Foreign Account Tax Compliance Act | FATCA

On December 21, 2011 the I.R.S. released information about form 8938 which requires certain individuals to attach the form to their personal income tax returns to report “Specified Foreign Financial Assets” for the 2011 tax year.  Form 8938 must be filed by individual taxpayers with specific types and amounts of foreign financial assets or accounts.  Covered taxpayers that fail to file form 8938 will be subject to various penalties.  The form covers many foreign financial holdings that are not required to be reported on form TD F 90-22.1 (FBAR) and taxpayers may be required to file form 8938 even though they may not be required to file the FBAR.

Who Must File- You must file form 8938 if:

You are a specified individual.  Specified individuals are as follows:

• U.S. Citizens
• Resident aliens of the U.S. for any part of the tax year
• Non-resident alien who makes an election to be treated as a resident alien for purposes of filing a U.S. tax return
• Non-resident aliens who are bona fide residents of American Samoa or Puerto Rico.

And You have an interest in specified foreign financial assets.

Specified foreign financial assets are as follows:

• Financial accounts maintained at foreign financial institutions
• Foreign retirement accounts
• Direct ownership of stock in a foreign corporation
• Foreign life insurance products
• Foreign partnership interests
• Foreign hedge funds
• Foreign private equity funds
• Foreign deferred compensation arrangements
• Beneficial interests in foreign trusts or estates
• Interests in disregarded entities are covered.

*An interest in most cases means “own”.  An individual has an interest in any asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the asset are or would be required to be reported, included or otherwise reflected on his or her income tax return.

**Interests in financial accounts or holdings maintained in the U.S. are not covered.

And You meet the following reporting thresholds:

If you live in the United States you must file if the AGGREGATE VALUE of foreign financial assets are:

• Single/Married Filing Separately – greater than $50,000 on the last day of the tax year OR greater than $75,000 at anytime during the tax year.
• Married Filing Jointly – greater than $100,000 on the last day of the tax year OR $150,000 at anytime during the tax year.

If you live in a Foreign Country, you must file if the AGGREGATE VALUE of the foreign financial assets are:

• Single/Married Filing Separately – great than $200,000 on the last day of the tax year OR $300,000 at anytime during the tax year.
• Married Filing Jointly – great than $400,000 on the last day of the tax year OR $600,000 at anytime during the tax year.

Note, if you are not required to file an income tax return then form 8938 is not required to be filed.

When and Where to File
The form is due on the same date as your income tax return including extensions since it is required to be filed with the income tax return.  As a result it should be filed at the same I.R.S. Service Center as your income tax return.

Other Important Information

• An individual does not have to report a specified foreign financial asset if he or she reports it on one of the following forms:

1. Form 5471 – Information Return of U.S. Persons With Respect to Certain Foreign Corporations
2. Form 3520 – Annual Return to Report Transactions With Foreign Trusts and receipt of Certain Foreign Gifts
3. Form 8621 – Return by a Shareholder of a Passive Foreign Investment Company
4. Form 8865 – Return of U.S. Persons with Respect to Certain Foreign Partnerships
5. Form 8891 – Beneficiaries of Certain Canadian Registered Retirement Plans

Valuation
Assets reported on form 8938 must be valued in U.S. Dollars.  In most cases a reasonable estimate of the asset’s maximum fair market value during the tax year is acceptable.  Appraisals by third-parties are not necessary.  Part II of form 8938 provides for the taxpayer to check a box identifying the range of the asset’s value as follows:

$0 to $50,000

$50,001 to $100,000

$100,001 to 150,000

$150,001 to $200,000

Over $200,000 list the values

If an asset does not have a positive value, then treat the value as zero for determining whether the threshold for determining reportable value has been met.

If an asset is jointly owned with a spouse then 100% of the value gets reported.  If an asset is owned jointly with someone other than a spouse then 100% of the value should be reported by each owner.

Treatment of Spouses and Minors
Normal rules apply to spouses filing joint or separate returns.  Minors must also file returns if they meet the thresholds and should be filed by the parent or guardian if the minor is not of age.

Penalties
The base penalty for failure to file is $10,000.  Additional penalties for failure to comply once notified may be levied and can increase beyond 90 days by $10,000 for each 30 day period up to a maximum of $50,000.  There is no penalty for a reasonable cause submission.

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Related Links
International Tax Services
Expatriation Consulting Services
Foreign Bank Account Report (FBAR)
Failure to File FBAR | Penalties
FBAR Penalty Relief Under Certain Circumstances
Recent FBAR Developments
FBAR Survey

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