Have you reported Foreign Assets to the IRS and Treasury properly?

Taxpayers with foreign financial accounts or foreign financial assets have filing responsibilities that should not be overlooked. There are two primary IRS international reporting forms required for individuals to disclose their interests in foreign accounts or foreign assets: 1) Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”) for foreign accounts, and 2) Form 8938, Statement of Foreign Financial Assets, for foreign assets.  

If you have a financial interest in a foreign bank or financial account with a combined balance of more than $10,000 (at any time during the year), or you have signature authority over such an account, you are required to report the account annually to the Treasury Department by filing the FBAR.  This form is due on June 30^th of each year. No extensions are available and the form must be received by the due date, not just mailed by the due date, to avoid the $10,000 late filing penalty. This penalty can increase significantly if the failure to file or supply correct information is willful.  

Form 8938 is much the same an is used to report “specified foreign financial assets” if the total value of all specified foreign financial assets in which you have an interest is more than the reporting threshold (which varies depending on your filing status and whether you live in the U.S. or abroad).  You are required to include a reportable asset even if you receive no income or distributions with respect to that asset.  Form 8938 must be filed with your income tax return. The penalty for failure to file this form or late filing is $10,000. If you receive a notice from the IRS for failure to file this form and do not file it within 90 days of the IRS notice, additional penalties may be imposed.

What are specified foreign financial assets?

Specified foreign financial assets include:

·         Savings, deposit, checking and brokerage accounts held with a foreign financial institution;

·         Stock or securities issued by a foreign corporation;

·         A note, bond or debenture issued by a foreign person;

·         A swap or similar agreement with a foreign counterparty;

·         An option or other derivative instrument that is entered into with a foreign counterparty or issuer;

·         A partnership interest in a foreign partnership;

·         An interest in a foreign retirement plan, pension, or deferred compensation plan;

·         An interest in a foreign estate;

·         Any interest in a foreign-issued insurance contract or annuity with a cash-surrender value;

·         Any financial account maintained by a foreign financial institution;

·         Reportable assets held by a disregarded entity.

The above list is not all inclusive. Other assets may also be considered specified financial assets and must be reported.

What are NOT specified foreign financial assets?

The IRS has indicated that certain assets are not considered specified foreign financial assets and therefore do not have to be reported. These include:

·         Foreign real estate (e.g., personal residence or rental property), unless the real estate is held through a foreign entity, such as a corporation, partnership, trust or estate.  In such cases, the interest in the entity is reported on Form 8938;

·         Foreign currency;

·         Directly held shares of a U.S. mutual fund that owns foreign stocks and securities;

·         Financial account maintained by a U.S. financial institution that holds foreign stock and securities (e.g., 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.  This is an exception to the general rule that a financial account maintained by a foreign financial institution is a specified foreign financial asset.  A financial account maintained by a U.S. branch or U.S. affiliate of a foreign financial institution does not have to be reported on Form 8938;

·         Financial account, such as a depository, custodial or retirement account, is held through a foreign branch or foreign affiliate of a U.S.-based financial institution;

·         Safe deposit box;

·         Payments or the rights to receive the foreign equivalent of Social Security; and

·         Directly held tangible assets, such as art, antiques, jewelry, cars and other collectibles;

·         Directly held precious metals, such as gold. Note, however, that gold certificates issued by a foreign person may be reportable on Form 8938.  Similarly, a contract with the foreign person to sell assets held for investment is reportable on form 8938.

Again, this list is not all inclusive. 

Valuation

Once it has been determined that an asset is required to be reported, it is important that the correct amount be reported. The following guidelines should be used in determining the amount of specified foreign financial assets to report on Form 8938:

·         The value of your interest in the foreign pension plan or deferred compensation plan is the fair market value of your beneficial interest in the plan on the last day of the year. If you do not know, or have reason to know, based on readily accessible information the fair market value of your beneficial interest in the pension plan or deferred compensation plan on the last day of the year and you did not receive any distributions from the plan, the value of your interest in the plan is zero; 

·         Fair market value of a foreign financial account is its maximum value based on periodic account statements; and

·         For a specified foreign financial asset not held in a financial account, you may determine the fair market value of the asset based on information publicly available from reliable financial information sources. Even if there is no information from a reliable financial information source or other verifiable source, you do not need to obtain an appraisal by a third party in order to reasonably estimate the asset’s maximum value during the tax year.

FBAR & Form 8938

Filing Form 8938 does not relieve you of the separate requirement to file the FBAR, if you are otherwise required to do so, and vice-versa; however, if you are not required to file an income tax return, you are not required to file Form 8938. If you omitted Form 8938 when you filed your income tax return and you were required to file this form, you should file Form 1040X, Amended U.S. Individual Income Tax Return, with Form 8938 attached, as soon as possible.