In March of 2010, Congress passed the Hiring Incentives to Restore Employment Act (the “HIRE Act”), which included the Foreign Account Tax Compliance Act (“FATCA”). FATCA created a new reporting requirement for certain U.S. taxpayers who own certain foreign financial assets.

U.S. citizens and income tax residents, including green card holders and persons meeting the Substantial Presence Test (generally, those who are present in the United States for the equivalent of 183 days or more when applying a three-year look-back test) may be required to file the new form. Additionally, nonresident aliens who make an election to be treated as a resident for purposes of filing a joint income tax return and nonresident aliens who are bona fide residents of American Samoa or Puerto Rico may need to file the form. Other nonresident aliens, including G-4 visa holders, are not required to file the form.

The above individuals must file a new form, Form 8938, Statement of Specified Foreign Financial Assets, for any year in which they have an interest in “specified foreign financial assets” in excess of a threshold that varies from $50,000 to $600,000 depending on whether the individual lives in the U.S. or abroad and whether they file a joint income tax return with their spouse (see the table below).

Specified foreign financial assets include the following:

  1. Foreign financial accounts
  2. Any of the following assets which are not held in a foreign financial account:
    • Any stock or security issued by a non-U.S. person
    • Any financial instrument or contract held for investment that has an issuer or counterparty who is not a U.S. person
    • Any interest in a foreign entity, including foreign trusts and estates

Please note that foreign real estate is not a specified foreign financial asset, unless it is held in an entity.

The above individuals must file a Form 8938 if their specified foreign financial assets exceed the following thresholds (in either column) during the tax year:

12/31 Aggregate Value of All Specified Foreign Financial Assets Exceeds: Highest Annual Balance Exceeds:
Single, living in the U.S. $50,000 $100,000
Single, living outside the U.S. $200,000 $400,000
Married, filing separately, living in the U.S. $50,000 $100,000
Married, filing separately, living outside the U.S. $200,000 $400,000
Married, filing jointly, living in the U.S. $100,000 $200,000
Married, filing jointly, living outside the U.S. $400,000 $600,000

Form 8938 must be attached to a taxpayer’s annual income tax return, beginning with tax years that begin after March 18, 2010 (for most taxpayers, this would be tax year 2011). Form 8938 must be filed even if none of the assets reported affect the taxpayer’s income tax liability for the year, but does not need to be filed if no income tax return is required. Failing to file the Form 8938 may result in penalties of $10,000 and an extended statute of limitations on the tax return.

The IRS recently released a draft version of the Form 8938. Part I of the form reports information on a taxpayer’s foreign financial accounts, including information similar to that reported on Form TD F 90-22.1 (the “FBAR”). Part II of the form provides information on other specified foreign financial assets as described in #2 above. This information includes acquisition and disposition dates during the year (if applicable), estimated maximum values (appraisals are not required), and information about the issuer and/or counterparty of the foreign asset. Part III of the form requires the taxpayer to show what income was earned on his or her specified foreign financial assets, and where that income was reported on his or her income tax return. The draft form does provide an exception whereby a taxpayer does not need to report foreign assets on Form 8938 if they are reported on certain other reporting forms; this exception is provided in Part IV of the form.

The IRS is still developing the final version of Form 8938 and the accompanying Regulations and instructions. Regulations are expected to be released soon, possibly by the end of 2011. The IRS announced in July that the Form 8938 requirement would be suspended until the final Form 8938 has been released. Therefore, if the final form and instructions are released in time for taxpayers to file the Form 8938 with their 2011 income tax return, then they will need to do so. If the final form is not released in time, then taxpayers will file a Form 8938 to report both 2011 and 2012 information with their 2012 income tax returns.

It is important to note that the Form 8938 does not replace a taxpayer’s FBAR filing requirements; this is an additional reporting requirement imposed by Congress. While the FBAR and Form 8938 reporting will be largely duplicative for many taxpayers, there are some important differences. One is that the Form 8938 is attached to the income tax return and is due on the same date as the return, whereas the FBAR is filed separately from the tax return and is due by June 30th. This means that taxpayers cannot prepare the Form 8938 themselves if they do not prepare their own tax return. It is also possible for a taxpayer to file one of the forms without having to file the other, depending on the types and amounts of foreign assets they own. For example, foreign hedge funds and private equity funds need to be reported on the Form 8938 but not on the FBAR.

Form 8938 represents another reporting burden for U.S. taxpayers who own foreign financial assets. If you owned foreign financial accounts and assets during 2011, you should begin gathering information related to those assets now to facilitate the preparation of Form 8938 with your tax return.* If you have any questions related to this article, please contact Grant Miller at 703.502.9500 or gmiller@thewolfgroup.com.

* The information required on the draft Form 8938 includes the following:

  1. Foreign Accounts
    • Type of account
    • Account number
    • Amount and type of income earned in account
    • Whether account was opened or closed during the year
    • Whether account was jointly owned with your spouse
    • Maximum value of account, in original currency
    • Name and address of financial institution
  2. Other Foreign Assets
    • Description of asset
    • Identifying number or other designation
    • Dates of acquisition or disposal during the year, if applicable
    • Amount and type of income earned on the asset
    • Whether asset was jointly owned with your spouse
    • Maximum value of asset, in original currency
    • Name of entity/issuer/counterparty
    • Type of entity/issuer/counterparty (i.e. partnership, corporation, trust, estate)
    • Mailing address of entity/issuer/counterparty
    • Whether entity is a U.S. or a foreign person

This newsletter is for informational purposes only. It should not be construed as tax, legal, or investment advice. Information has been gathered from sources believed to be reliable, but individual situations can vary and you should consult with your investment, accounting and/or tax professional.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE WOLF GROUP TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.