New Reporting of Specified Foreign Financial Assets

New Form 8938, Statement of Specified Foreign Financial Assets, is required to be completed for 2011 and future income tax returns.  This is the federal government's attempt to increase tax compliance by gathering more information about taxpayers' foreign assets.  Significant civil and criminal penalties apply if the form is not filed as required.  The statue of limitations is also suspended if Form 8938 is not filed when required.  Currently only individuals must file Form 8938.  The IRS plans to issue regulations that will require entities to file the form if the entity is formed or availed of to hold specified foreign financial assets and the value of the assets exceeds the filing threshold.  See more information at www.irs.gov/formspubs/article/0,,id=248113,00.html.

Different thresholds apply to require the filing of Form 8938 depending upon whether you are married and whether you live in or outside of the United States.  See the Form 8938 instructions.  Generally, you should be concerned about whether Form 8938 is required to be completed if the aggregate value of your foreign assets and accounts exceeds $50,000 ($100,000 if married) on the last day of the year or exceeded $75,000 ($150,000 if married) at any time during the year.  The specified foreign financial assets that must be reported include:

• Depository or custodial accounts maintained at foreign financial institutions,
• Foreign retirement accounts,
• Direct ownership of stock, security, other form of ownership interest in a foreign entity; and any direct ownership of a financial instrument or contract with a foreign person or entity (outside of an account at a foreign financial institution),
• Foreign life insurance products,
• Foreign partnership interests, such as foreign hedge funds and foreign private equity funds,
• Foreign deferred compensation arrangements, and
• Beneficial interests in foreign trusts or estates.

Form 8938 not only requires disclosure of your specified foreign financial assets, the form also requires that you disclose the specific tax form or schedule on which you have reported the income and deductions attributable to the foreign asset.  This is a complex form and it will require a significant amount of time to understand and to complete.

Filing Form 8938 does not relieve you of the requirement to also file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) that is due each June 30th and is filed with the U.S. Treasury Department, separate from your income tax return.