The IRS has always been interested in taxpayers with offshore
assets. The difficulty for the IRS has been finding out about those
assets. In 2010, the IRS took one step closer to resolving this
issue through the implementation of the Foreign Asset Tax
Compliance Act (FATCA).1 Unfortunately for taxpayers,
their problems may just be beginning.
Since the early 1970s, taxpayers have been required to report
foreign bank account information on Treasury Form TD F 90-22.1,
Report of Foreign Bank and Financial Accounts (FBAR).2
The regulations governing this filing are under Title 31 of the
U.S. Code. Since the Internal Revenue Code is under Title
26,3 there is a disconnect between reporting bank
account information on the FBAR form and reporting the income
earned on those accounts on the taxpayer's income tax return.
FATCA was enacted in 2010 as part of the HIRE Act.4 On
Dec. 19, 2011, the IRS issued temporary and proposed regulations
under Code Section 6038D.5 The regulations set out the
requirements for individuals to report "specified foreign financial
assets" on a statement attached to their income tax return for tax
years ending after Dec. 19, 2011.6
A final version of Form 8938, Statement of Specified Foreign
Financial Assets, was also issued in December 2011 and will be
required for individuals who meet the filing thresholds (discussed
below) for calendar year 2011.7 FATCA also includes
regulations relating to foreign financial institutions, which will
generally be effective in 2013.8 A discussion of those
rules is beyond the scope of this article.
FATCA COMPLIANCE FOR INDIVIDUALS
At first blush, the new Form 8938 looks similar to the FBAR. They
are similar with respect to reporting foreign bank account
information. Each form requires the name of the bank, the account
number, the address of the bank, and the maximum value of the
account during the year. That is where the similarities end. FATCA
requires additional information which will require careful review
of a client's holdings to determine whether or not reporting is
Generally, Form 8938 will be required to be filed by a U.S.
citizen, permanent resident (green card holder) or resident alien
of the United States, or a nonresident alien who makes an election
to be treated as a resident alien for tax
FATCA requires reporting of "specified foreign financial assets,"
which are generally defined as:10
• any financial account maintained by a foreign financial
• stocks and securities issued by someone who is not a U.S. person
and which are not held in a U.S. financial account;
• any interest in a foreign entity (partnership, corporation or
• any financial instrument or contract with an issuer or
counterparty that is not a U.S. person.
Some examples of items which are considered to be "specified
foreign financial assets" include:11
• stock purchased directly on a foreign stock
• stock issued by a foreign corporation and held directly by a
• direct interest in a foreign mutual fund, foreign hedge fund and
foreign private equity fund;
• a note, bond or other indebtedness issued by a foreign
• an interest in a foreign partnership, trust or estate;
• an interest in a foreign non-governmental pension or retirement
• an interest in a foreign disregarded entity which holds any of
There are several items that are not required to be reported on
Form 8938, including:
• interest in a social security, social insurance or similar
program of a foreign government;12
• the value of real estate, unless the real estate is held in a
foreign entity, in which case the interest in the foreign entity
may be reportable;13
• assets used in a trade or business are excepted from filing
under Reg. 1.6038D-3T(b);14 and
• assets reported elsewhere on the taxpayer's return, for
o an interest in a foreign trust reported on Form
o an interest in a foreign corporation reported on Form 5471
o an interest in a passive foreign investment company (PFIC)
reported on Form 8621
If an interest in a "specified foreign financial asset" has been
reported elsewhere on the individual's U.S. income tax return, Form
8938, Part IV, should be completed to indicate the number of forms
The Form 8938 is required only if the taxpayer's interest in
"specified foreign financial assets" meets certain thresholds
1) Single individuals (and married individuals filing a separate
return) living in the U.S. must file Form 8938 if the
total value of the foreign financial assets exceeds $50,000 on the
last day of the year or $75,000 at any point during the tax
2) Married individuals, filing a joint income tax return, and
living in the U.S. must file Form 8938 if the total value
of the foreign financial assets exceeds $100,000 on the last day of
the year or $150,000 at any point during the tax
3) Single individuals (and married individuals filing a separate
income tax return) living outside of the U.S. must file
Form 8938 if the total value of the foreign financial assets
exceeds $200,000 on the last day of the year or $300,000 at any
point during the tax year.19
4) Married individuals, filing a joint income tax return, and
living outside of the U.S. must file Form 8938 if the
total value of the foreign financial assets exceeds $400,000 on the
last day of the year or $600,000 at any point during the tax
Valuing the foreign asset has its own challenges. The instructions
to Form 8938 provide several examples for valuing trust interests,
foreign pension plans and foreign deferred compensation
plans.21 Special attention should be given to whether
the assets are held jointly or separately and the exchange rate to
use for currency conversion.22 In most cases, the
exchange rate published by the U.S. Treasury Department's Financial
Management Service for purchasing U.S. dollars must be
used.23 The exchange rate on the last day of the year is
to be used even if the asset was disposed of earlier in the
As with other foreign asset reporting requirements, the penalties
for failure to file Form 8938 are significant:
• Failure to file a complete and accurate Form 8938 results in a
• Continuing failure to file results in an additional $10,000 for
each 30-day period or part of a period up to a maximum of
• Accuracy-related penalty of 40 percent of any underpayment of
tax on unreported income involving an undisclosed
• Penalty of 75 percent of any underpayment of tax on unreported
income involving an undisclosed asset where the failure to report
is due to fraud.28
• Criminal penalties may be applied.29
The statute of limitations is three years after the date on which
you file Form 8938.30 The statute can be extended to six
years if an asset is omitted and the amount omitted was more than
IRS VDP AND OVDI
What happens if a taxpayer realizes that they had unreported
income or a requirement to file FBARs in prior years? The IRS 2009
Voluntary Disclosure Program (VDP) and 2011 Offshore Voluntary
Disclosure Initiative (OVDI) were implemented to provide a system
for delinquent taxpayers to come forward.32 A taxpayer
in this situation should consult their tax advisor for guidance on
whether or not to enter the OVDI program. The OVDI has been
reopened and currently has not published a closing
Unfortunately, it is expected that the rules relating to foreign
asset reporting will continue to become more complex and invasive
as the IRS fully implements FATCA in 2013. For example, this past
February, the United States, France, Germany, Italy, Spain and the
United Kingdom announced that they are "exploring a framework to
share information on bank accounts across borders." Just as the
United States is gathering information on its taxpayers' overseas
holdings, other jurisdictions will expect similar reporting from
the United States.
In today's global economy, taxpayers need to consider whether they
have any foreign reporting requirements. When looking into new
investments, taxpayers need to enquire about any special reporting.
A discussion with their tax advisor will help them avoid penalties
and meet any compliance obligations.
LAURA K. BAROOSHIAN AND STEPHEN A. COLELLA
work in the Private Clients Group at DiCicco, Gulman & Company
LLP, a full-service CPA and business advisory firm in Woburn.
Barooshian is a partner with specialized expertise in tax planning
for wealthy individuals, international taxation for individuals,
stock option planning and philanthropic planning alternatives. She
can be reached at [e-mail lbarooshian].
Colella is a principal with specialized expertise in tax matters
related to high net worth individuals and their various entities,
including the transfer of wealth to minimize estate and gift taxes.
He can be reached at [e-mail scolella].
1FATCA is part of the Hiring Incentives to Restore
Employment Act of 2010 Public Law No. 111-147 (2010).
2The Bank Secrecy Act provides, "[T]he Secretary of the
Treasury shall require a resident or citizen of the United States
or a person in, and doing business in, the United States, to keep
records, file reports, or keep records and file reports, when the
resident, citizen, or person makes a transaction or maintains a
relation for any person with a foreign financial agency."
See 31 U.S.C. §5314(a) (West 2012).
3See Internal Revenue Code, 26 U.S.C. § 1 et
4Hiring Incentives to Restore Employment Act of 2010 Public
Law No. 111-147 (2010).
5I.R.C. §6038D (West 2012).
6Treas. Reg. §§1.6038D-1T, §1.6038D-2T, §1.6038D-3T,
§1.6038D-4T, §1.6038D-5T, §1.6038D-7T, §1.6038D-8T.
7Treas. Reg. §1.6038D-1T, §1.6038D-2T.
8IRC Section 1471.
9Treas. Reg. §1.6038D-1T.
10Treas. Reg. §1.6038D-2T, §1.6038D-3T.
11Treas. Reg. §1.6038D-3T.
122011 Form 8938 instructions, Page 4.
13Treas. Reg. §1.6038D-3T(b)(iii).
14Id. at §1.6038D-3T(b).
15Id. at §1.6038D-7T.
16Id. at §1.6038D-7T.
17Id. at §1.6038D-2T(a)(1).
18Id. at §1.6038D-2T(a)(2).
19Treas. Reg. §1.6038D-2T(a)(3).
20Treas. Reg. §1.6038D-2T(a)(4).
212011 Form 8938 instructions, Pages 2-6.
22Financial Management Service, Treasury Reporting Rates of
242011 Form 8938 instructions, Page 5.
25Treas. Reg. §1.6038D-8T, 2011 Form 8938 instructions,
Pages 6 and 7.
32I.R.S. News Release IR IR-2011-14, (Feb. 8, 2011).
33I.R.S. News Release IR 2012-5, (Jan. 09, 2012); IRC
34Press Release, U.S. Department of Treasury, (Feb. 2, 2012)
available at www.treasury.gov/press-center/press-releases/Pages/tg1412.aspx.