Further guidance was just provided by the IRS in the form of finalized Treasury Regulations for those individuals who are required to report interests in so-called “specified foreign financial assets” (“SFFA”) on Form 8938. The final regulations were issued on Thursday December 11 (T.D. 9706). The regulations finalize temporary regulations issued in 2011 (T.D. 9567), making some changes, which are the subject of this blog post.
As many informed readers of this blog already know, a new information return filing requirement started for the 2011 tax year for individuals with any interest in so-called “Specified Foreign Financial Assets”. The information return on Form 8938 is required to be filed with the tax return (e.g., Form 1040). If a taxpayer does not have an obligation to file a federal tax return for a tax year, the individual is not required to file Form 8938 for that particular tax year.
Who Must File Form 8938?
Assuming a dollar threshold for aggregate value of SFFAs during the tax year is met, the following so-called “specified individuals” must file Form 8938:
- A US citizen (sounds simple enough, but who can be a US citizen may surprise you)
- A “resident alien” of the United States for any part of the tax year (this means the individual meets either the so-called “green card” test or “substantial presence” test). Read about these tests here and here.
- 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.
Filing becomes mandatory once certain dollar thresholds in aggregate fair market value of the SFFAs are exceeded during the tax year. The thresholds depend on one’s filing status and whether the “specified individual” is living abroad or in the United States. The IRS is authorized to set higher dollar threshold amounts; the current thresholds are set out below.
For taxpayers living in the United States the filing thresholds for aggregate value of SFFAs are:
- Single taxpayers and married taxpayers filing separately: $50,000 on the last day of the tax year or $75,000 anytime during the tax year;
- Married taxpayers filing jointly: $100,000 on the last day of the tax year or $150,000 anytime during the tax year.
For taxpayers living abroad, the thresholds are:
- Single taxpayers and married taxpayers filing separately: $200,000 on the last day of the tax year or $300,000 anytime during the tax year; and
- Married taxpayers filing jointly: $400,000 on the last day of the year or $600,000 anytime during the year.
What is a Specified Foreign Financial Asset?
A SFFA includes a financial account maintained by a foreign financial institution (e.g., a non-US bank account or stock trading account) and certain other foreign financial assets that are not held in an account at a financial institution, such as stock, securities, or any other interests in a non-US entity (e.g., units in a foreign mutual funds; interests in foreign trusts and foreign estates; foreign partnership interests). It includes notes, bonds, debentures, or other debt issued by a foreign person; interest rate and currency swaps, as well as other agreements with a foreign counterparty (such as foreign life insurance contracts).
Certain assets are exempt such as an interest in a social security, social insurance, or other similar program of a foreign government. On the other hand, US individuals are required to report on the Form 8938, their interest in a non-United States employee benefit plan – this could include foreign pension and equity compensation plans, deferred compensation plans, stock awards, stock options and the like.
Questions remain as to the precise parameters as to what constitutes a SFFA. The IRS has also issued some basic Questions and Answers regarding Form 8938. Instructions to Form 8938 are also very helpful.
Significant Clarifications Made by the Final Treasury Regulations
The Final Treasury Regulations contain various noteworthy changes to the temporary regulations issued in 2011 and provide some clarifications. Some significant items are summarized below:
Jointly Owned Assets
The final regulations clarify that when joint owners of a SFFA are not married, each of the joint owners must include the full value of the asset (rather than only the value of the specified person’s interest in the asset) in determining whether the aggregate value of such specified individual’s SFFAs exceeds the applicable reporting thresholds. In addition, each such joint owner must report the full value of the asset on his or her Form 8938.
The Instructions to Form 8938 provide that when both spouses are “specified individuals” and each files a separate tax return, the individuals are to include only one-half of the value of the asset jointly owned with the spouse in order to determine the total value of all SFFAs for determining the reporting threshold. The final regulations clarify that when joint owners are married but file separate tax returns each joint owner of a SFFA must report the full value of the asset (rather than only the value of the specified person’s interest in the asset) on the individual’s Form 8938, even if both spouses are specified individuals and even though only one-half of the value of the asset is considered in determining the applicable reporting thresholds.
I was hoping the final regulations might address the issue of nominee owners of SFFAs, but this issue was not covered.
Exception for Dual-Resident Taxpayers
An exception from filing Form 8938 is provided in the final regulations for certain dual-resident taxpayers. In order to qualify for the exception, such individuals must claim to be taxed as residents of a treaty partner country by timely filing Form 1040NR, U.S. Nonresident Alien Income Tax Return, and attaching a Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).
The final regulations also clarify that taxpayers who own so-called “disregarded entities” must include the value of any assets held by the entities both to determine whether they meet the SFFA filing threshold, and if they do meet the threshold, to determine the amount they must report on Form 8938. Typically, a “disregarded entity” is a single-owner US LLC or a foreign entity owned by one person that makes what is called a “check the box” election to treat that foreign entity as “disregarded”. In these cases, the taxpayer-owner must treat the assets owned by the entity as directly owned by him for purposes of the SFFA rules.
The final regulations also clarified that taxpayers included on a jointly filed Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, or Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, who notify the IRS of the joint filing will not be required to file Form 8938. However, the final rules do not exempt filers of FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), from filing Form 8938 because the forms serve different purposes.
The final regulations rejected commentators’ suggestions that Form 8854, “Initial and Annual Expatriation Statement” be added to the list of forms in Treasury Regulation §1.6038D-7(a) intended to relieve duplicative reporting. The Treasury Department and IRS considered the nature of the information collected on Form 8854 and concluded that requiring Form 8938 would not duplicate the information currently being reported on Form 8854. Further, Treasury and IRS stated that filing of Form 8938 is expected to “substantially enhance” IRS compliance programs with respect to Form 8854 filers.
Foreign Currency Conversions
The final regulations clarify that the US Treasury Department’s Bureau of the Fiscal Service foreign currency exchange rate is to be used to convert the value of a SFFA into US dollars for purposes of determining both the aggregate value of SFFAs in which a specified person has an interest and for determining the value of the SFFA. The 2014 rates can be found here. If no conversion rate is available at the Bureau of the Fiscal Service for a particular currency, another publicly available foreign currency exchange rate may be used provided the source of the foreign currency exchange rate is disclosed on Form 8938. The final regulations change the temporary regulations by amending the foreign currency conversion rules to permit a taxpayer to rely on a foreign currency conversion shown on a periodic financial account statement. Specifically, the taxpayer may rely upon periodic account statements that are provided at least annually by or on behalf of a financial institution maintaining an account, including the foreign currency conversion reflected in those statements, to determine the financial account’s maximum value unless the specified person has actual knowledge, or reason to know based on readily accessible information, that the statements do not reflect a reasonable estimate of the maximum account value during the taxable year.
SFFAs Include Retirement and Pension Accounts and Certain Non-retirement Savings Accounts
The regulations clarify that for tax years beginning after December 12, 2014, retirement and pension accounts, non-retirement savings accounts, and accounts satisfying conditions similar to those described in the FATCA Treasury Regulations (Treas. Reg. § 1.1471-5(b)(2)(i)) that are excluded from the definition of a “financial account” under a Model 1 or a Model 2 IGA are included in the definition of a “financial account” for purposes of determining SFFAs reportable on Form 8938.
This post updated on January 16 2015, to reflect the US Treasury Department’s Bureau of the Fiscal Service foreign currency exchange rate for 2014.
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