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Tax Alert regarding New IRS Regulations for additional Foreign Financial Asset Reporting

This memo has been issued from the International Tax Services Group of Alpern Rosenthal.

In recent years, the Department of the Treasury and the Internal Revenue Service have been increasing the type and amount of required disclosure regarding the ownership of foreign financial assets.  This tax alert is to make you aware of temporary and proposed regulations that were issued by Treasury on December 14, 2011 under the foreign financial asset reporting rules of IRC Section 6038D.  In general, these rules require U.S. individuals to report their ownership of any foreign financial assets, including foreign financial accounts, foreign securities, interests in foreign entities and trusts, and interests in foreign pension plans on Form 8938 "Statement of Foreign Financial Assets."  Form 8938 must then be attached to your 2011 individual income tax return.

The amount of reportable assets that one must own before reporting is required is $50,000 as of the end of the year or $75,000 anytime during the year.  For taxpayers who file a joint return the reporting threshold is $100,000 as of the end of the year or $150,000 anytime during the year.  A special higher reporting threshold applies to individuals living abroad.  As stated above, U.S. individuals are to report their ownership of any foreign financial assets, including foreign financial accounts, foreign securities, interests in foreign entities and trusts, and interests in foreign pension plans.  There are exceptions to reporting.  Certain foreign financial assets held in a financial account that is maintained by a U.S. payer, such as a domestic financial institution are exempt from reporting.   Additionally, there are a number of provisions that eliminate the requirement to report on Form 8938 foreign assets that are already being reported on certain other IRS forms, such as Forms 5471, 8865 and 8621.  The rules for determining whether a particular foreign asset needs to be disclosed are complex and require a thorough understanding of these new regulations.  If you are uncertain of whether a particular foreign asset you own requires disclosure under these new regulations you should discuss it with your Alpern Rosenthal representative.

The IRS may assess a penalty for failure to file a complete and correct Form 8938.  The penalty is $10,000. Additional penalties may apply if the individual does not comply within 90 days of a notice being mailed, up to a maximum of $50,000.

The temporary regulations, as described above, apply only to specified individuals.  The proposed regulations extend the reporting requirements of Section 6038D to specified U.S. domestic entities; however, they are proposed to apply to tax years beginning after December 31, 2011.

Finally, you may be familiar with or in the past have had to disclose your ownership and/or signature authority of foreign bank accounts on Form TDF 90-22.1.  This was a separate form that was not filed with your income tax return, but was filed directly with the Department of the Treasury.  This new reporting requirement under Section 6038D does not eliminate the required reporting under the foreign bank account rules.  Those reporting requirements and Form TDF 90-22.1 remain in effect, as well as its reporting threshold amount of $10,000.

If you have any questions, or would like more information please do not hesitate to contact your Alpern Rosenthal representative.

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