You have to credit the folks at the IRS for their ironic sense of humor. On June 20, 2012, the IRS clarified offshore reporting rules for 2011 with respect to Form 8938, “Statement of Specified Foreign Financial Assets." While the clarifications are both significant and welcomed, it would have been nice if the IRS hadn't waited two months after the filing deadline for Form 8938 (April 17, 2012). (The form, if required, was due with a U.S. taxpayer's 2011 tax return).
Well, better late than never. And, you can always file an amended return, or—if you acted before April 17—simply file a request for an automatic six-month extension to Oct. 15.
By way of background, the Foreign Account Tax Compliance Act (FATCA) (see background here and here) introduces new reporting requirements for U.S. citizens and resident aliens. One of the most significant of these requirements is the possible annual obligation to file Form 8938 as part of your U.S. tax return.
As its name indicates, Form 8938's focus is on foreign financial assets. Fortunately, the threshold for filing Form 8938 is relatively high, especially if you live outside the USA and are married and filing a joint tax return. The rules that apply to determine if you live abroad are the same as those that apply to the foreign earned income exclusion (FEIE).
| Filing Status | Living In | Value on Last Day of Year | Value on Any Day of Year |
| Unmarried or Married Filing Separately | USA | $50,000 | $100,000 |
| Married Filing Jointly | USA | $100,000 | $200,000 |
| Unmarried or Married Filing Separately | Foreign Country | $200,000 | $400,000 |
| Married Filing Jointly | Foreign Country | $400,000 | $600,000 |
Form 8938 is NOT the same as the more familiar foreign bank account reporting form (FBAR), Treasury Form TD F 90-22.1 (which, incidentally, is due June 30 of each year). The requirement to file Form 8938 is in addition to the FBAR filing requirement. To learn more about Form 8938 filing requirements, see the instructions here.
Oh, yes—in case you "forget" to complete Form 8938, you face a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. The IRS may also impose a 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed. In addition, the statute of limitations for auditing your tax return may remain open for three years after the date you file Form 8938.
Further Clarification on Reporting Requirements for Precious Metals and Safety Deposit Boxes
And now, for the good news about Form 8938 from the engagingly titled FATCA Newsletter, which arrived via e-mail yesterday. While giving no hint of what information would be provided, or if a secret decoder ring was needed to understand it, the newsletter announced that the IRS had posted nine additional Q&As on its Form 8938 Web page.
Being a curious sort, I surfed on over and found the answers to several reporting questions clients have repeatedly asked about. Rather than paraphrase the answers, I'll let the IRS speak for itself, since the answers are relatively free of "tax-speak"
"FAQ #20. I directly hold precious metals for investment, such as gold, in a foreign country. Do I need to report these assets on Form 8938?
Answer: No. Directly held precious metals, such as gold, are not specified foreign financial assets. Note, however, that gold certificates issued by a foreign person may be a specified foreign financial asset that you would have to report on Form 8938, if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you."
MN comment: Keep in mind that in most cases, the contractual relationship between you and the company holding the precious metals puts the holder in the legal position of a "bailee." Therefore, you also need to disclose the existence of the certificates on the FBAR.
"FAQ #21. This tax year I sold precious metals that I held for investment to a foreign person. Do I have to report the sales contract on Form 8938?
Answer: The contract with the foreign person to sell assets held for investment is a specified foreign financial asset investment asset that you have to report on Form 8938, if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you."
MN comment: This FAQ makes it clear that if you sell precious metals held offshore pursuant to any type of contract, you must report that contract on Form 8938, subject to the reporting thresholds. Even a short-term contract would appear to be covered by this requirement. One way you might legally avoid this reporting would be to sell your metals in person, over-the-counter, at current spot prices, rather than through a contract. Of course, doing so doesn't relieve you of the obligation to pay U.S. tax on any gains you make upon sale.
"FAQ #22. I have a safe deposit box at a foreign financial institution. Is the safe deposit box itself considered to a financial account?
Answer: No, a safe deposit box is not a financial account."
MN comment: It's good the IRS finally made this common-sense conclusion unambiguous. However, the assets in the safety deposit box may still be subject to reporting on Form 8938. For instance, if you use the safety deposit box to hold foreign securities with a value over the Form 8938 reporting threshold that applies to you, you still need to acknowledge the existence of those securities.
Still confused? We're happy to answer FATCA reporting questions from our clients. Just ask.
Copyright © 2012 by Mark Nestmann
