New for 2011 is a requirement for any individual who, during the tax year, holds any interest in a “specified foreign financial asset” to complete and attach Form 8938 to his or her income tax return if a reporting threshold is met. The reporting threshold varies depending on whether the individual lives in the U.S. and files a joint return with his or her spouse. For example, someone who is not married and doesn’t live abroad will need to file Form 8938 for 2011 if the total value of his or her specified foreign financial assets was more than $50,000 as of December 31, 2011 or more than $75,000 at any time during 2011. For married taxpayers filing a joint return and living in the U.S., the threshold amounts are doubled. The thresholds also are higher for taxpayers residing abroad.
Specified foreign financial assets include financial accounts maintained by foreign financial institutions and other investment assets not held in accounts maintained by financial institutions, such as stock or securities issued by non-U.S. persons, financial instruments or contracts with issuers or counterparties that are non-U.S. persons, and interests in certain foreign entities. However, no disclosure is required for interests that are held in a custodial account with a U.S. financial institution.
The penalty for failing to report specified foreign financial assets for a tax year is $10,000. However, if this failure continues for more than 90 days after the day on which the IRS mails notice of the failure to the individual, there are additional penalties of $10,000 for each 30-day period (or fraction of the 30-day period) during which the failure continues after the expiration of the 90-day period, with a maximum penalty of $50,000.
To the extent the IRS determines that the individual has an interest in one or more foreign financial assets but doesn’t provide enough information to enable the IRS to determine the aggregate value of those assets, the aggregate value of those assets will be presumed to have exceeded $50,000 (or other applicable reporting threshold amount) for purposes of assessing the penalty.
No penalty will be imposed if the failure to file the 8938 is due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information isn’t reasonable cause.
In addition, if it is shown that the individual failed to report the income from the foreign financial account on his or her income tax return, a 40% accuracy-related penalty is imposed for underpayment of tax that is attributable to an undisclosed foreign financial asset.
If you have questions related to this issue or are uncertain as to whether you are required to file Form 8938, please give this office a call to discuss your particular situation.