FATCA’s Form 8938
Reporting Obligations
Presented by Attorney David J. Lewis
Of Krugliak, Wilkins, Griffiths & Dougherty
Co., LPA
All contents herein are protected by U.S. Copyright Laws - Copyright © 2013
Krugliak, Wilkins, Griffiths & Dougherty Co., L.P.A.
00621284
Form 8938
• IRC §6038D, enacted as part of FATCA, requires certain
taxpayers with an interest in a “specified foreign financial
asset” to attach Form 8938 Statement of Specified Foreign
Financial Assets to their Form 1040.
– Form 8938 was released in its final form on December 21, 2011.
Accordingly, taxpayers must file Form 8938 starting with their
2011 Form 1040, if applicable. BNA Foreign Income Portfolio:
U.S. International Portfolio 947-1st.
• Form 8938 consists of four parts, covering foreign deposit
and custodial accounts (Part I), other foreign assets (Part II),
a summary ledger of tax items attributable to applicable
foreign assets (Part III), and a space to check-the-box for
the forms eligible for the exception for duplicative
reporting (Part IV).
00621284
Form 8938: Who must file?
• A “specified person” or “specified individual”
who is required to file an annual U.S. income
tax return or information return, and has an
interest in one or more foreign financial assets
with an aggregate fair market value exceeding
the applicable reporting threshold. I.R.C.
§6038D; Treas. Reg. §§1.6038D-1T, -2T.
00621284
Form 8938: Who must file?
A “specified person” is defined in the Regulations as any
“specified individual” who is:
1. A U.S. citizen;
2. A resident alien for any portion of the taxable year;
3. A nonresident alien who has elected to be taxed as a
U.S. resident under §6013(g) or (h); or
4. A nonresident alien who is a bona fide resident of
Puerto Rico or a §931 U.S. possession (American
Samoa, Guam, the Northern Mariana Islands, Puerto
Rico, and the U.S. Virgin Islands).
See Treas. Reg. §1.6038D-1T(a)(1)-(5).
00621284
Form 8938: Who must file?
• Reporting by domestic entities with interests
in specified foreign financial assets is not
currently required as the final regulations
have yet to be issued on this provision. Notice
2013-10, 2013-8 I.R.B. 503.
• At this time, the IRS has issued proposed rules
that would apply the same reporting regime
to domestic entities. Prop. Treas. Reg.
§1.6038D-6.
00621284
Form 8938:
Specified Foreign Financial Assets
“Specified foreign financial assets” are defined as:
1. Financial accounts (e.g. bank accounts, mutual funds, hedge
funds, private equity funds) that are maintained by a foreign
financial institution including financial institutions that are
organized under the laws of a U.S. possession; and
2. To the extent not held in an account at a financial institution:
i.
ii.
iii.
Stocks or securities issued by foreign persons;
Any other financial instrument or contract held for investment that is
issued by foreign person or has a foreign person as a counterparty;
and
Any interest in a foreign entity.
IRC §6038D(b); Treas. Reg. §1.6038D-1T(a)(6); Treas. Reg. § 1.6038D–3T(a)(2)
00621284
Form 8938:
Specified Foreign Financial Assets
Examples of specified foreign financial assets other than financial
accounts include:
1. Stock issued by a foreign corporation;
2. A capital or profit interest in a foreign partnership;
3. Debt issued by a foreign person, including a note, bond or
debenture;
4. An interest in a foreign trust;
5. An interest in various financial swaps or similar agreement with a
foreign counterparty (e.g. interest rate, currency, equity, and
commodity swaps); and
6. Any derivative instrument, including options, in relation to any of
the other examples or with respect to any currency or commodity
entered into with a foreign counterparty or issuer.
Treas. Reg. §1.6038D-3T(d).
00621284
Form 8938: Interest in Specified
Foreign Financial Asset
• A specified person has an “interest” in a specified
foreign financial asset if any income, gains, losses,
deductions, credits, gross proceeds, or distributions
attributable to the holding or disposition of the
specified foreign financial asset would be required to
be reported on an annual return.
• A specified person has an “interest” even if no income,
gains, losses, deductions, credits, gross proceeds, or
distributions are attributable to the holding or
disposition of the specified foreign financial asset for
the taxable year.
Treas. Reg. §1.6038D-2T(b)(1).
00621284
Form 8938: Reporting Thresholds
Domestic Taxpayers
• Unmarried taxpayers or married taxpayers filing
separate income tax returns: The total value of
specified foreign financial assets exceeds $50,000
on the last day of the taxable year or $75,000 at
any time during such year. Treas. Reg. §1.6038D2T(a)(1).
• Married taxpayers filing a joint return: The total
value of specified foreign financial assets exceeds
$100,000 on the last day of the taxable year or
$150,000 at any time during such year. Treas.
Reg. §1.6038D-2T(a)(2).
00621284
Form 8938: Reporting Thresholds
Taxpayers Living Abroad
You are a taxpayer living abroad if you are:
• a citizen of the U.S. and a bona fide resident of a foreign country or
countries for a continuous period which includes an entire taxable year, or
• a citizen or resident of the U.S. and who, during any period of 12
consecutive months, is present in a foreign country or countries for 330
days.
I.R.C. § 911(d)(1).
If you are a taxpayer living abroad, you must file if:
• You are filing a return other than a joint return and the value of your
specified foreign assets exceeds $200,000 on the last day of the tax year or
$300,000 at any time during the year; or
• You are filing a joint return, and the value of your specified foreign asset
exceeds $400,000 on the last day of the tax year or $600,000 at any time
during the year.
See Treas. Reg. §1.6038D-2T(a)(3)-(4).
00621284
Form 8938: Valuing the Asset
The value of a specified foreign financial asset is equated to fair market value,
both for purposes of determining if an interest exceeds a reporting threshold
and for reporting the maximum value of an asset on Form 8938.
• When reporting the maximum value of an asset, a taxpayer may rely on
the annual account statements of the foreign financial institution.
– An asset with attributed negative value is treated as having zero value.
– For assets that are denominated in a foreign currency, the value must first be
determined in the foreign currency before conversion into U.S. dollars.
• As for valuing assets not held in a financial account, the fair market value
as recorded on the last day of the tax year will suffice.
In either case, these valuation approaches are unavailable if, based on readily
accessible information, the specified person has actual knowledge or reason
to know that the purported maximum value of an asset does not reflect the
fair marker value of an asset.
Treas. Reg. §1.6038D-5T.
00621284
Form 8938: Valuing the Asset
• A special, but similar fair market value determination
applies for foreign trusts and foreign estates, pension plans,
and deferred compensation plans. These values are also
subject to the actual knowledge or reason-to-know
condition. Treas. Reg. §§1.6038D-5T(f)(2),(3).
• Special rules also apply to those jointly owned assets.
Generally, the entire value of the asset, and not the value
of each person's interest is used to determine value.
– This also applies to married individuals who file a joint return.
But, for married individuals who file separate returns, only onehalf of the value of the jointly owned asset is used.
Treas. Reg. §1.6038D-2T(c)(1).
00621284
Form 8938: Notable Exceptions from
Filing
Certain financial assets are not considered a specified foreign financial asset
and are exempt from reporting. Some of these exceptions include:
• Foreign real estate is not reportable on Form 8938. But, if the real estate is
held by a foreign entity, the taxpayer’s interest in the foreign entity is
reportable. Further, a mortgage or lease would be reportable.
http://www.irs.gov/Businesses/Corporations/Basic-Questions-andAnswers-on-Form-8938#Q3
• Accounts at U.S. branches of foreign banks are not reportable on Form
8938. http://www.irs.gov/Businesses/Corporations/Basic-Questions-andAnswers-on-Form-8938#Q10.
• Likewise, accounts at foreign branches of U.S. banks are not reportable.
http://www.irs.gov/Businesses/Corporations/Basic-Questions-andAnswers-on-Form-8938#Q11
• An interest in a foreign trust or estate is not reportable unless the person
knows or has reason to know based on readily accessible information of
the interest. Receipt of a distribution from the foreign trust or estate
constitutes actual knowledge. Treas. Reg. § 1.6038D–3T(c)
00621284
Form 8938: Mechanics of Filing
When?
• By due date, including extension, for income
tax return, even if none of the assets affect
the tax liability of the person. Specified
individuals who are married and file joint
returns need only submit a single Form 8938.
26 C.F.R. §1.6038D–2T(a).
00621284
Form 8938: Mechanics of Filing
What?
• Although the reportable information varies depending upon the
type of interest involved, Form 8938 generally requires:
– Names and addresses of foreign financial institutions, issuers and
counterparties, and entities;
– Information sufficient to identify a financial instrument or contract,
including dates, account type, and numbers;
– Amounts of income, gain, loss, deduction, or credit recognized with
respect to the foreign asset;
– All corresponding schedules, forms or returns filed with the IRS within
which the asset was reported or included;
– The foreign currency exchange rate used to determine the U.S. dollar
value of an asset; and
– The maximum value of an asset for the portion of the taxable year
during which the interest is held.
00621284
Form 8938: Penalties
• For a failure to timely file, a $10,000 penalty may
be imposed. Ninety days after notice of a failure
to file from the IRS, the initial penalty increases
by $10,000 for each 30-day period, up to $50,000
for each failure.
• The failure to comply with the reporting
requirements or any underpayment related to
such failure may result in criminal penalties.
I.R.C. §6038D(d); Treas. Reg. §1.6038D-8T(a),(c),
(f)(2).
00621284
Form 8938: Penalties
• Where a specified person has failed, upon
request by the IRS, to provide sufficient
information to determine the aggregate value
of the foreign financial asset, the IRS will apply
a presumptive value in excess of the reporting
threshold for the purpose of assessing
penalties.
I.R.C. §6038D(e); Treas. Reg. §1.6038D-8T(d).
00621284
Form 8938: Penalties
There is a “reasonable cause” exception to the
enforcement of a penalty for the failure to file.
• The specified person must show that the failure is
due to reasonable cause, and not willful neglect.
This determination is made on a case-by-case
basis.
• Notably, the regulations specifically provide that
the fact that a foreign jurisdiction would impose
civil or criminal penalties for disclosing the
required information is not reasonable cause.
I.R.C. §6038D(g); Treas. Reg. §1.6038D-8T(e).
00621284
Form 8938: Penalties
With the implementation of FATCA and its regulations:
• IRC §6662 was amended to impose a 40% penalty on
any understatement related to an undisclosed foreign
financial asset that is subject to reporting under I.R.C.
§6038D.
• Additionally, §6501 was amended to create a six-year
statute of limitations for assessment of tax on
understatements of income related to foreign financial
assets.
BNA Foreign Income Portfolio: U.S. International Portfolio
947-1st.
00621284
Form 8938 and the FBAR
• The information required to be reported on Form 8938 and
the FBAR Form TD F 90-22.1 is similar, but not identical.
• These two forms constitute separate reporting obligations
based on different policy considerations– Form 8938
concerns tax administration and Form TD 90-22.1 pertains
to law enforcement. BNA Foreign Income Portfolio: U.S.
International Portfolio 947-1st.
• For further explanation as to the differences between these
forms see Comparison of Form 8938 and FBAR
Requirements, available at
http://www.irs.gov/Businesses/Comparison-of-Form-8938and-FBAR-Requirements
00621284
Form 8938 and the FBAR
Form 8938
FBAR
Must domestic entities
file?
No.
Yes.
Reporting Thresholds
$50,000 on the last day of the
tax year or $75,000 at any
time during the tax year.
Higher threshold amounts
apply to married individuals
filing jointly and individuals
living abroad. (See slides
“Form 8938: Reporting
Thresholds”)
$10,000 at any time during
the calendar year.
Does the United States
include U.S. territories?
No.
Yes, resident aliens of U.S
territories and U.S. territory
entities are subject to FBAR
reporting.
Financial account held at a
foreign branch of a U.S.
financial institution
Not reportable.
Reportable.
00621284
Duplicative Reporting
A specified person is not required to report a specified foreign financial asset on Form
8938 if the specified person reports the asset on at least one of the following forms :
• Form 3520, “Annual Return To Report Transactions With Foreign Trusts and Receipt
of Certain Foreign Gifts”;
• Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign
Corporations”;
• Form 8621, “Return by a Shareholder of a Passive Foreign Investment Company or
Qualified Electing Fund”;
• Form 8865, “Return of U.S. Persons With Respect to Certain Foreign Partnerships”;
Form 8891, “U.S. Information Return for Beneficiaries of Certain Canadian
Registered Retirement Plans”; or
• Any other form under Title 26 of the U.S. Code that is identified by the Secretary in
as being for this same purpose.
The specified person is obligated, however, to report on Form 8938 the filing of the
form on which the asset is reported.
Treas. Reg. §1.6038D-7T(a).
00621284
Duplicative Reporting
• This exception also applies to foreign grantor trusts,
provided that the specified person, who is treated as the
owner of the trust or any portion thereof under §§671–
679, and the trust timely file Forms 3520 and 3520-A and
the person indicates this on Form 8938. Treas. Reg.
§1.6038D-7T(a)(2).
• Additionally, this applies to a specified person who is
treated as an owner of certain other domestic trusts under
§§671–679, if the trust is either (1) a widely-held fixed
investment trust under Treas. Reg. §1.671-5, or (2) a
liquidating trust created pursuant to a court order issued in
a bankruptcy proceeding under Chapter 7 or a confirmed
plan under Chapter 11 of the Bankruptcy Code. (See Treas.
Reg. §1.6038D-7T(b)).
00621284
Duplicative Reporting
Finally, a specified individual who is a bona fide resident of a U.S. possession and who
is required to file Form 8938 is not required to report the following specified foreign
financial assets:
• A financial account with a financial institution organized under the laws of the U.S.
possession;
• A financial account with a branch of a financial institution not organized under the
laws of the U.S. possession, if the branch is subject to the same reporting
requirements that apply to a financial institution organized under the laws of the
U.S. possession;
• Stock or securities issued by an entity organized under the laws of the U.S.
possession;
• An interest in an entity organized under the laws of the U.S. possession; and
• A financial instrument or contract held for investment, provided foreign issuer or
counterparty is (1) an entity organized under the laws of the U.S. possession, or (2)
a bona fide resident of the U.S. possession of which the specified individual is a
bona fide resident.
Treas. Reg. §1.6038D-7T(c)(1)-(5).
00621284
Form 8938 and Offshore Voluntary
Disclosure Program
• FATCA’s efforts are aimed at foreign financial institutions,
requesting cooperation to prevent tax evasion by U.S. taxpayers.
• Alternatively, the Offshore Voluntary Disclosure Program (OVDP)
focuses its efforts on taxpayers, allowing them to come forward
and report undeclared foreign income and assets.
• Participation in the OVDP requires taxpayers to produce relevant
foreign financial documentation and forms, including Form 8938.
OVDP FAQ 7, 25.
• As FATCA becomes more of a reality, foreign financial
information will be disclosed to the IRS, with or without taxpayer
cooperation. Thus, taxpayers may be encouraged to participate
in the OVDP, in an effort to avoid foreign reporting penalties.
00621284
Form 8938 and Treasury Circular 230
Treasury Circular 230
•
•
Going forward, tax preparers need to be aware of the possible preparer liability in connection
to foreign financial reporting.
Under Treasury Circular 230 the following rules apply:
–
–
–
–
•
§10.21: A practitioner who knows of a client’s noncompliance, omission, or error on tax returns,
must advise the client of the noncompliance, omission, or error and let them know of the potential
consequences of such.
§ 10.22: A practitioner must exercise due diligence, accurately prepare and file returns, and
determine the accuracy of representations made by the practitioner to the Department of the
Treasury.
§ 10.33: A practitioner must provide clients with the highest quality representation by establishing
the facts, determining the reasonableness of any assumptions or representations, relating the
applicable law to the relevant facts, and arriving at a conclusion supported by the law and facts.
§ 10.34: A practitioner may not submit documents to the IRS to limit tax in frivolous or intentional
disregard of tax rules and they must advise clients of potential penalties that are reasonably likely to
result from the position taken on the tax return.
Before the implementation of Form 8938, the preparer only needed the taxpayer’s foreign
bank account information to complete Schedule B on Form 1040. Additionally, the preparer
need to advise the client of the FBAR filing and the consequences of failing to file the FBAR
(which is not attached to a return and does not need to be signed by a return preparer).
However, because Form 8938 is part of Form 1040, the preparer who signs the return is now
responsible for the foreign financial asset information reporting, and Circular 230 rules apply.
00621284
Title 31 Subpoena
• The IRS has used Title 31 subpoenas (31 USC § 3804) to
compel U.S. taxpayers suspected of holding foreign
financial assets to provide bank account records and
documents for purposes of an investigation.
• When subpoenaed, the taxpayer must decide whether
to disclose potentially self-incriminating evidence or be
subject to civil or criminal penalties. It would therefore
seem that the taxpayer could invoke the Fifth
Amendment right against self-incrimination and refuse
to comply. However, the case law does not support this
rationale.
00621284
Title 31 Subpoena
Required Records Exception
• In Shapiro v. United States (1948), 335 U.S. 1, 68 S.Ct. 1375, 92 L.Ed.
1787 , the government requested a fruit wholesaler’s records of
prices. The U.S. Supreme Court ultimately held that the government
can require the production of “essentially regulatory” records
where the conduct was not “inherently criminal” and the records
have “public aspects” rather than being purely personal.
• From this holding, the “Required Records Exception” or the
“Required Records Doctrine” was born. Thus, when the government
is authorized to regulate an activity, an individual's Fifth
Amendment privilege does not prevent the government from
imposing recordkeeping, inspection, and reporting requirements as
part of a valid regulatory scheme.
00621284
Title 31 Subpoena
Building on Shapiro, the Supreme Court articulated three
elements of the Required Records Exception in Grosso v.
United States (1968), 390 U.S. 62, 88 S.Ct. 709, 19 L.Ed.2d 906,
and Marchetti v. United States(1968), 390 U.S. 39, 88 S. Ct.
697, 19 L. Ed. 2d 889—both cases dealt with whether the
Exception applied to the payment of an excise tax on illegal
gambling wagers. The Supreme Court described the three
“premises” as follows:
1. the purposes of the inquiry must be essentially regulatory;
2. the information must be obtained by requiring the
preservation of records that are customarily kept; and
3. the records must have assumed “public aspects” which
render them analogous to public documents.
00621284
Title 31 Subpoena
Four Circuit Courts have addressed the Fifth Amendment challenge to the Required Records
Exception. In all four cases, the Required Records Exception has been applied to render the
Fifth Amendment privilege against self-incrimination inapplicable and require an individual
to produce records regarding foreign bank accounts. The cases are as follows:
• In re M.H., 648 F.3d 1067 (9th Cir. 2011) cert. denied, 133 S. Ct. 26, 183 L. Ed. 2d 676
(U.S. 2012) : The Ninth Circuit Court held that requiring taxpayers with offshore bank
accounts to keep and maintain banking information for government inspection was
essentially regulatory in nature. The Court reasoned that having a foreign bank account
was not an illegal activity, and the information that taxpayers were required produce
was not inherently criminal. Thus, the required records doctrine applied to bring
records requested outside the scope of the Fifth Amendment privilege.
• In re Special February 2011-1 Grand Jury Subpoena Dated September 12, 2011, 691 F.3d
903 (7th Cir. 2012) cert. denied, 133 S. Ct. 2338, 185 L. Ed. 2d 1064 (U.S. 2013):The
Seventh Circuit held that the Fifth Amendment did not protect the taxpayer from
producing foreign financial records in response to a grand jury subpoena. The Court
reasoned: “The voluntary choice to engage in an activity that imposes record-keeping
requirements under a valid civil regulatory scheme carries consequences, perhaps the
most significant of which, is the possibility that those records might have to be turned
over upon demand, notwithstanding any Fifth Amendment privilege.”
00621284
Title 31 Subpoena
• In re Grand Jury Subpoena, 696 F.3d 428 (5th Cir. 2012): The Fifth Circuit
held that taxpayers using offshore bank accounts to keep and maintain
banking information for government inspection was essentially regulatory
in nature. Accordingly, the Required Records Exception precluded Fifth
Amendment protection and taxpayer was required to bring records of
foreign bank accounts, which were requested pursuant to a grand jury
proceeding.
• In re Grand Jury Proceedings, No. 4-10, 707 F.3d 1262 (11th Cir. 2013): The
Eleventh Circuit held that the taxpayer's and his wife's foreign financial
account records had “public aspects,” thus weighing in favor of finding
that those records fell within Required Records Exception to Fifth
Amendment privilege for purposes of the grand jury subpoena. The Court
noted that the taxpayer and his wife were required to keep these records
by valid regulatory scheme—regardless of fact that they were only
required to submit an FBAR—and, further, Treasury Department shared
information it collected regarding those records with other agencies.
00621284
Recent FACTA News
•
•
•
In early July 2013, the Swiss government revealed a program that permits about a
dozen Swiss banks being investigated by the U.S. DOJ to hand over "leaver lists“,
that is, information on U.S. clients' accounts that were transferred to other Swiss
banking institutions when the U.S. began targeting overseas tax evasion. Credit
Suisse and the Zurich Cantonal Bank (Zürcher Kantonalbank) are the first banks in
Switzerland that will provide to the IRS a “leaver list.”
The Swiss Broadcasting Corporation has reported that although names and
account details will not be handed over to the U.S. authorities, the disclosure will
include the number of “leavers”, the amount of assets transferred, and the names
of the destination financial entities.
Furthermore, U.S. cannot go on a “fishing expedition” by making a broad request
to Switzerland in hopes finding U.S. account holders who have committed tax
fraud. The requests must be well defined and indicate that the targeted individual
has committed tax fraud.
See Zsuzsanna Kadar, Credit Suisse to provide “leaver list” to the U.S., International
Taxes Weekly Newsletter Volume 5, No. 33 (Preview Documents for the week of
08/06/2013); and WSJ: Swiss banks near deal on U.S. tax information, RIA
International Taxes Weekly Newsletter (07/16/2013)
00621284
Recent FATCA News
• In light of the growing awareness foreign financial institutions have
in regard to FATCA compliance, several other major developments
have recently occurred (BNA Daily Tax Report, July 9, 2013):
– Israeli banking officials have reported that Americans have withdrawn
billions from Israeli banks due to FATCA. BNA Daily Tax Report, July 8,
2013.
– Russia has enacted legislation to comply with FATCA. BNA Daily Tax
Report, July 8, 2013.
– Germany's upper house approved a bill to implement FATCA. BNA
Daily Tax Report, July 8, 2013.
– Chile reports that the U.S. has begun the process for an
intergovernmental agreement. BNA Daily Tax Report, July 10, 2013.
– The EU anticipates reciprocity with respect to investor information
disclosure from the U.S. BNA Daily Tax Report, July 8, 2013.
00621284
Practical Advice
• (Stories from Accountants)
00621284