April 9, 2012
Authored by: Brent Howard and Kim Civins
Before your file your 2011 tax return, make sure you have included the new IRS Form 8938 if you have the threshold amount of interest in foreign assets. The IRS Form 8938 must be completed and filed with the US income tax return of any US individual taxpayer holding interest, either directly or as a beneficiary, in “specified foreign financial assets.”
IRS Form 8938 is part of the new foreign asset reporting laws enacted under the Hiring Incentives to Restore Employment Act in 2010 commonly referred to as the HIRE Act. The form covers the reporting requirements which many tax advisors thought would be just an expansion of several other forms, which already collect similar information. However, IRS Form 8938 is in addition to and does not replace any other forms such as IRS Form 3520 or the FBAR, but the information requested on the IRS Form 8938 is reduced if the US taxpayer provides the same information on another form.
A “specified foreign financial asset” includes any account held by the US taxpayer at a foreign financial institution, any interest held in a foreign entity, and any interest held by a non-US person for the US taxpayer’s benefit. This includes any interest in foreign hedge funds, private equity funds and real estate owned by an entity; capital or profits interest in foreign partnership; notes, bonds, other indebtedness issued by a foreign person; and any known interest in a foreign trust or estate.
A US taxpayer reaches the threshold amount for filing IRS Form 8938 if he or she had more the $50,000 in “specified foreign financial assets” as of December 31st or had $75,000 at any time during 2011. If the US taxpayer is living abroad, the amounts increase to $200,000 on December 31st or $300,000 at any time during 2011, and the values are doubled for a married couple filing jointly.
Failure to report “specified foreign financial assets” on IRS Form 8938 may result in an initial penalty of $10,000 and a penalty up to $50,000 for continued failure after IRS notification. Further, underpayments of tax attributable to non-disclosed “specified foreign financial assets” will be subject to an additional substantial understatement penalty of forty percent (40%).
Thus, if you have interest in any “specified foreign financial assets,” you should discuss the IRS Form 8938 with your tax preparer, or if a self preparer, you can review the form’s instructions on the IRS website.
The IRS Form 8938 is due with your income tax return, so filing an extension will give you additional time to collect the information needed to prepare the new form.