IRS Expands Foreign Assets Reporting Requirement
Certain Businesses, Trusts Now Required to File Form 8938
The time has finally come for certain specified domestic entities (i.e., certain corporations, partnerships, and trusts) to comply with FATCA reporting by filing a Statement of Specified Foreign Assets (Form 8938). For the past five years, only individuals have been required to report their foreign assets to the IRS annually on Form 8938.
However, earlier this year the IRS issued final regulations that provided guidance for certain specified domestic entities to report specified foreign assets, additionally releasing the instructions and updated Form 8938 for this year. These entities are now required to file the form with their annual tax return.
Which entities are required to file Form 8938?
A specified domestic entity is defined as a domestic corporation, domestic partnership or domestic trust formed or used, directly or indirectly, for holding specified foreign financial assets.
Reviewed annually, a domestic entity is determined as a specified domestic entity if it abides by the following criteria:
- The corporation or partnership is closely held by a specified individual (i.e., more than 80% of the total vote or value of a corporation or 80% of the total capital or profit interest of a partnership is held by a specified individual); and
- At least 50% of the corporation or partnership’s gross income is passive or at least 50% of the assets produce or are held for the production of passive income.
A domestic trust is treated as a specified domestic entity if it is described in Internal Revenue Code 7701(a) as having one or more specified persons (a specified individual or a specified domestic entity) as a current beneficiary. The filing threshold for taxpayers begins at $50,000, but different thresholds apply to taxpayers depending on their filing status and country of residence.
What types of financial assets need to be reported?
Not sure if this requirement applies to you? The following are some examples of specified foreign financial assets that should be reported on Form 8938:
- An account maintained at a foreign financial institution
- Stock or security issued by a foreign person
- Interest in any foreign entity, including Passive Foreign Investment Companies (PFIC)
- A financial instrument or contract held for foreign investment that has a foreign issuer or counterpart who is not a U.S. resident
- A financial instrument or contract, including interest and currency swaps, other swap contracts, options and other derivative contracts
- An interest in a foreign pension
Many taxpayers incorrectly assume that filing Form 8938 will satisfy their obligation to file the Report of Foreign Bank and Financial Accounts (FBAR) FinCEN Form 114 with the U.S. Department of the Treasury, but Form 8938 does not replace the FBAR reporting requirements.
Taxpayers who are subject to the Form 8938 reporting requirements and fail to comply face significant penalties, including criminal charges and fines between $10,000 and $50,000 per year. Further, the statute of limitations for the tax year may remain open for all or part of income tax return.
It’s important for taxpayers to know if they are subject to this new requirement before filing. Contact me or another member of Kaufman Rossin’s international tax team with any questions about Form 8938 and related requirements.