New foreign asset report standards starting to kick in.
Entities, such as Limited Liability Companies and S-Corporations, will become subject to the reporting requirements with the filing of their 2012 returns.
The IRS recently issued temporary regulations providing guidance for individuals required to report specified foreign financial assets.
The IRS has also released proposed regulations regarding filing by domestic entities. The new law and regulations will directly affect individuals and business that are invested in or plan to invest in real estate overseas through foreign entities.
The new financial asset reporting requirements are in addition to any existing Foreign Bank Account Report (FBAR) filing requirements taxpayers may already have under the Bank Secrecy Act.
Taxpayers may be required to file a Form 8938, an FBAR, or both, depending on the value of the foreign asset owned, the type of filer the taxpayer is, and the nature of the taxpayer's interest in the foreign asset.
Failure to file Form 8938 could result in significant penalties, as well as an expanded statute of limitations period for the IRS to examine the taxpayer's return and assess additional tax.
Who is Required to File Form 8938
New tax code section 6038D requires certain U.S. taxpayers who hold an interest in a "specified foreign financial asset" in excess of $50,000 during the taxable year to report information regarding those foreign assets. Given the rather low applicable threshold, certain real estate investors and businesses may be subject to these filing requirements.
Individuals required to file Form 8938 include U.S. citizens, resident aliens and certain nonresident aliens who hold a "specified foreign financial asset" that exceeds prescribed thresholds, which are increased for taxpayers residing outside the United States.
"Specified foreign financial assets" include any financial account maintained by a foreign bank; stock issued by a non-U.S, person; interest in a foreign entity; and financial instruments or investment contracts with a foreign issuer.
Taxpayers do not have to report direct ownership interests of foreign real estate. However, ownership interests in foreign entities that hold real estate are reportable regardless of the taxpayer's percentage ownership interest in the entity, if the interest exceeds the applicable threshold.
Individual calendar year taxpayers are required to start filing Form 8938 with their 2011 income tax return, which is filed in 2012. Individuals who otherwise are not required to file an income tax return are excepted from filing Form 8938.
Pursuant to the proposed regulations, "specified domestic entities" subject to the Form 8938 reporting requirement include certain domestic corporations, domestic partnerships and trusts, but exclude domestic estates. The proposed regulations regarding "specified domestic entities" apply to taxable years beginning in 2012. Accordingly, domestic entities are not required to file Form 8938 with their 2011 returns.
Penalties for Failure to File The minimum penalty for failure to file Form 8938 is $10,000 up to a maximum penalty of $60,000. The penalty may be waived if the taxpayer can demonstrate that the failure to file was due to reasonable cause. FATCA also imposes a new 40% penalty on any portion of an underpayment attributable to a transaction involving an undisclosed foreign financial asset.
Statute of Limitations
The IRS generally has three years from the date a return is due (excluding extensions) or filed, whichever is later, to assess additional tax, or six years in the case of taxpayers with a substantial understatement of gross income.
The extended six-year statute now also applies to taxpayers who omit more than $5,000 of income attributable to assets required to be reported under section 6038D.
Thus, even if the taxpayer does not have a substantial understatement, the IRS has six years rather than three to examine the taxpayer's return and assess additional tax if the taxpayer has omitted $5,000 or more of income attributable to reportable specified foreign financial assets.
If the taxpayer fails to file Form 8938, the return is considered incomplete and the statute of limitations may remain open for all or a part of the taxpayer's return until three years after the date the Form 8938 is filed.
BY JILL MISENER, MANAGER, WEISERMAZARS LLP
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|Comment:||New foreign asset report standards starting to kick in.|
|Publication:||Real Estate Weekly|
|Date:||Mar 7, 2012|
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