The IRS issued temporary and proposed regulations (T.D. 9567; REG-130302-10) on the requirement that certain foreign financial assets be reported to the IRS for tax years beginning after March 18, 2010.
Sec. 6038D requires individuals to report interests in “specified foreign financial assets” (SFFAs) when filing their federal income tax returns. 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). For individuals, the new reporting requirement begins in 2011 for the 2012 filing season. The IRS has still not issued a final version of the required form, Form 8938, Statement of Specified Foreign Financial Assets (or of the instructions).
The temporary regulations apply to individuals currently required to file; the proposed regulations will apply to specified domestic entities when they are required to file (in 2012). In all cases, the reporting requirement applies only to taxpayers who are required to file a federal income tax return. So, for example, it does not apply to bona fide residents of Guam, the Northern Mariana Islands or the U.S. Virgin Islands, but generally does apply to bona fide residents of Puerto Rico or American Samoa. In addition, taxpayers who file Form 8938 still must file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), because the forms serve different purposes (law enforcement vs. tax administration).
The SFFAs that must be reported on Form 8938 are broadly defined to include:
- Financial accounts in foreign financial institutions; and
- Other foreign financial accounts or instruments held for investment and not held in a financial institution account.
SFFAs do not include any asset for which the taxpayer has elected mark-to-market treatment (which involves including securities in inventory at fair market value). Certain other foreign financial assets, as specified in the temporary regulations, are also excepted from the reporting requirement.
The filing requirement is triggered by a low statutory threshold of $50,000 (or a higher amount if the IRS specifies) in aggregate value of SFFAs during the tax year. The regulations set these threshold amounts slightly higher:
- Single taxpayers/married filing separately: $50,000 on the last day of the year or $75,000 anytime during the year.
- Married filing jointly: $100,000 on the last day of the year or $150,000 anytime during the year.
- Single taxpayers/married filing separately living abroad: $200,000 on the last day of the year or $300,000 anytime during the year.
- Married filing jointly living abroad: $400,000 on the last day of year or $600,000 anytime during the year.
Note that the thresholds in the regulations of aggregate value “anytime during the taxable year” (except for married taxpayers filing jointly living abroad) are lower than the amounts in the draft instructions to Form 8938.
The initial penalty for noncompliance is $10,000. If a taxpayer fails to file for more than 90 days after the IRS notifies the taxpayer of the failure to comply, a penalty of $10,000 for each 30-day period (or fraction of) applies, with a maximum of $50,000.
The temporary regulations are generally effective for tax years ending after December 19, 2011, but taxpayers can elect to apply them to earlier years. The proposed regulations are proposed to apply to tax years beginning after December 31, 2011.