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Ready or Not – Foreign Asset Reporting is Here!

December 19, 2011

On December 16, 2011, the Internal Revenue Service issued temporary and proposed regulations relating to provisions that require foreign financial assets to be reported to the IRS for tax years beginning after March 18, 2010. The actual proposed and temporary regs provide that:

1. The foreign asset reporting requirement applies to individuals required to file 1040 or 1040-NR and to domestic entities, although only the individual form, Form 8938, is available now.

2. The taxpayer characteristics for the filing is in some respects more favorable, than the statute.
a. 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

b. 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

c. 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.
d. Taxpayers living abroad.
i. 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
ii. 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.
e. 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.
3. Assets Covered. 

a. Both foreign financial and non-financial assets are covered.
b. 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.
c. 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.
d. For Section 6038D purpose, 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 Section 6038D purposes.
4. Noncompliance.
a. Taxpayers required to file Form 8938 who do not are subject to penalties – a $10,000 failure to file penalty, an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40 percent penalty on an understatement of tax attributable to non-disclosed assets.
b. The statute of limitations is extended to six years after a taxpayer’s return is filed if the taxpayer omits $5,000 from gross income attributable to a specified foreign financial asset, without regard to the reporting threshold or any reporting exceptions.
c. If the taxpayer fails to file or properly report an asset on Form 8938, the statute of limitations for the taxable year is extended until the taxpayer provides the required information. If the failure is due to reasonable cause, the statute of limitations is extended only with regard to the item or items related to such failure and not the entire tax year.

5. FBAR filing is required.

6. Entity filing is required pursuant to the proposed regs. There is no form yet to make the filing.

Read more at: Tax Times blog

IRS Audits of Quiet Filers Have Begun.

December 16, 2011

I recently attended an ABA conference where multiple representatives from the IRS including, Senior Litigation Counsel Kevin M. Downing, were speakers and they all reiterated that the IRS has a program in place to audit Quiet Filers, who chose not to make a voluntary disclosure but rather chose solely to amend their tax returns to include their previously unreported income from their foreign bank accounts.

Issues that were not answered include:

1.     What FBAR penalty will apply?

o   the civil penalty for willfully failing to file an FBAR, greater of $100,000 or 50 percent of the total balance of the foreign account per violation. See 31 U.S.C. § 5321(a)(5).

o   the civil penalty for non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation. See 31 U.S.C. § 5321(a)(5)(B) or

o   the penalty of 25% (or more) of the total balance of the foreign account in conformity with OVCI #2?

2.     How will the IRS collect these FBAR penalties under title 31? (File in FDC to reduce them to an enforceable judgment?)

3.     Is the Quite Filer only subject to a 3 year statute limitations for income tax assessments, where the understatement of income is less and 25% of the taxpayers AGI?

4.     Does the fraud provision stop the Statute of Limitations from running?

We are sure there's are even more issues. Stay tuned as these issues and more get developed, during the various IRS audits of Quiet Filers, which has already begun.

Read more at: Tax Times blog

IRS Releases Guidance on Foreign Financial Asset Reporting

December 15, 2011

IRS NEWSWIRE WASHINGTON—The Internal Revenue Service in coming days will release a new information reporting form that taxpayers will use starting this coming tax filing season to report specified foreign financial assets for tax year 2011.

Form 8938 (Statement of Specified Foreign Financial Assets) will be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. It is important for taxpayers to determine whether they are subject to this new requirement because the law imposes significant penalties for failing to comply.

The Form 8938 filing requirement was enacted in 2010 to improve tax compliance by U.S. taxpayers with offshore financial accounts. Individuals who may have to file Form 8938 are U.S. citizens and residents, nonresidents who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory.

Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds.  For example, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

The thresholds for taxpayers who reside abroad are higher. For example in this case, a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

Instructions for Form 8938 explain the thresholds for reporting, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempted, and what information must be provided.

Form 8938 is not required of individuals who do not have an income tax return filing requirement.

The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file an FBAR (Report of Foreign Bank and Financial Accounts). 

Failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification.  A 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed. Special statute of limitation rules apply to Form 8938, which are also explained in the instructions.

Form 8938, the form’s instructions, regulations implementing this new foreign asset reporting, and other information to help taxpayers determine if they are required to file Form 8938 can be found on the FATCA page of irs.gov.

Read more at: Tax Times blog

Temporary & Proposed Regulations on Reporting of Specified Foreign Financial Assets released by IRS

December 15, 2011

The Internal Revenue Service Dec. 14 released temporary regulations (T.D. 9567)relating to the provisions of the Hiring Incentives to Restore Employment (HIRE) Act that require foreign financial assets to be reported to IRS for taxable years beginning after March 18, 2010.

The temporary regulations provide guidance concerning the requirement that individuals attach a statement to their income tax return on foreign financial assets in which they have an interest. The temporary regulations affect individuals required to file Form 1040, U.S. Individual Income Tax Return, and certain individuals required to file Form 1040-NR, Nonresident Alien Income Tax Return.

The temporary regulations also serve as the text of proposed regulations contained in a cross-reference notice of proposed rulemaking (REG-130302-10). The proposed regulations describe requirements for certain domestic entities to report foreign financial assets in the same manner as an individual.

This document is unpublished, but on 12/19/2011 it is scheduled to be published.

Read more at: Tax Times blog

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