The Internal Revenue Service published temporary regulations (T.D. 9567) on December 19, 2011, implementing Section 6038D, which provides that “specified individuals” who have an interest in “specified foreign financial assets” with a value of more than the applicable reporting threshold must attach new Form 8938, Statement of Specified Foreign Financial Assets, to their tax returns for tax years beginning after March 18, 2010.

On the same day, IRS published proposed regulations (REG-130302-10) that apply the provisions of Section 6038D to domestic entities as if the domestic entity were an individual, if the domestic entity is formed or availed of for the purposes of holding “specified foreign financial assets,”—i.e., certain domestic corporations, partnerships and trusts (but not estates). The proposed regulations are to be effective for the taxable years beginning after December 31, 2011. However, until they are issued as a final regulation, no domestic entity is required to file Form 8938.

A final version of Form 8938 and corresponding instructions were published on December 22, 2011. IRS is increasingly focusing its attention on offshore accounts and assets and the obligation of U.S. taxpayers to report such assets and accounts. Section 6038D, which was enacted by Congress in 2010 as part of the Foreign Account Tax Compliance Act provisions of the Hiring Incentives to Restore Employment (HIRE) Act, is a part of IRS’s push for heightened tax compliance among U.S. taxpayers with foreign accounts and assets.

Generally

T.D. 9567 provides guidance regarding the requirement that a “specified individual” or a “specified domestic entity” (collectively referred to as a “specified person”) that holds any interest in a specified foreign financial asset (SFFA) during the taxable year attach a statement to the person’s annual tax return to report the information identified in Section 6038D(c) on Form 8938, if the aggregate value of the SFFA exceeds $50,000 for the taxable year. A joint interest in an SFFA is subject to reporting by each specified person that is a joint owner of the asset (although, jointowner married individuals are allowed to report on a single Form 8938).

A specified person is considered to have an “interest” in an SFFA if any income, gain, loss, deduction, credit, gross proceeds or distribution attributable to the holding or disposition of the asset is, or would be, required to be reported, included or otherwise reflected on the person’s annual return, even if no income, gain, etc., is attributable to the asset for a particular tax year. Owners of disregarded entities and certain grantor trusts will be considered to have an interest in an SFFA held by the disregarded entity or trust. However, a person’s interest in a partnership, corporation, estate or trust is not a reportable interest solely as a result of the person’s status as a shareholder, partner or beneficiary.

Specified Foreign Financial Assets

Section 6038D(b) defines SFFA as any financial account (generally, a depository or custodial account or equity or debt instrument in a foreign financial institution) maintained by a foreign financial institution, as well as foreign financial assets or instruments held for investment purposes and not used or held for use by the person’s trade or business (i.e., stocks or securities issued by any non-U.S. person, financial instruments or contracts that have an issuer or counterparty that is a non-U.S. person, and interests in a foreign entity). Section 6038D(c) sets forth the information that must be included on Form 8938, including, among other items, the maximum value of the SFFA and the amount of income, gain, loss, deduction or credit recognized with respect to the SFFA.

A “specified individual” includes a U.S. citizen, U.S. resident alien and a non-resident alien who has elected to be treated as a U.S. resident for purposes of filing a joint income tax return or is treated as a U.S. resident under other sections of the Code.

Individuals who reside in the U.S. must file Form 8938 if:

  • the total value of their SFFAs on the last day of the tax year exceeds
    • $50,000 (Single individuals or Married filing a separate return) and
    • $100,000 (Married filing a joint return) or
  • the total value of their SFFAs during the tax year at any time exceeds
    • $75,000 (Single individuals or Married filing a separate return) and
    • $150,000 (Married filing a joint return).

Higher Asset Thresholds for Those Abroad

Form 8938 must be filed when the total value of SFFAs exceeds the above prescribed thresholds, but the thresholds for taxpayers who reside abroad are higher than those for taxpayers who reside in the United States. According to the preamble to T.D. 9567, persons who live outside the United States “can reasonably be expected to have a greater amount of SFFA for reasons unrelated” to the policy concerns of Section 6038D.

Individuals who “live abroad” must file Form 8938 if:

  • the total value of their SFFAs on the last day of the tax year exceeds
    • $200,000 (Single individuals or Married filing a separate return) and
    • $400,000 (Married filing a joint return) or
  • the total value of their SFFAs during the tax year at any time exceeds
    • $300,000 (Single individuals or Married filing a separate return) and
    • $600,000 (Married filing a joint return).

A U.S. taxpayer is considered to live abroad if he or she is either a U.S. citizen who has been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year or a U.S. citizen or resident who is present in a foreign country or countries at least 330 full days during any period of 12 consecutive months that ends in the tax year being reported.

Presumption

A specified individual is presumed to exceed the above reporting thresholds if the Secretary determines that the individual has an interest in an SFFA and hasn’t provided sufficient information to demonstrate the aggregate value of the assets.

Some Exceptions

Taxpayers who are not required to file a U.S. tax return do not have to file Form 8938. In addition, taxpayers do not have to report the following: assets that are reported by a specified person on certain other forms, as long as the Form 8938 indicates the filing of the other forms used to report the assets; assets considered owned by a specified person that is treated as the owner of certain types of trusts, as long as the filing of Form 3520 and Form 3520-A is reported on Form 8938; or certain assets that have certain connections to a U.S. territory and are held by a specified individual who is a bona fide resident of the same U.S. territory. On the other hand, filing of Form 8938 does not replace the obligation to file the Report of Foreign Bank and Financial Accounts (FBAR) (and vice versa).

Penalties

Penalties apply to taxpayers who fail to comply with the new reporting requirement unless the person shows that the failure to report is due to reasonable cause and not to willful neglect. An individual who fails to disclose the information required to be reported is subject to a $10,000 penalty. Further, if a failure to comply continues for more than 90 days after receipt of notice of such failure, an additional penalty of $10,000 applies for each 30-day period (or fraction thereof) during which the failure to disclose continues—up to a maximum of $50,000.

IRS Announces Third Voluntary Disclosure Program

IRS announced on January 9, 2011, plans to reopen its Offshore Voluntary Disclosure Program (OVDP) (IR-2012- 5), giving taxpayers a third opportunity to get current with their taxes and disclose previously undisclosed offshore accounts. The revived OVDP program offers taxpayers an opportunity to participate under the same general terms as previously offered by IRS in 2009 and 2011, with a few key differences. There is no set deadline to apply and the terms of the program can change at any time going forward. The offshore penalty is now 27.5 percent (increased from 25 percent in the 2011 program) of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure; however, some taxpayers will be eligible for 5 or 12.5 percent penalties. Also, as before, taxpayers who feel that the penalty is disproportionate may opt instead to be examined. IRS announced that it would update the frequently asked questions on its website addressing the 2011 program to reflect the new program.