IRS Continues to Cross-Reference Foreign Financial Accounts and Assets

IRS Continues to Cross-Reference Foreign Financial Accounts and Assets was published by JD Supra on 4/2/19.

IRS holds information that is sourced from the FATCA reports submitted by Foreign Financial Institutions (FFI)

(on Form 8966 – FATCA Report) and by Individual US Taxpayers that have reporting obligations via Form 8938 (Statement of Specified Foreign Financial Assets).  IRS electronically matches (cross-checks) these forms to identify US Taxpayers that are not making required disclosures to IRS through not filing or underreporting as well as FFIs that are not reporting their reportable US account holders through its cross-check process. Through its cross-check process, IRS will identify:

• US Taxpayers that are not compliant because they have been reported to the IRS by the FFIs via a FORM 8966 report while the Taxpayer has not submitted FORM 8938 or filed an erroneous Form 8938.
• FFIs that are not compliant because a US account holder has reported its reportable foreign accounts via FORM 8938 and an FFI has not submitted FORM 8966 regarding that US account holder.

Tax Form 8938 – Who must File?

• Is used to report the specified foreign financial assets of a “Specified Individual and a Specified Entity” when the total value of all the specified foreign financial assets in which the Taxpayer has an interest is more that the appropriate reporting threshold.  
• Specified Individuals and Specified Domestic Entities are required to file Form 8938 and report the specified foreign financial assets in which they have an interest regardless of whether the assets affect their annual income tax liability.     

A Specified Individual is:

• A U.S. citizen.
• A resident alien of the United States for any part of the tax year.
• A nonresident alien who makes an election to be treated as a 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.
• Individuals that have a reportable interest in specified foreign financial assets required to be reported.
• Individuals whose specified foreign financial assets aggregate value is more than the reporting threshold.

A Specified Domestic Entity is:

• A closely held domestic corporation that receives at least 50 percent of its gross income from passive income, or at least 50 percent of its assets produce or are held for the production of passive income.
• A closely held domestic partnership that receives at least 50 percent of its gross income from passive income or at least 50 percent of its assets produce or are held for the production of passive income.
• A domestic trust that has one or more specified persons (a Specified Individual or a Specified Domestic Entity) as a current beneficiary.

Reporting Thresholds for Individuals

• Unmarried individuals that reside in the U.S.:   the market value of their foreign financial assets is greater than $50,000 on last day of the year or greater than $75,000 at any time during the year.
• Married individuals filing jointly that reside in the U.S.:  the market value of their foreign financial assets is greater than $100,000 on last day of the year or greater than $150,000 at any time during the year.
• Married individuals filing separately that reside in the U.S.:  the market value of their foreign financial assets is greater than $50,000 on last day of the year or greater than $75,000 at any time during the year.
• Unmarried individuals that reside outside the U.S. and satisfying either the bona fide resident or physical presence tests:  the market value of their foreign financial assets is greater than $200,000 on last day of the year or greater than $300,000 at any time during the year.
• Married individuals filing jointly that reside outside the U.S. and satisfying either the bona fide resident or physical presence tests:  the market value of their foreign financial assets is greater than $400,000 on last day of the year or greater than $600,000 at any time during the year.
• Married individuals filing separately that reside outside the U.S. and satisfying either the bona fide resident or physical presence tests:  the market value of their foreign financial assets is greater than $200,000 on last day of the year or greater than $300,000 at any time during the year.

What are the specified foreign financial assets?

• financial accounts such as savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer.
• Assets held for investment and NOT held in a financial account such as:

1. Stock or securities issued by a foreign corporation;
2. A note, bond or debenture issued by a foreign person;
3. 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 counterpart;
4. 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 counterpart or issuer;
5. A partnership interest in a foreign partnership;
6. An interest in a foreign retirement plan or deferred compensation plan;
7. An interest in a foreign estate;
8. Any interest in a foreign-issued insurance contract or annuity with a cash-surrender value.

Will Optional GIIN Reporting on Form 8938 remain Optional? Or is it the beginning of a new IRS Cross-Reference?

Form 8938 includes a field for the “optional” reporting of a Foreign Financial Institution’s GIIN.  A question arises as to IRS’s purpose in requesting this “optional” information. Perhaps the “optional” component of providing a GIIN is temporary and will be a permanent requirement at some point in the future?  For Tax Year 2018, Form 8938 – continues to make the GIIN optional – However, the instructions for Form 8938 for 2018 stipulate that Taxpayers will not be subject to penalties if they “enter the wrong GIIN or leave the field blank and that Completing this information may reduce the need for the IRS to contact them”.

FFI’s utilize IRS Form 8966 (known as the FATCA Report) to report certain U.S. Accounts.  IRS can cross-check the Form 8938 against the Form 8966.

Penalties can range from $10K to $50K

Failure to report foreign financial assets on Form 8938 may result in a penalty of $10,000 (and a penalty up to $50,000 for continued reported failure after IRS notification). Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent.

IRS has launched a Compliance Campaign directly targeted at FATCA Filing Accuracy

IRS is prepared to enforce FATCA compliance.  On July 5, 2018, IRS responded to a Treasury Inspector General for Tax Administration (TIGTA) Report by stating that they:

• “are taking action to reduce inaccurate or missing information and have initiated multiple compliance activities related to the Form 8938, including developing automated risk assessments across the FATCA filing population”
• “will continue our efforts to systematically identify non-filers and underreporting related to U.S. holders of foreign accounts and FFIs”

Don’t be a Victim of your Own Making

Form 8938 is complex and confusing and must be attached to the taxpayer’s annual tax return.  Taxpayers with foreign financial assets ought to consult with a Specialized Tax Advisor if they have foreign financial assets and have Form 8938 filing requirement.    

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