The U.S. Department of the Treasury and the IRS have issued what is expected to be their final significant package of regulations implementing the Foreign Account Tax Compliance Act (FATCA). FATCA requires foreign financial institutions (FFIs) — including foreign banks, brokers, insurance companies and investment funds — to disclose to the IRS certain information about their U.S.-owned accounts. The law is intended to combat offshore tax evasion.
Although the new regulations are targeted primarily at FFIs and U.S. financial institutions that deal with them, they demonstrate the heightened scrutiny the federal government is putting on foreign accounts and, in turn, the need for individual taxpayers holding such accounts to comply with their own reporting obligations.
Self-reporting requirements
FATCA requires certain U.S. taxpayers holding specified foreign financial assets with an aggregate value that exceeds $50,000 at the end of the tax year ($100,000 for joint filers) or with a total value of more than $75,000 at any time during the tax year ($150,000 for joint filers) to report certain information about those assets on Form 8938, “Statement of Specified Foreign Financial Assets,” along with their annual tax returns. The threshold is higher for those living outside the United States.
The term specified foreign financial assets is more broadly defined than many taxpayers realize, which may cause them to inadvertently understate the aggregate value of such assets for purposes of determining whether a filing obligation exists.
The following is a non-exhaustive list of foreign financial assets that may be subject to Form 8938 reporting:
- Financial accounts maintained by a foreign financial institution
- Foreign mutual funds, hedge funds, and private equity funds
- Stock issued by a foreign corporation
- A capital or profits interest in a foreign partnership
- An interest in a foreign trust or foreign estate
- A note, bond, or other form of indebtedness issued by a foreign person
- Foreign-issued life insurance or annuity contract with cash-value
- Foreign pension or deferred compensation plans
Taxpayers that have a Form 8938 filing obligation and fail to file the form by the extended due date may be subject to a penalty of $10,000. Additionally, if a taxpayer underpays tax as a result of a transaction involving a specified foreign financial asset that was not properly disclosed, a penalty equal to 40% of such underpayment may also be imposed.
The IRS has indicated that it will issue future regulations requiring a domestic entity to file Form 8938 if the entity is formed or used to hold specified foreign financial assets and the total asset value exceeds the appropriate reporting threshold. Until that time, only individuals must file Form 8938.
Both individuals and entities, however, may need to file Financial Crimes Enforcement Network (FinCEN) Form 114, “Report of Foreign Bank and Financial Accounts (FBAR),” which supersedes the former Form TD F 90-22.1. “U.S. persons” must file FBARs with the Department of Treasury by June 30 of the following year for each year that:
- The person had a financial interest in or signature authority over at least one financial account located outside of the United States, and
- The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.
The term “U.S. person” includes U.S. citizens, residents, entities (including, but not limited to, corporations, partnerships and limited liability companies), and trusts or estates. A person who holds a foreign financial account may have a reporting obligation even though the account produces no taxable income.
Note that the FBAR must be received by the U.S. Department of the Treasury by June 30th of the year immediately following the year being reported. The June 30th deadline may not be extended. A person subject to FBAR reporting who fails to timely file the form may be subject to a civil penalty of $10,000. If the failure to report an account or an account identifying number is willful, the civil penalty equal to the greater of $100,000 or 50% of the balance of the account may be imposed.
The Form 8938 and FBAR filings often contain seemingly duplicative information, but the filing of one does not relieve a person of an obligation to complete and file the other. (See the IRS’ Comparison of Form 8938 and FBAR Requirements here.) Additionally, information that is reported on a Form 8938 may also be reported elsewhere in the same annual tax return. In some instances, specified foreign financial assets reported on another form included with the annual tax return (e.g., Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations”) may be excepted from Form 8938 reporting.
As information about foreign financial assets increasingly makes its way to the IRS from FFIs, the odds of falling in the agency’s crosshairs by neglecting to file Form 8938 or FBAR will become greater, as will the likelihood of incurring a costly penalty.
Protect yourself
If you hold offshore financial accounts, it’s essential that you properly report the required information to the IRS. This latest round of regulations, along with the coming effective date for the withholding requirements, signals an ever tighter focus on foreign assets on the horizon. To ensure you’re in compliance, or if you have questions regarding FATCA regulations or reporting requirements, please contact us at (719) 630-1186 or through our Secure Email.
