In an effort to combat taxpayers who are not reporting income earned on foreign assets, the IRS has implemented a new Form 8938, Statement of Specified Foreign Financial Assets, that beginning with the 2011 tax year must be included with a taxpayer’s Form 1040 if the taxpayer holds specified foreign financial assets with an aggregate value exceeding $50,000. Prior to 2011, taxpayers had to disclose foreign financial accounts with an aggregate value exceeding $10,000 in a separate filing with the U.S. Treasury using exclusively a form called the Foreign Bank Account Report (“FBAR”). The FBAR filing requirement still applies even though a taxpayer is now required to include Form 8938 with his or her Form 1040.
The authority for this new form comes from Section 511 of the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147, adding new Sec. 6038D, which states that a specified person who holds an interest in specified foreign financial assets must attach Form 8938 to that person’s income tax return, provided the aggregate value of the person’s foreign financial assets exceeds $50,000. While the minimum threshold for filing a Form 8938 is $50,000.00 in foreign assets, higher asset thresholds apply to U.S. taxpayers who file a joint tax return or who reside abroad.
The penalty for failure to file Form 8938 is $10,000. If a taxpayer does not file Form 8938 within 90 days of the IRS’s mailing a notice of failure to file the form, an additional penalty of $10,000 is imposed for each 30-day period or part of a 30-day period after the initial 90-day period the failure to file continues, up to a maximum amount of $50,000. In addition to a penalty for failing to file Form 8938, an accuracy-related penalty may be imposed. Taxpayers are subject to a penalty equal to 40% of the underpayment of tax if the underpayment results from a transaction that involved undisclosed specified foreign financial assets. Lastly, taxpayers must pay a penalty of 75% of the underpayment if the underpayment is due to fraud.
You must file Form 8938 if:
1. You are a specified individual.
A specified individual is:
- A U.S. citizen
- A resident alien of the United States for any part of the tax year
- A nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return
- A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico
2. You have an interest in specified foreign financial assets required to be reported.
A specified foreign financial asset is:
- Any financial account maintained by a foreign financial institution
- Other foreign financial assets held for investment that are not in an account maintained by a US or foreign financial institution, namely: stock or securities issued by someone other than a U.S. person
- Any interest in a foreign entity, and
- Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person.
3. If you live in the U.S. and the aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you:
- Unmarried taxpayers living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year
- Married taxpayers filing a joint income tax return and living in the US: The total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year
- Married taxpayers filing separate income tax returns and living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
If you live abroad and the aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you:
- You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or
- You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
The IRS deems a taxpayer to be living abroad where:
a. You are a U.S. citizen whose tax home is in a foreign country and you are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year, or
b. You are a US citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days.
If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. If you are not in OVDI, civil Penalties start at 50% of the value of the foreign assets and you could be subject to criminal charges. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.
Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in San Francisco, Los Angeles and elsewhere in California qualify you for OVDI.
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