United States: Temporary Regulations for Foreign Financial Asset Reporting
The U.S. Department of the Treasury and Internal Revenue Service (IRS) recently released temporary regulations (T.D. 9567)1 relating to provisions of the Hiring Incentives to Restore Employment (HIRE) Act2 that require individuals to report foreign financial assets with their U.S. income tax returns. The reporting is required for all tax years beginning after March 18, 2010, which is the 2011 tax return for most individuals.
Significant penalties apply for failure to provide the requisite information. As such, it is important for taxpayers to be aware of these new reporting requirements with respect to their 2011 income tax returns.
The HIRE Act, enacted March 18, 2010, added section 6038D, “Information with Respect to Foreign Financial Assets” to the Internal Revenue Code (I.R.C.). Section 6038D requires U.S. taxpayers to report ownership of specified foreign financial assets with their U.S. income tax returns, to the extent the total value of those assets exceeds certain threshold amounts. The threshold amounts are based on where the taxpayer lives and his or her tax return filing status.
This reporting will be satisfied using Form 8938, Statement of Specified Foreign Financial Assets. The IRS issued a draft Form 8938 earlier this year and issued draft instructions to the form in October 2011. Final Form 8938 and final instructions were released by the IRS on December 17 and December 19, respectively. As such, taxpayers will not need to rely on the transitional rule for 2011 income tax returns.
Reporting Thresholds Modified
The temporary regulations slightly modify the reporting thresholds from the Form 8938 draft instructions.
The value on any day of the year for three of the four types of individuals was reduced. See the shaded cells in the table below for the changes.
|Filing Status||Living in||Meets reporting threshold if aggregate value of all specified foreign financial assets is:|
|On Last Day of Year||On Any Day of Year|
|Unmarried or Married Filing Separately||U.S.||> $50,000||> $75,000
(reduced from $100,000)
|Married Filing Jointly||U.S.||> $100,000||> $150,000
(reduced from $200,000)
|Unmarried or Married Filing Separately||Foreign Country||> $200,000||> $300,000
(reduced from $400,000)
|Married Filing Jointly||Foreign Country||> $400,000||> $600,000|
Clarification for Individuals Living in a Foreign Country
The temporary regulations clarify what is meant by “taxpayers living abroad.” The draft instructions included some language to describe taxpayers living abroad, but it was not consistent with the Internal Revenue Code. The temporary regulations have amended the draft instruction approach and the regulations state that the increase to the reporting threshold applies to a “specified individual who is a qualified individual under section 911(d)(1).”3
I.R.C. section 911(d)(1) states that a “qualified individual” is an “individual whose tax home is in a foreign country and who is a citizen of the United States and establishes … that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.” This is the same language that is used when determining if a U.S. person working in a foreign location meets the requirements of the foreign earned income (section 911) exclusion. These “tests” are often referred to as the “bona fide residence test” and the “physical presence test.”
An individual is not required to claim the foreign earned income (section 911) exclusion in order to be considered living abroad for purposes of the Form 8938 filing thresholds. Rather, the taxpayer must simply meet the “tests” under section 911(d)(1) as a qualified individual for the higher thresholds to apply.
Foreign Government Social Security Plans Excepted from Reporting
The temporary regulations add an exception from reporting for interests in “a social security, social insurance, or other similar program of a foreign government.”4
Does Exception Apply to All Foreign Government-Mandated Retirement Arrangements?
While the additional exception is welcome, taxpayers should not assume that all government-mandated retirement arrangements meet this exception, even if considered part of the foreign country’s social insurance. It is unlikely that accounts such as the Australia Supernannuation fund or the India Provident Fund will meet this exception. This is because many of these types of arrangements operate like a foreign pension plan where the employee and employer contributions are set aside in a privately-directed account for the benefit of the individual. In addition, oftentimes the balance in the account can be withdrawn upon permanent departure from the foreign country which is not the type of foreign social security plan that would meet the exception described in the temporary regulations.
Please Note: Foreign Pensions and Foreign Deferred Compensation Are Reportable
While many hoped that foreign pensions and foreign deferred compensation plans would be removed from the list of specified foreign financial assets, the temporary regulations make it clear that the intention is for this information to be included on Form 8938.
FBAR Still Required
While the Form 8938 requires much of the same information as the Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”), the Form 8938 does not replace the FBAR, and must be filed with the taxpayer’s income tax return. The temporary regulations make it clear that there is currently no intention of eliminating the FBAR.5
Proposed Regulations with Respect to Domestic Entities
Proposed regulations (REG-130302-10), cross-referencing the temporary regulations, were simultaneously issued. The proposed regulations set forth requirements for certain domestic entities to report foreign financial assets in the same manner as an individual. The proposed regulations apply to domestic entities formed or availed of for the purposes of holding, directly or indirectly, specified foreign financial assets. Such entities are referred to as “specified domestic entities” and include certain closely held corporations and partnerships that meet passive income or asset tests. Until these proposed regulations are issued in final form, a domestic entity is not required to file Form 8938 to report specified foreign financial assets.
The new reporting requirements promise to bring challenges to the preparation of U.S. income tax returns for U.S. citizens on international assignment as well as non-U.S. nationals who are working in the United States.
Taxpayers who meet the definition of a specified individual and the reporting threshold will be required to provide a significant amount of detail regarding foreign financial assets. Failure to file a correct Form 8938 may result in significant penalties so it is important to be aware of these new reporting requirements.