The Foreign Account Tax Compliance Act, enacted in 2010, created new IRC Section 6038D and requires individuals to file a statement with their income tax returns to report interests in specified foreign financial assets if the aggregate value of those assets exceeds certain thresholds.
Temporary regulations implementing IRC 6038D have been issued. Under the regulations, specified individuals (U.S. citizens, residents and certain non-resident aliens) are required to complete and attach Form 8938, Statement of Specified Foreign Financial Assets, to their income tax returns. This is effective for tax years starting after March 18, 2010, which for most people will be their 2011 tax returns filed during the 2012 filing season.
In developing the regulations IRS considered the potential burden this new self-reporting requirement could have on affected taxpayers. To balance reporting burden and the need for compliance improvement, there are higher asset thresholds for married couples and those residing abroad. There are also exceptions that relieve taxpayers from reporting certain assets, and special rules for valuing assets.
Reporting thresholds vary based on whether a filer files a joint tax return or resides abroad, and are higher for married couples and taxpayers who qualify for foreign residency.
Unmarried taxpayers living in the US: The total value of specified foreign financial assets 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 US: The total value of specified foreign financial assets 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 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 at any time during the tax year.
Taxpayers living abroad.
Status is other than a joint return and the total value of specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or
Married filing joint return and the value of specified foreign assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year. These thresholds apply even if only one spouse resides abroad.
Married individuals who file a joint annual return for the taxable year will file a single Form 8938 that reports all of the specified foreign financial assets in which either spouse has an interest.
Specified Foreign Financial Assets
Specified foreign financial assets include foreign financial accounts, and foreign non-account assets held for investment (as opposed to held for use in a trade or business), such as foreign stock and securities, foreign financial instruments, contracts with non-US persons, and interests in foreign entities. The regulations include a list of examples, such as swaps, options, and derivative contracts.
There are exceptions. Certain assets of a foreign nature are not specified foreign financial assets that require Form 8938 reporting. Additionally, certain specified foreign financial assets reported elsewhere need not be reported on Form 8938. These exceptions are as follows:
A financial account maintained by a U.S. payor is not a specified foreign financial asset. For example, a specified person is not required to report a financial account maintained by a U.S. branch of a foreign financial institution, or a foreign branch of a U.S. financial institution..
Exceptions from reporting are made for assets reported on certain other tax forms. These include: Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, or Form 8891. The value of specified foreign financial assets reported on these forms are included in determining the total value of assets for Form 8938 purposes, but the assets do not need to be reported on Form 8938. In this situation, the taxpayer identifies on Form 8938 which and how many of these form(s) report the specified foreign financial assets.
Exceptions from reporting are made for certain trusts, certain assets held by bona fide residents of possessions, and assets or accounts for which mark-to-market elections have been made under Section 475.
A beneficial interest in a foreign trust or a foreign estate is not a specified foreign financial asset of a specified person unless the specified person knows or has reason to know of the interest.
An interest in a social security, social insurance, or other similar program of a foreign government is not a specified foreign financial asset.
A specified individual that is treated as a beneficiary of a domestic bankruptcy trust or a domestic widely held fixed investment trust is not required to file Form 8938 to report any specified foreign financial asset held by the trust.
Certain key definitions of terms in the regulations, such as “financial account” and “financial institution,” will be further defined by regulations under FATCA Chapter 4.
Taxpayers will need to determine the value of their specified foreign financial assets in order to determine if the aggregate value exceeds the threshold applicable to them. Generally, a reasonable estimate of the highest fair market value of the asset during the tax year is reported, but special rules apply to ease valuation burdens.
For reporting purposes, a specified individual may rely on a year-end financial account statement or the year-end value of a non-account asset if it reasonably approximates the maximum value of the account or asset during the tax year. Special rules also apply for reporting the maximum value of an interest in a foreign trust, foreign retirement plan, or a foreign estate.
A specified person may determine the fair market value of a specified foreign financial asset based on information publicly available from reliable financial information sources or from other verifiable sources.
Even if there is no information from reliable financial information sources regarding the fair market value of a reported asset, the regulations do not require a specified person to obtain an appraisal by a third party in order to reasonably estimate the asset’s fair market value.