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News December 19, 2011 Issue

New HIRE Act Rule Expands Foreign Financial Interest Reporting Requirements

Just when you were getting used to the FBAR, here comes new IRS Form 8938.

This latest report requires individuals to disclose ownership of and interest in specified foreign financial assets as part of their personal income tax returns beginning with tax year 2011.

"Specified foreign financial assets" include private fund interests and derivatives such as swaps and options.

According to guidance on the IRS website, you must file Form 8938 if:

1. You are a "specified individual," that is,

  • a U.S. citizen,
  • a resident alien or individual electing to be treated as a resident alien on a joint tax return, or
  • a "bona fide" resident of Puerto Rico or American Samoa who is a nonresident alien.

AND

2. You have an interest in specified foreign financial assets, which include:

  • Any financial account maintained by a foreign financial institution (except foreign branches of U.S. financial institutions, U.S. branches of foreign financial institutions, or U.S. "payers" such as a U.S. domestic financial institution),
  • Other foreign financial assets, such as securities issued by a non-U.S. person, any interest in a foreign entity, and any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person.

(The guidance notes that Form 8938 and its instructions provide more information on the definition of specified foreign financial assets and when you have an interest in such an asset.)

AND

3. The aggregate value of your specified foreign financial assets is more than the following reporting thresholds:

  • For individual filers, total specified foreign assets of $50,000 on the last day of the tax year or $75,000 any time during the tax year;
  • For joint filers living in the U.S., total specified foreign assets of $100,000 on the last day of the tax year or $150,000 at any time during the tax year; or
  • For joint filers who live abroad, total specified foreign assets of $400,000 on the last day of the tax year or $600,000 at any time during the tax year.

The temporary rule is another offspring of the Foreign Account Tax Compliance Act (FATCA), and is found at Internal Revenue Code Section 6038D. At the time the temporary rule was issued, the Treasury Department also issued a rule proposal that would require entities to file Form 8938 as well as individuals.

The Form 8938 filing obligation is separate and distinct from the FBAR filing obligation.

Individuals meeting certain criteria with respect to foreign financial assets must file Form 8938 with the IRS. Individuals and entities meeting certain criteria with respect to foreign financial assets must file FBARs with the Financial Crimes Enforcement Network. Form 8938 is an attachment to income tax returns, and therefore is not required of individuals who do not have an income tax filing obligation.

Information required in Form 8938 includes the identifying information, complete with names and addresses, for:

  • Any foreign financial institution holding assets and account numbers where the assets reside;
  • Whether a depository or custodial account was opened or closed during the year;
  • For non-financial institution held assets, the identity of a securityís issuer, and the class or issue held;
  • Information identifying financial instruments and contracts, including all counterparties and issuers;
  • Interests in foreign entities;
  • Maximum value of each asset during the portion of the year each was held by the reporting individual; and
  • The exchange rate used to convert the assetís value to U.S. dollars.

The temporary rule adopting Form 8938 was issued December 14 with an effective date of December 19. The Form 8938 filing requirement begins with all personal income tax returns for years after March 18, 2010, which effectively is the 2011 tax year.