Tax Law Center Blog

Form 8938, Statement of Specified Foreign Financial Assets, is a new reporting form. Form 8938 will be used to report certain foreign financial assets as required as part of the Hiring Incentives to Restore Employment Act (HIRE Act), which was signed into law in 2010 by President Obama.

Form 8938 is effective for 2011 and future tax years. The form will typically be attached to your annual federal income tax return if you have a filing requirement. Please keep in mind Form 8938 is a separate and distinct reporting form from Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly referred to as the FBAR. Individuals may be required to file both reports, depending on the specific facts of a particular year.

It is possible that the provisions of the HIRE Act will affect you and any disregarded entities. While the HIRE Act technically requires reporting by domestic entities in addition to individual reporting requirement, the IRS has currently suspended the reporting requirement for domestic entities until it issues final regulations covering domestic entities.

Last month the IRS finally released the final version of Form 8938, Statement of Specified Foreign Financial Assets, and released its Form 8938 instructions. Affected taxpayers must use the form to report certain financial assets to the IRS.

Under the Foreign Account Tax Compliance Act’s addition of Sec. 6038D to the Code, individuals are required to report interests in specified foreign financial assets (SFFAs) when filing their federal income tax returns. The act was effective for tax years beginning after March 18, 2010; however, in Notice 2011-55, the IRS suspended the requirement until the final version of Form 8938 was released. Therefore, the taxpayers subject to the requirement must file the form in 2012 for 2011 tax years. In addition, taxpayers who would have been required (except for the suspension of the requirement in Notice 2011-55) to file Form 8938 in 2011 for a tax year that began after March 18, 2010, must file it for the prior year with their return for the current tax year.

The Sec. 6038D reporting requirement also applies to any domestic entity that is formed or availed of to hold specified foreign assets, but until the IRS issues regulations governing such domestic entities, only individuals are required to file Form 8939.

The final form is unchanged from the draft form released in June. The instructions, issued in draft form in September, have been updated to reflect changes made by last week’s regulations—most notably, a reduction in the reporting threshold amounts for the value of specified foreign financial assets held at any time during the tax year. The new thresholds for taxpayers living in the United States are:

• 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.

The reporting thresholds for taxpayers living abroad are:

• Single taxpayers/married filing separately: $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 the year or $600,000 anytime during the year.

There are significant civil and criminal penalties for failure to file Form 8938 or for an incorrectly filed Form 8938. The civil penalty starts at $10,000 and goes up from there. In addition to penalties, failure to file Form 8938 when required could result in the statute of limitations on tax liability for the entire income tax return to remain open until three years after the failure is remedied as well as possible criminal prosecution in certain circumstances.

It is very important for anyone with funds in offshore accounts to have a tax professional who is familiar with all of the applicable reporting requirements to assist them. Taxpayers with undisclosed foreign accounts should also consider participating in the 2012 OVDP. Although the 2012 OVDP penalty regime may seem harsh for many, the decision to participate should include an economic analysis of the taxpayer’s projected future earnings that could be generated from the foreign funds. If a taxpayer is discovered before any voluntary disclosure submission, there could be harsh criminal (in addition to civil) penalties. The risks may outweigh the benefits.

Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.