New Form 8938 for US Residents having Financial Assets Abroad

Form 8938

The US Internal Revenue Service (IRS) has added one more form to collect information from its citizens and residents on their foreign financial assets. With effect from 2012, the IRS has introduced ‘Form 8938 – Statement of Specified Foreign Financial Assets’ to be filed along with the income tax return. That is, all those filing their tax returns of 2011 will have to include Form 8938, if applicable to them. This form, which has already earned synonyms like ‘Son of FBAR’ and ‘FBAR Turbo,’ will be in addition to the already existing requirement of Foreign Bank and Financial Accounts Report (FBAR) that must be filed by June 30th each year.

Parag Patel, an attorney and Partner at New Jersey based Patel Law Offices says, “Form 8938 is and will be a significant tool for the IRS to identify the scope of international tax non-compliance of a given US taxpayer. The reason why Form 8938 is so useful for the IRS is that Form 8938 now requires a taxpayer to disclose more information, which connects various parts of a taxpayer’s international tax compliance including the information that escaped disclosure on other forms earlier.”

“This summary, in turn, allows the IRS to effectively identify the overall scope of a taxpayer’s noncompliance. Form 8938 may lay the foundation (and road map) for an IRS investigation of whether the taxpayer has been in compliance previously. For example, Question 3a of Form 8938 indirectly asks a problematic question: the date of the account opening (the question specifically asks whether the account was opened in the tax year). For older accounts, this is a dangerous question. Answering that the account was not opened in the tax year, implicitly (and affirmatively by omission) states that account was opened in a prior year. As a result, prior years FBARs should have been filed. The answer to question 3a could provide incriminating evidence to the IRS,” Patel explains.

The IRS is tracking foreign accounts in all countries, but thanks to recent indictments of account holders in countries like Switzerland and India (several HSBC India account holders have been indicted), there could be increased focus on these countries.

Given the serious implications of Form 8938, let’s look at its applicability so you do it right when you file your taxes for 2011.

Who must file Form 8938? You must file Form 8938 if: 1. You are a specified individual AND 2. You have an interest in specified foreign financial assets required to be reported AND 3. The aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you

1. A specified individual is:

– A US citizen – A resident alien of the United States for any part of the tax year (you can find a definition of resident alien in this article) – A nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return – A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico 2. A specified foreign financial asset is: – Any financial account maintained by a foreign financial institution. A foreign financial institution includes bank account, investment vehicles such as foreign mutual funds, foreign hedge funds, and foreign private equity funds. – Other foreign financial assets held for investment that are not in an account maintained by a US or foreign financial institution. Examples of other specified foreign financial assets include stock issued by a foreign corporation, a capital or profits interest in a foreign partnership, a note, bond, debenture, or other form of indebtedness issued by a foreign person, an interest in a foreign trust or foreign estate, an interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement with a foreign counterparty and an option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer.

You would therefore have to report all your share holdings, mutual fund holdings, ULIP and insurance policy holdings, pension plans and bank balances in India.

Specified foreign financial assets do not include physical assets such as gold and real estate. However, if gold is held in the form of ETFs, it would be included as specified foreign financial asset.

3. The reporting thresholds that apply are as follows: – Unmarried taxpayers living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year – Married taxpayers filing a joint income tax return and living in the US: The total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year – Married taxpayers filing separate income tax returns and living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. – Taxpayers living abroad: You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year or you are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

How to determine value of specified financial assets? You must report the maximum value during the tax year of each specified foreign financial asset reported on Form 8938. You may rely on periodic account statements for the tax year to report a financial account’s maximum value.

Use the currency exchange rate on the last day of the tax year to figure the maximum value of a specified foreign financial asset or the value of a specified foreign financial asset for the purpose of determining the total value of your specified foreign financial assets to see whether you have met the reporting threshold.

Here’s what this really means. Suppose you are a single taxpayer in the US and you had a balance in your demat account worth $50000 on December 31, 2011. You qualify to report Form 8938. But what you actually report in Form 8938 will be the highest value in your demat account during 2011. So suppose you held shares worth $55000 during 2011 but sold off some shares due to which the balance dropped to $50000, you must report $55000 in Form 8938.

What is the due date for filing Form 8939? Form 8938 must be filed along with your income tax return. For US tax year 2011, the due date is April 17th 2012.

Is Form 8938 in addition to FBAR? Yes. In recent years, the IRS has increased its focus on tracking offshore accounts for possible tax evasion. This new Form 8938 is just one more measure in that direction. In short, today, if you are a US resident or US citizen with bank and financial accounts in countries outside the US, you will have several reports to file. Your US tax return, 1040, itself has questions about your foreign financial interests in Schedule B. Then you have this new Form 8938 that must be filed along with your tax return. And finally you have the FBAR that must be filed by June 30th each year for the previous tax year.

The FBAR and Form 8938 collect more or less the same kind of information with a few differences. Read more about FBAR here.

While Form 8938 itself is not very complicated, the filing process might be cumbersome. For instance, while reporting share holdings in Indian companies in Part II of form 8938, you would need to list each company’s holding separately giving details of not just the shareholding but address of the company, dividends received and where you reported the income on your 1040. Consult a professional to make sure you don’t leave out any important details.