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– A new reporting requirement for Foreign Financial Assets

Form 8938, Statement of Specified Foreign Financial Assets, (“Form 8938”) is a new reporting form. Form 8938 will be used to report certain foreign financial assets as required as part of the Hiring Incentives to Restore Employment Act (“HIRE Act”), which was signed into law on March 18, 2010 by President Obama.

Form 8938 is effective for 2011 and future tax years. The form will typically be attached to your annual federal income tax return if you have a filing requirement. Please keep in mind the Form 8938 is a separate and distinct reporting form from the Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly referred to as the “FBAR”. Individuals may be required to file both reports, depending on the specific facts for a particular year.

It is possible that the provisions of the HIRE Act will affect you and any disregarded entities. While the HIRE Act technically requires reporting by domestic entities in addition to individual reporting requirement, the IRS has currently suspended the reporting requirement for domestic entities until it issues final regulations covering domestic entities.

Some of the foreign financial assets that must be reported on the new Form 8938 include, but are not limited to:

  • Financial accounts maintained at foreign financial institutions;
  • Foreign retirement accounts;
  • Direct ownership of stock in a foreign corporation (outside of a financial institution);
  • Foreign life insurance products;
  • Foreign partnership interests, such as foreign hedge funds and foreign private equity funds;
  • Foreign deferred compensation arrangements; and,
  • Certain beneficial interests in foreign trusts or estates.

In many instances the definition of a reportable foreign financial asset is broader than the reporting requirement for reportable foreign financial accounts under the FBAR. Similar to the FBAR the Form 8938 only requires reporting when the total value of specified foreign assets exceeds certain thresholds. As a general rule, the Form 8938 is required when a taxpayer’s aggregate value of all such assets is greater than $50,000 during the tax year. This filing threshold may be higher in certain cases. For example, a married couple living in the U.S. and filing a joint tax return would file Form 8938 if their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

There are significant civil and criminal penalties for failure to file the Form 8938 or for an incorrectly filed Form 8938. The civil penalty starts at $10,000 and goes up from there. In addition to penalties, failure to file Form 8938 when required could result in the statute of limitations on tax liability for the entire income tax return to remain open until three years after the failure is remedied as well as possible criminal prosecution in certain circumstances.