IRS Releases Draft Version of Instructions to Form 8938 for Foreign Financial Asset Holders


By Ron Kramer

On September 28, 2011, the Internal Revenue Service (IRS) released on its website a draft version of the 2011 Instructions to Form 8938, “Statement of Specified Foreign Financial Assets.” Form 8938 will be used by individuals to report an interest in one or more specified foreign financial assets under Internal Revenue Code Section 6038D. The instructions indicate that under a transitional rule most taxpayers won’t have to file Form 8938 until 2012.

In June 2011, the IRS released a draft version of Form 8938 without instructions.


For tax years beginning after March 18, 2010, the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act, P.L. 111-147) provides that individuals with an interest in a “specified foreign financial asset” during the tax year must attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets is greater than $50,000 (or a dollar amount higher than $50,000, as IRS may prescribe). In addition, to the extent provided by IRS in regulations or other guidance, IRC Section 6038D applies to any domestic entity formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets in the same manner as if the entity were an individual.

“Specified foreign financial assets” are: (1) depository or custodial accounts at foreign financial institutions, and (2) to the extent not held in an account at a financial institution, (a) stocks or securities issued by foreign persons, (b) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (c) any interest in a foreign entity. Under the provisions of the HIRE Act, Form 8938 was due to be filed with 2011 tax returns. However, in IRS Notice 2011-55, the IRS suspended the IRC Section 6038D reporting requirements until it releases Form 8938 in final form. Notice 2011-55 provided that after new Form 8938 is released in its final form, individuals for whom the filing of Form 8938 was suspended for a tax year would have to attach the form for the suspended tax year to their next income tax return required to be filed with IRS.

In addition, Notice 2011-55 further stated that the statute of limitations period for tax assessments for periods for which reporting is required under IRC Section 6038D would not expire before three years after the date on which the IRS receives Form 8938.

Draft Instructions to Form 8938.

The draft Instructions to Form 8938 provide a “Transitional rule for 2011,” and also note the relief provided in Notice 2011-55. The transitional rule states that an individual’s obligation to file Form 8938 is deferred until 2012 if he or she: (1) had a tax year that began after March 18, 2010; (2) was required to file Form 8938; and (3) filed an annual return (e.g., Form 1040, Form 1041, etc.) before Form 8938 was released.

The draft instructions contain significantly higher reporting thresholds than the $50,000 threshold provided in the HIRE Act. The draft Instructions provide that individuals satisfy the reporting thresholds if they have specified foreign financial assets of more than $100,000 ($200,000 for joint filers) at any time during the year, or if the total value of their specified foreign financial assets, on the last day of the tax year, is more than $50,000 for unmarried taxpayers living in U.S., $100,000 for married taxpayers filing a joint return and living in the U.S., and $50,000 for married taxpayers filing separate returns and living in the U.S.

The draft Instructions also provide the reporting threshold for taxpayers living abroad, (i.e., taxpayers who are bona fide residents of a foreign country or countries for an uninterrupted period that includes the entire tax year, or are present in a foreign country or countries during at least 330 full days during any period of 12 consecutive months ending in the tax year). These expatriates satisfy the reporting threshold if they are not filing a joint return and the value of their specified foreign financial assets is more than $200,000 on the last day of the tax year, or more than $400,000 at any time during the tax year ($400,000 and $600,000 for joint filers).

The draft Instructions also caution that filing Form 8938 does not relieve a taxpayer of the requirement to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), if he or she is otherwise required to file Form TD F 90-22.1. Both forms will be required to be filed for each year.

Failure-to-file penalty. The Instructions explain that if an individual fails to file a correct and complete Form 8938, he or she may be subject to a penalty of $10,000. If this failure continues for more than 90 days after the day on which IRS mails a notice of the failure to the individual, he or she will be penalized $10,000 for each 30-day period (or fraction of the 30-day period) during which the failure continues after the expiration of the 90-day period. The penalty imposed for any failure can’t exceed $50,000.

It appears that the IRS does not anticipate that Form 8938 will be finalized in time for a filing with 2011 tax returns. Accordingly, a 2011 Form 8938 will be required to be attached to the 2012 tax return along with a 2012 Form 8938. Therefore, taxpayers should prepare to gather the necessary information to report their 2011 foreign assets.

Review a copy of the draft instructions to Form 8938 or the draft of Form 8938.

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