New Foreign Asset Reporting In Effect For 2011 Tax Year

Individuals must report specified foreign financial assets on new Form 8938 for 2011 tax year. The HIRE Act (the Hiring Incentives to Restore Employment Act of 2010 passed in March, 2010) provides that individuals with an interest in a “specified foreign financial asset” during the tax year beginning in 2011 must attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets is greater than $50,000. These regulations are tricky, so anyone with “foreign assets” should completely understand the implications of this new law.  The new law (most commonly referred to as “FATCA”) is in addition to the Financial Bank Account Reporting (“FBAR”) related to foreign bank accounts with over $10,000 balances.

“Specified foreign financial assets” are: (1) depository or custodial accounts at foreign financial institutions, and (2) to the extent not held in an account at a financial institution, (a) stocks or securities issued by foreign persons, (b) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (c) any interest in a foreign entity.

A specified person who fails to provide required information for any tax year is subject to a $10,000 penalty. A failure continuing for more than 90 days after the day on which IRS mails a notice of the failure to the specified person subjects the specified person to an additional penalty of $10,000 for each 30-day period (or fraction thereof) during which the failure continues after the 90-day period has expired, up to a maximum penalty of $50,000 for each such failure. No penalty applies if the failure was due to reasonable cause and not willful neglect.

Who must file Form 8938. Unless an exception applies, a taxpayer must file Form 8938 if: (1) they are a specified person that has an interest in specified foreign financial assets; and (2) the value of those assets is more than the applicable reporting threshold.

A specified person includes any specified individual or a specified domestic entity if it is formed or availed of to hold specified foreign financial assets. If the value of the specified foreign financial assets is more than the appropriate reporting threshold and no exception applies, taxpayers must file Form 8938 even if none of the specified foreign financial assets affect their tax liability for the tax year.

Generally, a specified individual is: a U.S. citizen; a resident alien of the U.S. for any part of the tax year; a nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return; or a nonresident alien who is a bona fide resident of American Samoa or Puerto Rico.

If a taxpayer and their spouse file a joint return (and so would file one combined Form 8938 for the tax year), they must include the value of the asset jointly owned with theirs spouse only once to determine the total value of all of the specified foreign financial assets that they own. If a taxpayer and their spouse are specified individuals and each files a separate return, they include one-half of the value of the asset jointly owned with their spouse to determine the total value of all of  specified foreign financial assets. If a taxpayer has joint ownership with a spouse who isn’t a specified individual or someone other than a spouse, each joint owner includes the entire value of the jointly owned asset to determine the total value of all of that joint owner’s specified foreign financial assets.

The following reporting thresholds apply to taxpayers living in the U.S.:

    • An unmarried taxpayer satisfies the reporting threshold only if the total value of the specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
    • Married taxpayers filing a joint income tax return satisfy the reporting threshold only if the total value of their specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 any time during the tax year.
    • A married taxpayer filing a separate income tax return satisfies the reporting threshold only if the total value of his specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

The following reporting thresholds apply to a taxpayer living abroad—i.e., whose tax home is in a foreign country and who is (1) a U.S. citizen who has been a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year; or (2) a U.S. citizen or resident who is present in a foreign country at least 330 full days during any period of 12 consecutive months that ends in the tax year being reported:

    • A taxpayer who doesn’t file a joint return satisfies the reporting threshold if the total value of his specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.
    • A married taxpayer who files a joint income tax return satisfies the reporting threshold only if the total value of all specified foreign financial assets he or his spouse owns is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.

If you have any questions regarding these new regulations or your reporting requirements for your foreign assets, please do not hesitate to contact us.

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