The HIRE Act of 2010 enacted Section 6038D which requires single taxpayers to report ownership of specified foreign financial assets which in aggregate exceed $50,000 on new Form 8938, which is filed with an individual’s Form 1040. Various dollar thresholds apply to individuals who do not file single taxpayer returns. Individuals required to file Form 8938 are still required to comply separately with Treasury rules for filing FBARs, or Form T.D. 90-22.1, to report foreign bank and financial accounts.
Specified foreign financial assets generally include financial accounts maintained at foreign financial institutions; stock, securities, and other financial instruments issued by a foreign person or other foreign issuer; and interests in foreign entities held for investment. Assets held at U.S. branches of foreign financial institutions are not specified foreign financial assets. The IRS recently posted responses to Frequently Asked Questions about Form 8938. The IRS FAQ’s are available here: http://www.irs.gov/businesses/corporations/article/0,,id=255061,00.html
The FAQs elaborate on many common situations. For example, FAQ’s 7 and 8 provide that foreign investments maintained by a U.S. financial institution or its holdings, such assets held through U.S. mutual fund accounts, IRAs (traditional or Roth), 401(k) retirement plans, qualified U.S. retirement plans, and brokerage accounts maintained by U.S. financial institutions, are not reported on Form 8938. FAQ 3 discusses the rules governing foreign real estate. Foreign real estate held directly by an individual is not reportable on Form 8938. However, if foreign real estate is held through a foreign entity, such as a corporation, partnership, trust or estate, the investment in the entity is a specified foreign financial asset that is reported on Form 8938 if you meet the reporting threshold.
There is a $10,000 penalty for failure to file Form 8938 and failures to report tax on income generated by assets not disclosed on Form 8938 are subject to a 40% accuracy-related penalty. In addition, when a taxpayer fails to file Form 8938, the statute of limitations for the tax year remains open until three years after Form 8938 is filed.
If you would like to discuss your obligations to report foreign assets or are looking for assistance with any IRS reporting requirements, please contact Jim Mastracchio at (202) 861-1650 or Jennifer Benda at (303) 764-4025.