U.S. citizens or U.S. resident aliens, who held assets outside of the United States for any amount of time during 2011, should be aware of a rapidly approaching deadline to file Form 8938 “Statement of Specified Foreign Financial Assets.” Taxpayers subject to the Form 8938 filing requirements must submit this form with their 2011 individual tax return (Form 1040 and supporting schedules) by April 17, 2012.
This deadline is extended until June 15 if the taxpayer lives abroad or October 15 if the taxpayer files a request for extension.
Form 8938 is separate and distinct from the more familiar foreign bank account reporting form (FBAR), Treasury Form TD F 90-22.1. The filing of Form 8938 will not waive the FBAR reporting requirement, due to the U.S. Treasury by June 30th. Accordingly, since the FBAR and Form 8938, have different filing deadlines, taxpayers will want to ensure that the value of the assets listed on both forms are consistent with each other.
Form 8938 must be filed if the total value of the taxpayer’s foreign financial investments exceeds $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. If the taxpayers are married, Form 8938 will be required if the total value of the specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. Because there is limited guidance on computing the value of foreign assets, if an exact value of the assets cannot be determined, a reasonable estimate may be used.
Foreign financial assets which are required to be reported on Form 8938 may constitute:
•1. Financial accounts maintained by a foreign financial institution. A “financial account” is any depository or custodial account maintained by a foreign financial institution. This term also encompasses any debt or equity interest in a foreign financial institution, other than interests that are regularly traded on the securities market.
In turn, a foreign financial institution is any financial institution that is not a U.S. entity and satisfies one or more of the following:
•o It accepts deposits in the ordinary course of a banking or similar business.
•o It holds financial assets for the account of others as a substantial part of its business.
•o It is engaged primarily in the business of investing, reinvesting, or trading securities, partnership interests, commodities, or any interest (including futures, forward contracts, or options) in such securities, partnership interests or commodities.
•2. Foreign financial assets if they are held for investment and NOT held in an account maintained by a financial institution:
•o Stock or securities issued by someone that is not a U.S. person.
•o Any interest in a foreign entity.
•o Any financial instrument or contract that has an issuer or counterparty that is not a U.S. person.
•o Stock issued by a foreign corporation.
•o A capital or profits interest in a foreign partnership.
•o A note, bond, debenture, or other form of indebtedness issued by a foreign person.
•o An interest in a foreign trust or foreign estate.
•o An interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement with a foreign counterparty.
•o An option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer.
Additionally, while Form 8938 doesn’t directly apply to real estate, it will, however, apply to real estate held by an investment entity. This comes into consideration more often than one might think, namely because numerous countries have foreign investor laws which require that real estate must be held by an investment entity instead of the individually, by the taxpayer.
Taxpayers who fail to complete Form 8939 face onerous consequences. If taxpayers fail to file a complete and correct Form 8938 by the due date, they may be subject to a penalty of $10,000, with an additional penalty of up to $50,000 for continued failure to file after IRS notification. The IRS may also impose a 40% penalty on any understatement tax resulting from an undisclosed foreign financial asset.
