Reporting of Foreign Financial Assets

INFORMATION TO ASSIST IN COMPLYING WITH REPORTING OF FOREIGN FINANCIAL ASSETS

Foreign Bank Account.  A U.S. person who has a financial interest in or signature authority over any foreign financial account (e.g., bank, securities, or other financial account) in a foreign country that exceeds $10,000 in aggregate value at any time during the calendar year must report that relationship by filing Form TD F 90-22.1, known as an FBAR, with the Treasury Department before July 1 of the following year.

Specified Foreign Financial Assets. Any individual who holds an interest in a specified foreign financial asset during the tax year must attach to his or her tax return certain information for each such asset if the total value of all such assets exceeds $50,000 (or a higher dollar amount prescribed by the IRS) ( Code Sec. 6038D). The Form 8938 is required to be included with the tax return starting with the 2011 tax year.   A "specified foreign financial asset" includes:

1. a depository, custodial, or other financial account maintained by a foreign financial institution,
2. a stock or security issued by a person other than a U.S. person,
3. a financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person(individual, partnership, corporation, etc), and
4. an interest in an entity that is not a U.S. person.

The individual must disclose the asset’s maximum value during the tax year, and provide specific information based on the asset type. For a financial account, the individual must provide the name and address of the financial institution in which the account is maintained, and the account number. For stock or security, the individual must provide the issuer’s name and address, and any other information needed to identify the asset’s class or issue. For any other instrument, contract, or interest, the individual must provide any information needed to identify the asset, and the names and addresses of all issuers and counterparties.

So, you could be required to file both a Forms TDF 90-22.1 and 8938 for a particular year.

Cost of Not Complying.  An individual who fails to furnish the required information at the time and in the manner prescribed is subject to a $10,000 penalty. If the failure continues for more than 90 days after the IRS mailed notice of the failure to the individual, the individual is subject to an additional $10,000 penalty for each 30-day period (or a fraction thereof) during which the failure continues after the 90-day period; this additional penalty cannot exceed $50,000. For purposes of assessing these penalties, the total value of the individual’s foreign financial assets is presumed to exceed $50,000 (or a higher dollar amount prescribed by the IRS) if the individual does not provide sufficient information to demonstrate their total value.

These penalties are not imposed if the failure is due to reasonable cause and not willful neglect. However, the fact that a foreign jurisdiction would impose a civil or criminal penalty for disclosing the required information is not reasonable cause.

To the extent provided by the IRS in regulations or other guidance, these provisions also apply to any domestic entity formed or used to directly or indirectly hold specified foreign financial assets.

Additionally, a 40-percent accuracy-related penalty may be imposed for tax underpayment attributable to an undisclosed foreign financial asset understatement. The statute of limitations for assessments is extended to six years if there is an omission of gross income in excess of $5,000 attributable to a specified foreign financial asset (which may or may not be subject to the reporting requirements discussed above). Also, the three-year limitations period is suspended for failure to timely provide information reporting on specified foreign financial asset.

See the brown underlined Forms above for hyperlinks to the IRS website for specific instructions.

As always, we are here to help you determine if you have a reporting requirement with regard to foreign assets.  Please feel free to give us a call and let us know how we can be of assistance.  While the laws get ever more increasingly complex and the filing requirements become more burdensome it is our goal at Miller Grossbard and Associates to keep things easy for our clients.