November 27, 2011

Effective for 2011 tax returns, a U.S. taxpayer who during a taxable year, holds any interest in a specified foreign financial asset (SFFA) must attach the new Form 8938 to his or hers income tax return if the aggregate value of all such assets exceeds $ 50,000. This new reporting requirement was added as part of the Foreign Account Tax Compliance Act (FATCA) on which we have reported earlier (See previous tax alerts)

The IRS published a draft form and instructions for the new Form 8938, Statement of Specified Foreign Assets, which is the form that will be used to report SFFA.

The information that must be reported on Form 8938 is similar, but not identical, to the information required for Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). The Form 8938 filing requirement is separate from the FBAR filing requirement. If a taxpayer is required to file Form 8938, the individual is still required to file the FBAR if the individual would otherwise be required to do so in addition to other Information Returns such as Form 5471 and 3520 (See separate article)

A taxpayer who fails to file Form 8938 by the due date may be subject to a penalty of USD 10,000 with a maximum of $50,000 under certain circumstances and in some cases there may be a criminal penalty as well. No penalty will be imposed if the failure to disclose is due to reasonable cause and not willful neglect.

An SFFA includes:

• Any depository or custodial account maintained by a foreign financial institution;
• Any equity or debt interest in the foreign financial institution;
• Other foreign financial assets held for investment and not held in an account maintained by a foreign financial institution, including:
  • Stock and securities issued by foreign companies;
  • An interest in a foreign entity;
  • Any financial instrument or contract such as a note, debenture issued by a foreign person;
  • A capital or profits interest in a foreign partnership
  • An interest in a foreign trust or estate
  • An option or other derivative investment entered into with a foreign counterparty or issuer.

Filing Form 8938 is only required if the aggregate value of all of the SFFAs of a taxpayer living in the U.S.A. exceeds the following thresholds:

See IRS tax form 8938 and 8938 Instructions for more information