRS released the final version of Form 8938. As a result, calendar year taxpayers will be required to file Form 8938 with their 2011 return. Thus, return preparers should begin information gathering for the 2011 year as soon as possible.