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Form 8938: Statement of Specified Foreign Financial Assets

An individual who holds any interest in a specified foreign financial asset during the taxable year is required to attach a statement to their return including information relating to those assets, if the aggregate value of the specified foreign financial assets exceeds $50,000 for the taxable year.

A specified foreign financial asset is any financial account maintained by a foreign financial institution and, to the extent not held in an account at a financial institution: (i) any stock or security issued by any person other than a United States person; (ii) any financial instrument or contract held for investment that has an issuer or counterparty that is not a United States person; and (iii) any interest in a foreign entity.

Failure to comply with the reporting requirements could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification.

Explanation of Regulations

Each U.S. citizen, resident alien of the United States, or non-resident alien who has elected to be taxed as a U.S. resident must file Form 8938 if he or she has an interest in foreign financial assets that exceeds either $50,000 on the last day of the taxable year or $75,000 at any time during the taxable year. Married individuals filing a joint annual return are not required to file Form 8938 unless the aggregate value of all of the foreign financial assets in which they have an interest exceeds $100,000 on the last day of the year or $150,000 at any time during the taxable year. If no US Tax Return is required to be filed for the year Form 8938 need not be filed for that year.

A higher threshold applies to for most US citizens and taxpayers living overseas. For such persons, the filing threshold is increased to foreign financial assets which exceed $200,000 on the last day of the taxable year or $300,000 at any time during the taxable year ($400,000 and $600,000 for married individuals who file a joint federal income tax return).

A person is generally considered to have an interest in a foreign financial asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions attributable to the holding or disposition of the asset required to be included on the person's annual tax return filed with the IRS - even if no income, gains, losses, deductions, credits, gross proceeds, or distributions are attributable to the asset for a particular taxable year).

The owner of a disregarded entity or grantor trust is generally treated as having an interest in any foreign financial assets held by the disregarded entity or trust.

A parent that makes an election under the Code to include certain unearned income of a child in the parent's gross income required to be reported for the tax year has an interest in any foreign financial asset held by the child. A person is not generally treated as having an interest in any foreign financial assets held by a partnership, corporation, trust (with some exceptions), or estate solely as a result of the person's status as a partner, shareholder, or beneficiary.

Assets reported by a person on certain other forms timely filed with the IRS do not need to separately identified on Form 8938. But the value of foreign financial assets that qualify for this exception is included for purposes of determining whether the aggregate value of foreign financial assets in which a person has an interest exceeds the applicable reporting threshold.

Another category of assets excepted from reporting are assets considered owned by a person that is treated as the owner of certain trusts. Additionally, certain assets held by a individual who is a bona fide resident of a U.S. territory are also excepted from reporting. Foreign financial assets that qualify for either of these two exceptions are not included for purposes of determining whether the aggregate value of foreign financial assets in which a person has an interest exceeds the applicable reporting threshold.

A beneficial interest in a foreign trust or a foreign estate is not a foreign financial asset of a person unless the person knows or has reason to know based on readily accessible information of the interest. Receipt of a distribution from the foreign trust or foreign estate is deemed for this purpose to be actual knowledge of the interest.

Penalties

The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer's obligation to file an FBAR (Report of Foreign Bank and Financial Accounts), even though certain information may be reported on both Form 8938 and the FBAR. The penalty of $10,000 can be assessed for failure to timely file a complete and correct Form 8938. A continued failure to file within 90 days of after IRS mails a notice of failure to file can subject a taxpayer to an additional penalty of $10,000 for each 30 day period up to a maximum additional penalty of $50,000. In addition, failure to timely file a Form 8938 for any year can cause the statute of limitations for assessment of income taxes with respect to such year to remain open beyond the normal three year period.