Do you know about the new foreign financial asset reporting requirements?

If not, you could be facing significant risk – not only because of the potential for substantial penalties but also because the failure to disclose foreign financial assets leaves open the statute of limitations on taxpayers’ returns.

Section 6038D of the Internal Revenue Code requires that taxpayers with an interest in specified foreign financial assets (SFFA), with an aggregate value exceeding an applicable threshold, file Form 8938, “Statement of Specified Foreign Financial Assets.” The new code section is effective for the 2011 tax year for U.S. individuals.

It is expected that the reporting requirement commences for domestic entities beginning with their 2012 tax returns. These filings are in addition to any reporting requirements on Form TD F 90-22.1, “Report of Foreign Bank and Financial Accounts.”

Specified foreign financial assets include any financial account maintained by a foreign financial institution, as well as assets that are not in a financial account. These include any stock or security issued by a non-U.S. person, any financial instrument or contract held for investment issued by a non-U.S. person, and any financial interest in a foreign entity.

The interest in all specified foreign financial assets must be valued based on the highest fair market value during the year and on the last day of the year. Reporting is required for single U.S. individuals residing in the United States when the aggregate fair market value of all SFFA exceeds either $75,000 on any day during the year or $50,000 on the last day of the year.

Failing to file Form 8938 can result in the following:

  • A $10,000 penalty for each failure
  • Possible additional penalties of up to $50,000 if the individual fails to file after notice from the IRS
  • An additional 40 percent accuracy-related penalty if unreported income is associated with the SFFA

The statute of limitations remains open for three years after the date the disclosure is filed and for six years if unreported income is associated with the SFFA. Fraud and criminal penalties also may be imposed if there is a willful failure to file as part of an effort to evade taxation.