The IRS began new reporting requirements for certain individuals filing their 1040 income tax returns. Unless an exception applies, you must file Form 8938, Statement of Foreign Financial Assets, if you are a specified person that has an interest in specified foreign financial assets, and the value of those assets is more than the applicable reporting threshold. These terms can be confusing, so we will explain the basics.
Specified Person
You are a specified individual if you are one of the following:
- A U.S. citizen
- A resident alien of the United States 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 married joint status on their 1040 income tax return
- A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico
Specified Foreign Financial Assets
Specified foreign financial assets include the following:
- Financial accounts maintained by a foreign financial institution
- Foreign financial assets if they are held for investment, even if not held in a financial account. These include:
- Stock or securities issued by someone who is not a U.S. person
- Any interest in a foreign entity
- Any financial instrument or contract that has a non-U.S. person as the issuer or counterparty.
Interest
You have an “interest” in a specified foreign financial asset if any of the following are or would be required to be reported, included, or otherwise reflected on your income tax return:
- Income
- Gains or losses
- Deductions or credits
- Gross proceeds or distributions from holding or disposing of the asset.
→ You have an interest in a specified foreign financial asset even if there are no reportable transactions that occurred in the current tax year. The logic is you would have reported or included them in your tax return had such transactions occurred because you have an interest in the assets.
→ An interest in a foreign trust or a foreign estate is not a foreign financial asset unless you know or have reason to know of the interest based on readily accessible information. For example, if you receive a distribution from a foreign trust, then you know you have an interest.
Value
You must report the maximum value during the tax year of each specified foreign financial asset reported on Form 8938. This means the entire value of a jointly held asset, regardless of the value of your separate interest in the account. If you own an asset jointly with your spouse and file jointly, you report the maximum value of that asset only once.
The maximum value is usually the fair market value of the entire asset. If the specified foreign financial asset is denominated in a foreign currency, the maximum value must be determined and then converted to U.S. dollars for reporting on Form 8938.
Reporting Threshold
Filing Form 8938 with your income tax return is required if the aggregate value of your specified foreign financial assets in which you have an interest is more than the reporting thresholds that may apply to you:
- Unmarried taxpayers living in the U.S. – The total value 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 and living in the U.S. – The total value is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
- Married taxpayers filing separate income tax returns and living in the U.S. – The total value 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.
- Taxpayers living abroad:
- Married taxpayers filing a joint income tax return – The total value 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.
- Filing other than a joint return – The total value 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.
And these are just the basics!!!
The penalty for not filing a required Form 8938 is $10,000. If the IRS mails a failure to file notice and you disregard it, you may be subject to a maximum penalty of $50,000.
You can see the IRS is serious about foreign financial reporting. The rules are extremely complex. Gary Kaplan, C.P.A. is extremely knowledgeable about reporting requirements. Call him with any of your questions.
