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Think FATCA Requirements Only Apply to Foreign Entities? Think Again

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The Foreign Account Tax Compliance Act (FATCA)[LR1]  is generally associated with reporting requirements for foreign banks and foreign entities to disclose the names of U.S. individuals using such foreign vehicles to hide U.S. financial accounts. (See all three blog posts in this series on FATCA compliance.)

However, there is an important FATCA reporting requirement, the Statement of Specified Foreign Financial Assets, Form 8938, that affects U.S. individuals and certain U.S. entities that own foreign financial assets.

Failure to timely submit this form may lead to significant penalties and could open up the possibility of an IRS audit.

Form 8938 basics

Section 6038D of the Internal Revenue Code requires a U.S. individual to report any interest in a specified foreign financial asset to the extent such assets exceed a certain threshold.

Beginning with the 2012 tax year, this reporting is satisfied by filing Form 8938 with the Internal Revenue Service (IRS).

A specified foreign financial asset is defined as including any of the following:

  1. a financial account maintained by a foreign financial institution, such as foreign savings, deposits, checking, and brokerage accounts;
  2. stock or securities issued by a foreign person, such as shares issues in a foreign corporation;
  3. financial instruments or contracts held for investment purposes whose issuer is a foreign person, such as a promissory note issued by a foreign person; and
  4. any interest in a foreign entity, such as an interest in a foreign partnership or a foreign trust).  

The filing threshold for filing Form 8938 for an unmarried individual is $50,000 on the last day of the year (or more than $75,000 at any time during the tax year), and higher if the individual is married and/or living outside the United States. The statute provides that future regulations may be issued to require reporting by domestic entities formed for the purpose of holding a specified foreign financial asset. However, no such regulations have been issued to date.

Taxpayers with a Form 8938 filing obligation need to attach this form to their annual individual income tax return (Form 1040). If Form 8938 is not timely filed by the due date, the IRS may impose penalties of $10,000.

Perhaps even more alarming, the failure to file Form 8938 may extend the statute of limitations (i.e., the period during which the IRS can audit a) until the form is submitted. This is particularly significant because the scope of the IRS audit does not have to be limited to the individual’s foreign bank accounts.

Most taxpayers dread the possibility of an IRS audit and will want to avoid this potential headache. 

The Report of Foreign Bank and Financial Accounts

The Report of Foreign Bank and Financial Accounts[LR3] , also known as the FBAR and FinCEN Report 114 (previously Form TDF 90-22.1), is a separate form required to be filed by U.S. individuals and U.S. entities that have a financial interest or signature authority over a foreign financial account to the extent the value in the account exceeds $10,000. The definition of a foreign financial account for FinCEN Form 114 purposes is similar, but not the same, as the definition used for Form 8938.

Even though the information required to be reported on Form 8938 and FinCEN Report 114 can be duplicative in some respects, the filing of one form does not satisfy the filing of the other. Both forms should be timely submitted even if they are reporting the same foreign account(s).

Individual taxpayers can electronically file FinCEN Form 114[LR4]  through the Bank Secrecy Act (BSA) E-Filing website. [LR5] Penalties for failing to do so by the deadline can result in significant penalties, including fines of up to $10,000 per year. Willful violations can result in criminal penalties, including imprisonment and fines of the greater of $100,000 or 50% of the balance per year.

Don’t Get Caught in the Line of Fire

The introduction of the Form 8938 filing requirement adds yet another tool to the  IRS’ arsenal for combating offshore tax evasion by U.S. taxpayers. U.S. individual taxpayers with reportable foreign financial assets must file Form 8938 on an annual basis, and if need be, amend their individual income tax return for prior years to include the filing as far as the 2012 tax year. Otherwise, they could face monetary penalties and, perhaps even more concerning to some, they could be subject to an extension of the IRS statute of limitations on their income tax return, which could result in an IRS audit.

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See all three blog posts on FATCA compliance on ThinkAdvisor.