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Sunday, March 25, 2012

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New US Reporting for Foreign Assets

Beginning with his 2011 tax return, a US citizen or resident who owns certain specified foreign financial assets (SFFAs) has a new US tax filing obligation, form 8938 ("Statement of Specified Foreign Financial Assets"). Most US citizens who are Canadian residents are already familiar with FBAR reporting of foreign bank and financial accounts on form TD F 90.22-1: reporting is required annually if the aggregate value of those accounts exceeds $10,000 during the tax year. Now, in addition to the FBAR, certain US individuals must file form 8938 with their US tax returns to report certain detailed information about the taxpayer's SFFAs (Code section 6038D, enacted with FATCA).

An SFFA includes many types of non-US financial accounts that are also reported on the FBAR, but the definition of an SFFA is broader than the definition of a foreign financial account for FBAR purposes. SFFAs include other foreign financial assets held for investment that are not in an account--namely, stock or securities of non-US issuers, any interest in a non-US entity, and any financial interest or contract that has a non-US issuer or counterparty.

For 2011, only specified individuals must file form 8938--a US citizen; a resident alien of the United States for any part of the tax year (even if he elects to be a non-resident under a treaty's residence tie-breaker rules); a non-resident alien who makes an election to be treated as a resident alien for the purposes of filing a joint US tax return; and, in some cases, a resident of a US possession. Proposed regulations have been issued that require form 8938 reporting by certain US entities for taxable years beginning after December 31, 2011. However, if a person is not required to file a US income tax return for the year, form 8938 is also not required.

A significant and favourable difference distinguishes form 8938 from the FBAR: form 8938 reporting thresholds are more generous and take into account both the taxpayer's filing status and his residence. For a taxpayer who lives in the United States and files a return other than a joint return, form 8938 reporting is required if the total value of his SFFAs for the year is $50,000 on the last day of the tax year or $75,000 at any time during the tax year; these thresholds increase to $100,000 and $150,000, respectively, for taxpayers who file jointly. For a taxpayer who lives outside the United States and files a return other than a joint return, the thresholds are $200,000 and $300,000, respectively, and $400,000 and $600,000, respectively, for taxpayers who file jointly. When compared with the $10,000 threshold for FBAR filing that applies regardless of residence, the reporting thresholds for form 8938 reflect a more practical approach on the part of the United States.

To qualify as living abroad for purposes of the higher filing thresholds, the individual's tax home must be in a foreign country and he must meet the same presence-abroad test that was established for the "foreign earned income" exclusion: the individual either has been a bona fide resident of a foreign country for an entire tax year or has been present in a foreign country for at least 330 full days during any 12 consecutive months that ends in the tax year being reported.

If an individual would otherwise be required to file form 8938 and has an SFFA that is reported on another US information return (such as form 3520, 3520-A, 5471, 8865, or 8891), the asset need not be reported on form 8938, but the value must be included in the determination of whether the threshold for filing form 8938 is met. Part IV of form 8938 must also be completed to disclose which and how many such other information returns report the particular SFFA.

The information that must be disclosed on form 8938 depends on the particular type of asset, but it generally includes basic identification of the account or asset; the name and address of the financial institution or the issuer or counterparty of stock, securities, or financial assets; the maximum value of the account or asset during the year; whether the account or asset was acquired or disposed of during the year; the amount of income, gain, loss, or other item recognized during the year and the schedule, form, or return on which it is reported to the IRS; and the currency exchange rate used. In addition, with respect to interests in foreign entities, form 8938 must disclose whether the foreign entity is a passive foreign investment company.

Non-compliance with the new form 8938 reporting requirements can have severe consequences. The penalty for failing to file form 8938 or to accurately report SFFAs is a minimum of $10,000. If the taxpayer does not file a correct and complete form 8938 within 90 days after the IRS mails a notice of failure to file, the penalty is increased by $10,000 for each 30-day period of non-compliance, up to a $50,000 maximum. Reasonable cause may be asserted to avoid the penalty only if the taxpayer affirmatively shows the facts that support that claim. A foreign law, whether civil or criminal, that restricts disclosure of the information that must be reported on form 8938 is not reasonable cause.

In addition, if a taxpayer underpays his US tax as a result of a transaction that involves an undisclosed foreign financial asset, the accuracy-related penalty is increased from 20 percent to 40 percent. Failure to file form 8938 can cause the limitation period to remain open for the income tax return with which the form should have been filed. If a taxpayer fails to file form 8938 or fails to report an SFFA, the limitation period for all or part of a taxpayer's US return for the tax year remains open until three years after a complete and accurate form 8938 is filed. Moreover, if on his tax return a taxpayer omits more than $5,000 gross income that relates to an SFFA, the limitation period is extended to six years from the date on which the return is filed.

It is clear that the IRS is serious about collecting more information on foreign financial assets that are held by US persons, as evidenced by the new form 8938 reporting, the IRS's FBAR enforcement efforts, and the impending FATCA regime that applies to non-US financial institutions with US clients. In light of the significant penalties associated with form 8938 reporting, the breadth of the information to be reported, and the compliance issues that many US citizens in Canada have faced with respect to FBAR reporting, a US taxpayer should carefully review new form 8938 and the regulations issued under Code section 6038D to determine whether he must file form 8938 with his 2011 US tax return.

Jessica S. Wiltse
Hodgson Russ LLP, Buffalo

 
  Canadian Tax Highlights
Volume 20, Number 3, March 2012
©2012, Canadian Tax Foundation