US Entities with foreign assets have more information reporting

The US Treasury has issued long-awaited regulations specifying the domestic taxpayers who have to disclose substantial foreign financial assets to the Internal Revenue Service (IRS) every year.

The new rules, effective immediately, are linked to the Foreign Account Tax Compliance Act (FATCA). When FATCA was enacted in 2010, the new Section 6083D was added to the Internal Revenue Code requiring certain domestic US taxpayers to make annual reports to the IRS on their ‘specified foreign financial assets’. These reports, to be submitted on Form 8938, would be mandatory if the aggregate value of the foreign assets was above USD50,000 on the last day or the year, or above USD75,000 at any time during the year.

Form 8938 and associated draft instructions have been available since 2012 for use by non-resident US persons, but agreement had, at that stage, not been reached on exactly what types of ‘domestic entity’ would also be required to report assets. The US Treasury published a draft regulation addressing this issue in 2011, but later changed its mind and deferred reporting by domestic entities until final regulations had been published.

The final rule sets out exactly which domestic entities must file Form 8938 reports. It includes any domestic corporation, a domestic partnership, or a domestic trust ‘formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets’. For corporations or partnerships, this means entities that are closely held by a specified individual, and whose main activity is to generate passive income. The rule gives a definition of ‘closely held’ and ‘passive income’, designed to catch entities that ‘have a high risk of being used for tax evasion’ while reducing compliance burdens for active entities.

Domestic trusts are exempt if the trustee is a regulated financial institution or public corporation that files annual returns on behalf of the trust. Domestic grantor trusts owned by one or more ‘specified persons’ are also exempt.

Reports are required from all entities whose tax years start after 31 December 2015. There is a USD10,000 penalty for failure to file the form, which overlaps heavily with the existing FBAR form.