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IRS lowers foreign financial asset filing thresholds; sets up new jaywalker-hunting blinds

December 16, 2011

Congress last year passed yet another poorly-considered foreign financial asset reporting requirement, one which largely overlaps -- but doesn't replace -- existing reporting requirements. Yesterday the IRS issued the rules for complying with the "FATCA" requirements; the rules require reporting at lower amounts than those on their draft forms issued earlier this year.

The new rules (TD 9567) require the filing of new Form 8938 (not yet released in final form) at these threshholds:

Unmarried taxpayers living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 (was $100,000 on the draft Form 8938) at any time during the tax year.

Married taxpayers filing a joint income tax return and living in the US: The total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 (was $200,000 on the draft 8938) at any time during the tax year.

Married taxpayers filing separate income tax returns and living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 (was $100,000 on the draft Form 8938) at any time during the tax year.

The new form will apply to the the same foreign financial accounts covered by the old FBAR Form TD F 90-22.1 -- which is still required -- for account owners. It will also apply to a number of items that don't have to be filed under the FBAR rules, including:

- Shares of a foreign company held directly and not through a broker. For example, many policyholders of Canadian insurer Sun Life received share certificates when the company demutualized. Unless the shares have been transferred to a broker, they are to be reported on Form 8938.

- Interests in foreign partnerships

- Loans to foreign persons.

So if you fronted some cash to Uncle Hans in the old country to help him finance his new strudel shop, you might have a reportable foreign financial asset.

The penalties for failure to file this form are stiff: $10,000 for filing the form even a single day late. If experience with other IRS foreign reporting rules is a guide, they will automatically assess this penalty if they think it applies, no questions asked.

The rules for reporting foreign accounts are a mish-mash of overlapping and confusing rules that do more to ensnare the unwary -- to shoot the jaywalkers -- than to catch international tax cheats. Many of the items reported on the 8938 are already on the FBAR form, or on Form 5471 or Form 8865 (though some information won't have to be reported a second time). It's too bad the IRS isn't doing more to streamline the rules, eliminate duplication, and help people come into compliance. Instead, they are bent on hammering the inadvertent violators.

Additional information:

Press release, IRS Releases Guidance on Foreign Financial Asset Reporting

Do I need to file Form 8938, "Statement of Specified Foreign Financial Assets"?

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