The IRS issued temporary and proposed regulations (T.D. 9567; REG-130302-10) on the requirement that certain foreign financial assets be reported to the IRS for tax years beginning after March 18, 2010.
Sec. 6038D requires individuals to report interests in “specified foreign financial assets” (SFFAs) when filing their federal income tax returns. The IRS is also authorized under Sec. 6038D to apply the reporting requirement to any domestic entity that is formed or availed of principally to avoid reporting (a “specified domestic entity”). For individuals, the new reporting requirement began in 2011 for the 2012 filing season. The IRS also issued a final version of Form 8938, Statement of Specified Foreign Financial Assets, and instructions.
The temporary regulations apply to individuals currently required to file; the proposed regulations will apply to specified domestic entities when they are required to file (starting in 2012). In all cases, the reporting requirement applies only to taxpayers that are required to file a federal income tax return. So, for example, it does not apply to bona fide residents of Guam, the Northern Mariana Islands or the U.S. Virgin Islands but generally does apply to bona fide residents of Puerto Rico or American Samoa. In addition, taxpayers who file Form 8938 still must file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), because the forms serve different purposes (tax administration vs. law enforcement).
SFFAs that must be reported on Form 8938 are broadly defined to include financial accounts in foreign financial institutions and other foreign financial accounts or instruments held for investment. SFFAs do not include any asset for which the taxpayer has elected mark-to-market treatment (which involves including securities in inventory at fair market value). Certain other foreign financial assets, as specified in the temporary regulations, are also excepted from the reporting requirement.
The filing requirement is triggered by a statutory threshold of $50,000 in aggregate value of SFFAs during the tax year, with the IRS authorized to set higher amounts. As revised by the temporary regulations, they are, for taxpayers living in the United States:
- Single taxpayers/married filing separately: $50,000 on the last day of the year or $75,000 anytime during the year.
- Married filing jointly: $100,000 on the last day of the year or $150,000 anytime during the year.
For taxpayers living abroad, the thresholds are:
- Single taxpayers/married filing separately: $200,000 on the last day of the year or $300,000 anytime during the year.
- Married filing jointly: $400,000 on the last day of the year or $600,000 anytime during the year.
The initial penalty for noncompliance is $10,000. If a taxpayer fails to file for more than 90 days after the IRS notifies the taxpayer of the failure to comply, a penalty of $10,000 for each 30-day period (or fraction of it) applies, with a maximum of $50,000.
The temporary regulations are generally effective for tax years ending after Dec. 19, 2011, but taxpayers can elect to apply them to earlier years. The proposed regulations would apply to tax years beginning after Dec. 31, 2011.
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