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The Internal Revenue Service on December 11th, 2014 has issued final regs that provide guidance on the requirement under Code § 6038D, for Form 8938 filers. This provides more information and clarifications on certain filers, types of assets to be reported, valuation etc.
The final regs apply for tax years ending after Dec. 19, 2011, but taxpayers may apply them to earlier years.
To quickly recap, the Form 8938, has to filed by individuals with an interest in a "specified foreign financial asset" during the tax year in which the aggregate value of all such assets at the end of the year is $50,000 for Single filers and $100,000 for filers with the status Married Filing Jointly. IRC § 6308D also applies to a domestic entity that has been formed or used for purposes of holding specified foreign financial assets in the same way as if it were an individual.
If the Form 8938 is not filed as required during a tax year, there is a penalty of $10,000. This penalty increases if the taxpayer continues to stay non-compliant.
Specified Foreign Financial Assets are:
(1) Depository or custodial accounts at foreign financial institutions,
(2) To the extent not held in an account at a financial institution,
(a) Stocks or securities issued by foreign persons,
(b) Any other financial instrument or contract held for investment that is issued by
or has a counter-party that is not a U.S. person, and
(c) Any interest in a foreign entity.
In late December of 2011, IRS issued temporary and proposed regs detailing the Code Sec. 6038D requirement for individuals to attach a statement to their income tax return to provide information on foreign financial assets in which they had an interest At that time, IRS also released the final version of Form 8938 (Statement of Specified Foreign Financial Assets) and its Instructions.
IRS has adopted the 2011 temporary regs as final regs with certain modifications described below.
Dual resident taxpayers:
The final regs provide an exemption from the Code Sec. 6038D reporting requirements for a dual resident taxpayer who determines his U.S. tax liability as if he were a nonresident alien and claims a treaty benefit as a U.S. nonresident by
- Timely filing a Form 1040NR, Nonresident Alien Income Tax Return (or such other appropriate form under that section), and
- Attaching a Form 8833, Treaty-Based Return Position Disclosure.
Persons not required to file tax return:
As provided in the 2011 temporary regs, the final regs provide that a specified person that doesn't have to file a tax return for the year doesn't have to file a Form 8938.
The final regs clarify that a specified person that is transferred property in connection with the performance of personal services is first considered to have an interest in the property for purposes of Code Sec. 6038D on the first date that the property is substantially vested or, in the case of property with respect to which a specified person makes a valid election under Code Sec. 83(b), on the date of transfer of the property.
Assets held by a disregarded entity (most times an LLC):
The final regs provide that a specified person that owns a foreign or domestic entity that is a disregarded entity, is treated as having an interest in any specified foreign financial assets held by the disregarded entity.
As a result, a specified person that owns a disregarded entity (whether domestic or foreign) that, in turn, owns specified foreign financial assets, must include the value of those assets in determining whether the specified person meets the reporting thresholds under IRC § 6308D and, if so, must report the assets on Form 8938.
Jointly owned assets for those who are not married to each other:
The final regs clarify that each of the joint owners of a specified foreign financial asset who are not married to each other must include the full value of the asset (rather than only the value of the specified person's interest in the asset) in determining whether the aggregate value of the specified individual's specified foreign financial assets exceeds the applicable reporting thresholds, and each joint owner must report the full value of the asset on his or her Form 8938.
Jointly owned assets for those who are married to each other, but file separately:
The final regs also clarify that, in the case of joint owners who are married to each other and file separate returns, each joint owner of a specified foreign financial asset must report the full value of the asset (rather than only the value of the specified person's interest in the asset) on the individual's Form 8938, even if both spouses are specified individuals and only one-half of the value of the asset is considered in determining the applicable reporting thresholds under IRC§ 6038D.
Specified foreign financial assets:
The final regs modify the definition of a financial account for purposes of Code Sec. 6038D in order to require consistent reporting under Code Sec. 6038D with respect to:
- Retirement and pension accounts and certain non-retirement savings accounts: For tax years beginning after Dec. 12, 2014, the final regs also provide that retirement and pension accounts, non-retirement savings accounts, and accounts satisfying conditions similar to those described in Reg. § 1.1471-5(b)(2)(i) and that are excluded from the definition of a financial account under an applicable Model 1 IGA or Model 2 IGA (as provided in Reg. § 1.1471-5(b)(2)(vi)), are included in the definition of a financial account for Code Sec. 6038D purposes.
- Stock, securities, financial instruments, and contracts that are held for investment: The final rule clarifies that specified foreign financial assets include stock, securities, financial instruments, and contracts that are held for investment and not held in an account maintained by a financial institution and are issued by a person organized under the laws of a U.S. possession.
The final regs clarify that the maximum fair market value for a specified foreign financial asset with no positive value during the year is treated as zero.
The final regs adopt two modifications to the valuation rules relating to foreign currency:
- First, the final regs state that a foreign currency conversion shown on a periodic financial account statement is among the aspects of the statement that a taxpayer may rely upon to the extent provided in Reg. § 1.6038D-5(d).
- Second, IRC § 6038D of the 2011 temporary regs provides that, except as otherwise provided, a specified person must use the foreign currency exchange rate issued by the U.S. Treasury Department's Financial Management Service for purposes of Code Sec. 6038D. The final regs are updated to reflect the fact that foreign currency exchange rates are now issued by the Treasury Department's Bureau of the Fiscal Service.
Please consult with a tax professional for advice on Form 8938,it's thresholds and compliance requirements if the rules under IRC Section 6308D apply to you.
Bibliography: Federal Register- Info with respect to foreign financial assets; Form 8938; Internal Revenue Bulletin 2012-8; IRB 2013-15; 26 U.S. Code § 6038D.
As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxsolutionsllc.com.