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Welcome to America!

President Obama's recent initiatives to grow the U.S. economy have been premised on removing the hurdles to unlocking America's innovation and creativity. The "We Can't Wait" initiative, which liberalizes visa procedures to increase travel and tourism in the U.S., will pump money into the U.S. economy and, ideally, will create an increase in the number of U.S. residents. New residents to the U.S. will be surprised to learn of the far-reaching reporting obligations under the U.S. Tax Code and related financial legislation.

This article reviews the new reporting requirements for IRS Form 8938 "Statement of Specified Foreign Financial Assets," introduced under the Foreign Account Tax Compliance Act (FATCA), which in turn was enacted as part of the 2010 Hiring Incentives to Restore Employment Act (the HIRE Act). Those rules introduced various foreign tax reporting and compliance provisions, including a requirement for taxpayers to report their foreign financial asset holdings if the amount of those holdings exceeded certain minimum thresholds.

Unlike the TDF 90.22-1 Foreign Bank Account Reporting (FBAR) rules, which are mandated under the Bank Secrecy Act, Form 8938 is mandated under the Internal Revenue Code. As such, there can be duplication of reporting of affected accounts under both the FBAR and FATCA reporting rules.

General rules

Form 8938 is required to be filed with a taxpayer's 2011 U.S. income tax return if the filer is a "specified person" who owns "specified foreign financial assets" with a value over the specified threshold.

Definitions

A "specified person" includes:

  • U.S. citizens;
  • permanent residents, such as green card holders;
  • individuals satisfying the day count residency tests; and
  • non-resident aliens who elect to be treated as U.S. residents for tax filing purposes

Included in the definition of "specified foreign financial assets" (SFFAs) are:

  • any financial account (i.e., depository account, custodial account, debt or equity interests in the financial institution) maintained by a non-U.S. financial institution (which includes non-U.S. investment vehicles such as foreign mutual funds, hedge funds and private equity funds);
  • other foreign financial investments and assets if held for investment;
  • financial instruments or contracts that have a non- U.S. person as the counterparty;
  • a capital or profits interest in a foreign partnership;
  • an interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, and similar type arrangements;
  • an option or other derivative instrument with respect to any of the above examples;
  • life insurance or annuities with cash surrender values;
  • a beneficial interest in a foreign estate or trust; and
  • deferred compensation and pension plans held by U.S. expatriates working abroad.

Clarifying guidance

Real estate, whether developed or rented, is not a reportable asset. However, real estate may become reportable if the specified individual holds title to the asset through a foreign entity. In addition, if the real estate is leased, a contract for investment is created and the above definition would capture such lease arrangements between a U.S. person and a non-U.S. person.

A specified individual need not report a beneficial interest in a foreign trust or foreign estate unless the taxpayer has reason to know of the interest. If the taxpayer receives a distribution from the trust or estate, however, knowledge is attributable to that person.

Loans between U.S. taxpayers and their foreign family members fall within the definition of an SFFA.

For taxpayers living in the U.S., the specified threshold requirements are:

Single

If the aggregate value of all SFFAs meets or exceeds

  • $50,000 as at December 31 or
  • $75,000 at any time in the year
Married
Filing
Joint

If the aggregate value of all SFFAs meets or exceeds

  • $100,000 as at December 31 or
  • $150,000 at any time in the year
Married
Filing
Separate

If the aggregate value of all SFFAs meets or exceeds

  • $50,000 as at December 31 or
  • $75,000 at any time in the year

For taxpayers living outside the U.S., the specified threshold requirements are:

Single

If the aggregate value of all SFFAs meets or exceeds

  • $200,000 as at December 31 or
  • $300,000 at any time in the year
Married
Filing
Joint

If the aggregate value of all SFFAs meets or exceeds

  • $400,000 as at December 31 or
  • $600,000 at any time in the year
Married
Filing
Separate

If the aggregate value of all SFFAs meets or exceeds

  • $200,000 as at December 31 or
  • $300,000 at any time in the year

Where SFFAs are owned jointly, the determination of whether the threshold has been met or exceeded depends on the identity and filing status of the joint owners. In these instances the following rules apply:

Married Filing Separate and each is a U.S. person (specified person)

For determining the thresholds:

  • each owner includes only 50% of the assets value

For reporting on Form 8938:

  • each spouse files a separate Form 8938 and reports 100% of the jointly owned asset

Married Filing Joint and each is a U.S. person (specified person)

For reporting on Form 8938:

  • file one Form 8938 and report each SFFA owned by either person

Married Filing Separate and one spouse is not a U.S. person (specified person)

For determining the thresholds:

  • the U.S. person includes 100% of the asset's value

For reporting on Form 8938:

  • the U.S. person reports 100% of the value of the SFFA

Joint owners who are both U.S. persons and one is not a spouse

For determining the thresholds:

  • each person includes 100% of the asset's value

For reporting on Form 8938:

  • the U.S. person reports 100% of the value of the SFFA

Treaty positions and closer connection positions

Where a U.S. resident alien or permanent resident (green card holder) elects under an income tax treaty to be treated as a non-resident of the U.S. for tax purposes, that person continues to be treated as a specified person and Form 8938 must be filed.

Non-U.S. persons, including "snowbirds," who rely on the "closer connection" exception to avert the U.S. day count under the residency rules, should be able to steer clear of the Form 8938 reporting since the exception is under U.S. domestic provisions. However, the IRS has not yet provided definitive guidance in this area.

Exceptions

There are certain exceptions to reporting the SFFA information. Taxpayers are not required to report the specified foreign financial asset if they report the asset on certain other forms filed with the IRS (i.e. Form 3520 for foreign trusts or Form 8891 for RRSPs).

Additionally, taxpayers who are not required to file either a Form 1040 or Form 1040NR tax return need not file Form 8938, even if they own specified foreign financial assets with a value over the applicable reporting threshold. Refer to the IRS website for an updated list.

Penalties

The penalty for failure to submit the required disclosure is $10,000, increasing by $10,000 for each 30-day period following notification of non-compliance. However, a 90-day grace period exists before the second penalty is assessed. The maximum penalty is $50,000.

These new reporting rules are only one component of the U.S. global enforcement of reporting offshore accounts for U.S. persons. Our next Tax Alert will highlight the reporting requirements for passive foreign investment company rules (PFIC).

Joseph E. Sardella, CA, CPA, is a Tax Partner in the Toronto office of Collins Barrow.

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Information is current to April 19, 2012. The information contained in this release is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.