Individuals who are required to report interests in foreign financial assets to the IRS got guidance on the process in the form of final regulations (T.D. 9706). The regulations finalize temporary regulations (T.D. 9567) issued in 2011, with some changes.
Sec. 6038D, enacted as part of the Foreign Account Tax Compliance Act, requires individuals to report interests in specified foreign financial assets (SFFAs) when filing their federal income tax returns for tax years beginning after March 18, 2010, using Form 8938, Statement of Specified Foreign Financial Assets. SFFAs include, among other things, interests in:
- Foreign bank and financial accounts;
- Foreign trusts and foreign estates;
- Stock issued by foreign corporations;
- Foreign partnerships;
- Notes, bonds, debentures, or other debt issued by a foreign person;
- Interest rate swaps, currency swaps, and other similar agreements with a foreign counterparty; and
- Certain foreign derivatives.
The IRS is also authorized under Sec. 6038D to apply the reporting requirement to any domestic entity that is formed or availed of principally to avoid reporting (a specified domestic entity). When it issued the 2011 temporary regulations, the IRS also issued Prop. Regs. Sec. 1.6038D-6, under which specified domestic entities would be required to report SFFAs. However, until that proposed regulation is finalized, the requirement to report SFFAs applies only to individual taxpayers.
The SFFA reporting requirement is triggered by a statutory threshold of $50,000 in aggregate value of SFFAs during the tax year, with the IRS authorized to set higher amounts. As provided by the regulations, the current thresholds for taxpayers living in the United States are:
- For single taxpayers and married taxpayers filing separately: $50,000 on the last day of the year or $75,000 anytime during the year; and
- For married taxpayers filing jointly: $100,000 on the last day of the year or $150,000 anytime during the year.
For taxpayers living abroad, the thresholds are:
- For single taxpayers and married taxpayers filing separately: $200,000 on the last day of the year or $300,000 anytime during the year; and
- For married taxpayers filing jointly: $400,000 on the last day of the year or $600,000 anytime during the year.
Taxpayers who do not have an obligation to file a federal tax return for a tax year do not have to file a Form 8938 for that tax year.
One significant change in the final regulations, made in response to comments, is the addition of an exception for dual-resident taxpayers who claim to be taxed as residents of a treaty partner country by timely filing Form 1040NR, U.S. Nonresident Alien Income Tax Return, and attaching a Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).
The rules also clarify that taxpayers who own disregarded entities must include the value of any assets held by the entities both to determine whether they meet the filing threshold, and if they do meet the threshold, to determine the amount they must report on Form 8938. In addition, the final regulations provide that if an asset is held jointly by unmarried taxpayers, the full value of the asset must be included to determine both the threshold and the amount to be reported.
Another change from the temporary regulations amends the foreign currency conversion rules to permit a taxpayer to rely on a foreign currency conversion shown on a periodic financial account statement.
The final regulations also clarified that taxpayers included on a jointly filed Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, or Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, who notify the IRS of the joint filing will not be required to file Form 8938. However, the final rules do not exempt filers of FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), from filing Form 8938 because the forms serve different purposes.
The IRS indicated in the preamble to the regulations that it is considering the proper treatment for virtual currency and requested comments on how virtual currency should be treated under these rules.