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IRS Promises Guidance On Foreign Financial Asset Reporting

by Mike Godfrey,, Washington

19 December 2011

The United States Internal Revenue Service (IRS) has disclosed that it will shortly release a new information reporting form that taxpayers will use to report specified foreign financial assets to comply with the provisions of the Foreign Account Tax Compliance Act (FATCA).

Starting in tax year 2011, Form 8938 (Statement of Specified Foreign Financial Assets) will be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. The IRS has stressed the importance for taxpayers to determine whether they are subject to this new requirement because the law imposes significant penalties for failing to comply.

Taxpayers are reminded that the FATCA filing requirement was enacted in 2010 to improve tax compliance by US taxpayers with offshore financial accounts. Individuals who may have to file Form 8938 are US citizens and residents, non-residents who elect to file a joint income tax return and certain non-residents who live in a US territory.

Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds. For example, a married couple living in the US and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed USD100,000 on the last day of the tax year, or more than USD150,000 at any time during the tax year.

The thresholds for taxpayers who reside abroad are higher. For example, a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds USD400,000 on the last day of the tax year, or more than USD600,000 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.

It is confirmed that Form 8938 is not required of individuals who do not have to file an income tax return, but that the new FATCA 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 USD10,000 penalty, with an additional penalty up to USD50,000 for continued failure to file after IRS notification. A 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.

Douglas H. Shulman, the Commissioner of Internal Revenue, in a recent speech, has also made reference to the requirement, under FATCA, for foreign financial institutions to report directly to the IRS information about financial accounts held by US taxpayers, or held by foreign entities in which US taxpayers hold a substantial ownership interest.

Since the law was passed, Shulman pointed out that the IRS has issued guidance laying out a practical framework and timeline for implementation, and that he has also “directly engaged executives from banks and financial institutions around the globe, as have my colleagues at the Treasury Department and IRS”.

He noted that the major concerns generally fall into two categories - the conflict between FATCA and other countries’ laws, and the difficulty in implementing and administering the withholding requirements for pass-through payments and the potential burden they place on foreign financial institutions.

He confirmed that “we have taken these conversations very seriously and you can expect new proposed regulations from us soon after the new year that take into account the implementation concerns we have heard.”

A comprehensive report in our Intelligence Report series, examining in depth the situation of offshore transparency and secrecy in a number of the most prominent jurisdictions, is available in the Lowtax Library at and a description of the report can be seen at
TAGS: individuals | compliance | tax | investment | offshore confidentiality | tax compliance | law | banking | Internal Revenue Service (IRS) | tax authority | offshore | legislation | United States | regulation | penalties

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