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Lessons Learned Preparing & Defending IRS Form 8938



John Dundon

The Foreign Account Tax Compliance Act, better known as FATCA, was enacted March 18, 2010 and requires filing IRS Form 8938. It is important to note that this foreign financial asset reporting requirement does not replace or otherwise affect a taxpayer’s obligation to file a FinCEN Form 114. Basically, if you are a US taxpayer holding foreign financial assets you must file IRS Form 8938 if you have an obligation to file IRS Form 1040 reporting income.

Assets include bank accounts and often times are also reported on FinCEN Form 114 for foreign bank account reporting requirements.

Specified foreign financial assets include any financial account maintained by a foreign financial institution, any assets which are not held in an account maintained by a financial institution including stock or security issued by a person other than a United States person, financial instruments or contracts held for investment that has an issuer or counter party which is other than a United States person, and any interest in a foreign entity.

Foreign real estate held directly by the taxpayer is NOT reported. Foreign real estate held through a foreign entity is also NOT reported, but the foreign entity itself is a specified foreign financial asset, and its maximum value includes the value of the real estate.

Top 10 Lessons Learned Navigating the Shoals of IRS Form 8938

 

  1. Reporting thresholds vary. If for example form 1040 is not required Form 8938 is also not required. U.S citizens, resident aliens, and certain non-resident aliens that have an interest in specified foreign financial assets and meet the reporting threshold must file. U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold must file.
  2. If any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included, or otherwise reflected on your income tax return you must file.
  3. Resident aliens of U.S territories and U.S. territory entities are subject to FBAR reporting Reporting Threshold (Total Value of Assets) $50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad) or $10,000 at any time during the calendar year.
  4. You have a financial interest if you are the owner of record or holder of legal title; the owner of record or holder of legal title is your agent or representative; you have a sufficient interest in the entity that is the owner of record or holder of legal title.
  5. You report the maximum value of specified foreign financial assets, which include financial accounts with foreign financial institutions and certain other foreign non-account investment assets. Report the maximum value of financial accounts maintained by a financial institution physically located in a foreign country.
  6. Typically, a financial account includes a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other entity performing the services of a financial institution). Commodity futures or options account, an insurance policy with a cash value, an annuity policy with a cash value, and shares in a mutual fund or similar pooled funds are all reported.
  7. Financial accounts located in a foreign country are physically located outside of the United States. An account maintained with a branch of a United States bank that is physically located outside of the United States is a foreign financial account. An account maintained with a branch of a foreign bank that is physically located in the United States is not a foreign financial account.
  8. Signature authority is the authority of an individual to control the disposition of assets held in a foreign financial account by direct communication to the bank or other financial institution.
  9. Foreign real estate held directly by the taxpayer is NOT reported. Foreign real estate held through a foreign entity is also NOT reported, but the foreign entity itself is a specified foreign financial asset, and its maximum value includes the value of the real estate.
  10. Report your interest in the foreign pension plan or foreign deferred compensation plan in Part VI of the form. Do not separately report the assets held by the plan. The maximum value of your interest is the fair market value (FMV) of your beneficial interest in the assets of the estate, pension plan or deferred compensation plan as of the last day of the tax year. If you didn’t receive distributions during the tax year and you don’t know or have reason to know, based on readily accessible information, the FMV of your interest as of the last day of the tax year, use a value of zero as the maximum value of the asset.

Summary

 

The instructions for IRS Form 8938 have a helpful link comparing the filing requirements of IRS Form 8938 and FinCEN 114. In most cases, you must use the U.S. Treasury Bureau of the Fiscal Service foreign currency exchange rate for purchasing U.S. dollars. If no U.S. Treasury Bureau of the Fiscal Service exchange rate is available, you must use another publicly available foreign currency exchange rate for purchasing U.S. dollars and disclose the rate on Form 8938.

Special rule for dual resident taxpayers: If you are a dual resident taxpayer (within the meaning of Treasury Regulations section 301.7701(b)-7(a)(1)), who determines his or her income tax liability for all or a portion of the taxable year as if he or she were a nonresident alien as provided by Treasury Regulations section 301.7701(b)-7. If you are a dual resident you are best served consulting an Enrolled Agent.

I am enrolled with the United States Treasury Department to practice before the IRS, governed by rules stipulated in United States Treasury Circular 230. As a Federally Authorized Tax Practitioner and a tax appeals specialist my Enrolled Agent License #85353 is issued by the United States Treasury. With this license I work for U.S. taxpayers everywhere to resolve tax matters and de-escalate stress about taxes or tax disputes for individuals and corporations with federal and state issues.

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