The Internal Revenue Service plans to release a new information reporting form that taxpayers will need to use next tax season to report on certain types of foreign financial assets for tax year 2011.

The new form, Form 8938 (Statement of Specified Foreign Financial Assets), will need to be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. The IRS said Wednesday it is important for taxpayers to determine whether they are subject to this new requirement because the law imposes significant penalties for failing to comply.

The new Form 8938 filing requirement was enacted in 2010 to improve tax compliance by U.S. taxpayers with offshore financial accounts. It was part of the Foreign Asset Tax Compliance Act, or FATCA, which was included in the HIRE Act of 2010. Individuals who may have to file Form 8938 are U.S. citizens and residents, nonresidents who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory.

The FATCA provisions have been attracting controversy, as they impose new requirements on individuals and foreign financial institutions to report information to the IRS. U.S. citizens and dual citizens in Canada in particular were concerned about the possibility of heavy new penalties being levied by the IRS because of the new requirements, and last Friday, the IRS posted a new page on its Web site to clarify the tax responsibilities of U.S. citizens and dual citizens living abroad (see IRS Offers Some Relief for Expats and Dual Citizens).

With regard to the new Form 8938, the IRS said it is required when the total value of specified foreign assets exceeds certain thresholds. For example, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

The thresholds for taxpayers who reside abroad are higher, the IRS noted. In this case, a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of their specified foreign assets exceeded $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

Instructions for Form 8938 explain the thresholds for reporting, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempted, and what information must be provided.

The IRS noted that Form 8938 is not required of individuals who do not have an income tax return filing requirement. 

The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file an FBAR (Report of Foreign Bank and Financial Accounts). 

Failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification, the IRS noted.  A 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed. Special statute of limitation rules apply to Form 8938, which are also explained in the instructions.

Form 8938, the form’s instructions, regulations implementing this new foreign asset reporting, and other information to help taxpayers determine if they are required to file Form 8938 can be found on the FATCA page of IRS.gov.

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