Foreign Asset Reporting Update
Reporting of foreign asset ownership may require filing more than one form starting this filing season.
January 26, 2012
Enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147, the Foreign Account Tax Compliance Act (FATCA) is an attempt to minimize tax evasion by United States taxpayers holding investments in offshore accounts. The reporting provisions of FATCA are being phased in over the next few years to require U.S. taxpayers, as well as foreign financial institutions, to report directly to the IRS the ownership interests of certain financial interests.
U.S. Taxpayers Holding Foreign Financial Assets
FATCA requires certain U.S. taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938, Statement of Specified Foreign Financial Assets) that the taxpayers must attach to their annual tax returns. For most taxpayers, the first use of this form will be as part of the 2011 tax return filed during the 2012 tax filing season. Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification). Further, underpayments of tax attributable to nondisclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40% Although the IRS anticipates issuing regulations to include domestic entities in the filing requirement, if the entities are formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, as of this date the filing requirement of Form 8938 applies only to individuals.
Form 8938 Does Not Replace FBAR Filing Requirements
The reporting of foreign financial accounts on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), is required under Title 31. Certain foreign financial accounts are reported on both Form 8938 and FBAR. However, the information required by the forms is not identical in all cases. Different rules, key definitions, and reporting requirements apply to Form 8938 and FBAR reporting. Because of these differences, taxpayers may be required to report certain foreign financial accounts on one but not both forms.
Because they serve different law enforcement purposes, Form 8938 and the FBAR require different categories of persons to file, have different filing thresholds for Form 8938 (i.e., minimum $50,000 threshold) and FBAR reporting (i.e., $10,000 reporting threshold), and require different assets, as well as accompanying information, to be reported on each form.
For FBAR purposes, a filer (defined broadly as a U.S. person, so it applies to individuals as well as to all types of entities) must report a financial account if the filer had a financial interest or signature authority in the financial account during the previous calendar year. Financial interest for FBAR purposes is based on whether the person is the owner of record for, or holds legal title to, the financial account. Signature authority is the authority of a person to dispose of assets held in a financial account.
For purposes of filing Form 8938, an individual has an interest in the financial account if potential tax attributes or transactions related to the account would be reported on the individual’s tax return. The concept of signature authority does not apply for purposes of Form 8938 requirements.
In certain instances, FBAR reporting is required by persons who do not have a direct financial interest in a foreign financial account. For example, an individual is required to report the foreign financial account of his or her wholly owned domestic or foreign corporation. If a domestic corporation has a direct or indirect financial interest in the foreign account, it will also be required to report the account, as would any individuals, such as employees, who have signature authority over the financial account. For purposes of Form 8938, if a foreign financial account is reported by a specific individual, the foreign account will not also be reported by a specified domestic entity, and vice versa.
The due date for filing the FBAR with the Treasury Department in Detroit is June 30 for financial accounts for which the filer had a financial interest or signature authority during the previous calendar year. Form 8938 is due with the taxpayer’s annual income tax return and filed with the applicable IRS service center.
Reporting by Foreign Financial Institutions
FATCA will also require foreign financial institutions (FFIs) to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The timeline for implementing these new reporting requirements is contained in Notice 2011-53, which requires an FFI to enter into a special agreement with the IRS by June 30, 2013. Under this agreement a “participating” FFI will be required to perform the following:
(1) Undertake certain identification and due-diligence procedures with respect to its account holders;
(2) Report annually to the IRS on its account holders who are U.S. persons or foreign entities with substantial U.S. ownership; and
(3) Withhold and remit to the IRS 30% of any payments of U.S.-source income, as well as gross proceeds from the sale of securities that generate U.S.-source income, made to (a) nonparticipating FFIs, (b) individual account holders failing to provide sufficient information to determine whether or not they are a U.S. person, or (c) foreign entity account holders failing to provide sufficient information about the identity of its substantial U.S. owners.
Although Notice 2011-53 provides the phased-in timeline of key FATCA implementation dates for FFIs, it should be noted that many details of the new reporting and withholding requirements will be revealed in Treasury regulations that are expected to be proposed shortly.
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Mary F. Bernard, CPA, is director — income/franchise tax, at the Dallas, Texas-headquartered tax services firm of Ryan. Bernard formerly worked as principal, director of State & Local Tax Services, at Providence, RI-basedKahn, Litwin, Renza & Co., Ltd.