New foreign asset reporting rules.

• Author: Hanson, Kristin N.

The IRS has taken aggressive steps to monitor taxpayers' foreign financial assets as a way to increase compliance. For tax years beginning after March 18, 2010, many taxpayers are required to file new Form 8938, Statement of Specified Foreign Financial Assets. Form 8938, which must be filed in addition to Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), as part of the annual tax return for individuals. Form 8938 and its requirements have created controversy since their inception and have caused confusion and difficulties for both taxpayers and their advisers.

Section 511 of the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147, added new Sec. 6038D, which states that a specified person who holds an interest in specified foreign financial assets should attach Form 8938 to that person's income tax return, provided the aggregate value of the person's foreign financial assets exceeds $50,000. Notice 2011-55 suspended the requirement to file Form 8938 until the final form and instructions were released. However, just when taxpayers felt comfortable that the form would not be released in time for filing their 2011 returns, Form 8938 and its instructions were released on Dec. 17, 2011. Two days later, temporary and proposed regulations were published under T.D. 9567. These regulations provide more specific guidance to individual tax-payers on how to report their interests in foreign financial assets on Form 8938.

Specified Persons

Temp. Regs. Sec. 1.6038D-1T sets forth the scope of reporting. A "specified person" refers to a specified individual or a specified domestic entity. A specified individual is a U.S. citizen, a resident alien of the United States for any portion of the year, a nonresident alien who made a Sec. 6013(g) or (h) election, or a bona fide resident of Puerto Rico or another U.S. possession.

Temp. Regs. Sec. 1.6038D-IT does not define "specified domestic entity." Prop. Regs. Sec. 1.6038D-6 defines "specified domestic entity" as "a domestic corporation, a domestic partnership or a trust ... [that] is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets." Although the filing requirement for a specified individual was enacted for the 2011 tax year, the filing requirement for a specified domestic entity is not effective until additional regulations are released.

Specified Foreign Financial Assets

Temp. Regs. Sec. 1.6038D-3T provides a detailed explanation of the assets covered by Sec. 6038D, namely specified foreign financial assets, as well as the related information that must be disclosed. Specified foreign financial assets include both financial accounts maintained by foreign financial institutions and other foreign financial assets or instruments. They include stocks or securities issued by a non-U.S. person, any interest in a foreign entity, and any financial instrument or contract that has an issuer or counterparty that is not a U.S. person.

To the extent that these assets can be identified, Form 8938 will require disclosure of the name and address of the foreign financial institution, identification of the financial assets, and information regarding issuers and counterparties, if applicable. Additionally, the taxpayer is required to disclose the maximum value of each asset, as well as the currency and exchange rate that was used, if any. The amount of any income, gains, losses, deductions, or credits that derived from the assets reported should be listed, along with the corresponding...