December 22, 2014
By Philip Stein, CPA and Dave Wolf, Esq.
The IRS issued on December 11, 2014 final regulations ("Regs") regarding Form 8938. Form 8938, has to be filed by US taxpayers with an interest in a "specified foreign financial asset" during the tax year in which the aggregate value of all such assets at the end of the year is $50,000 for Single Filers and $100,000 for Married Filing Jointly if living in the United States. For those taxpayers living outside the United States, the ceiling is higher, respectively $200,000 and $400,000.
Form 8938 is filed together with an individual's tax return and is not required to be filed when there is no requirement to file the individual's annual tax return. However when there is a requirement to file a tax return but no tax is due for that year, Form 8938 does need to be filed.
If Form 8938 is not filed as required during a tax year, there is a penalty of $10,000. This penalty increases if the taxpayer continues to stay non-compliant.
Examples of specified foreign financial asset are:
· Savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer.
· Stock or securities issued by a foreign corporation;
· A note, bond or debenture issued by a foreign person;
· A partnership interest in a foreign partnership;
· An interest in a foreign retirement plan 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.
The Regs have a few changes from the temporary onespublished in 2010 as part of the FATCA legislationand below are some of the more important ones:
Dual resident taxpayers:
The Regs provide an exemption from filing Form 8938 for a dual resident taxpayer who determines his U.S. tax liability as if he were a nonresident alien and claims a treaty benefit as a non resident of the United States by:
· Timely filing a Form 1040NR, Nonresident Alien Income Tax Return (or such other appropriate form under that section), and
· Attaching a Form 8833, Treaty-Based Return Position Disclosure.
The Regs also state that there is no exemption from filing Form 8938 for those residents in the United States under a non-immigrant H, L or E visa
This means that "Green Card" holders living in Israel taking a treaty position and Israelis choosing to be treated as non residents during their first year in the United States will not have to file Form 8938.
Non-vested property:
The Regs clarify that a specified person that is transferred property in connection with the performance of personal services is first considered to have an interest in the property (i) on the first date that the property is substantially vested or (ii) in the case of property with respect to which a specified person makes a valid election on the date of transfer of the property.
Assets held by a disregarded entity
The Regs provide that a specified person that owns a foreign or domestic entity that is a disregarded entity, is treated as having an interest in any specified foreign financial assets held by the disregarded entity. As a result, a specified person that owns a disregarded entity (whether domestic or foreign) that, in turn, owns specified foreign financial assets, must include the value of those assets in determining whether the specified person meets the reporting thresholds and, if so, must report the assets on Form 8938.
Jointly owned assets
The Regs clarify that each of the joint owners of a specified foreign financial asset who are not married to each other must include the full value of the asset (rather than only the value of the specified person's interest in the asset) in determining whether the aggregate value of the specified individual's specified foreign financial assets exceeds the applicable reporting thresholds, and each joint owner must report the full value of the asset on his or her Form 8938.
In the case of joint owners who are married to each other andfile separate returns, each joint owner of a specified foreign financial asset must report the full value of the asset (rather than only the value of the specified person's interest in the asset) on the individual's Form 8938, even if both spouses are specified individuals and only one-half of the value of the asset is considered in determining the applicable reporting thresholds.
Retirement and pension accounts and certain non-retirement savings accounts:
The Regs clarify that pension and other retirement accounts are includable on Form 8938:
Retirement and pension accounts, non-retirement savings accounts, and accounts satisfying conditions similar to those described in Reg. § 1.1471-5(b)(2)(i) and that are excluded from the definition of a financial account under an applicable Model 1 IGA or Model 2 IGA (as provided in Reg. § 1.1471-5(b)(2)(vi)), are included in the definition of a financial account for Form 8938 purposes.
Valuation
The Regs clarify that the maximum fair market value for a specified foreign financial asset with no positive value during the year is treated as zero.
Virtual currency
The Regs have not determined the proper treatment of virtual currency for Form 8938 and the IRS welcomes comments and suggestions.
Dave Wolf, U.S. and Israeli tax attorney, Partner at Dave Wolf & Co. Law Firm
Philip Stein, U.S. accountant, CEO and founder of Philip Stein & Associates
The content of this article is intended to provide a general guide to the subject matter and is not a substitute for legal or accounting consultation. Specific advice should be sought in accordance with the particular circumstances.