Form 8938 – New IRS Regulations Require Domestic Entity Filers

Pursuant to new guidance (T.D. 9752, RIN 1545-BM54) issued by the Department of Treasury under Internal Revenue Code § 6038D and effective as of February 23, 2016, the requirement for which domestic entities must file Form 8938 Statement of Specified Foreign Financial Assets has been clarified.  The new regulations eliminate a prior “principal purpose test” which called for the taxpayer to make a subjective decision as to whether or not the entity was formed by an individual with the principal purpose of avoiding IRC § 6038D.  Under the new regulations, any corporation or partnership is considered formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets if at least 50 percent of the corporation or partnership’s gross income or assets is passive.  If the entity meets this test, then it must file Form 8938. 

Individuals who are responsible for filing Form 8938, include:

  • U.S. citizens;
  • Resident aliens of the United States for any part of the tax year;
  • Nonresident aliens who make an election to be treated as a resident alien for purposes of filing a joint income tax return; and
  • A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico.

Who hold specified foreign financial assets, which are:

A)   Financial accounts maintained by a foreign financial institution:

  • A financial account is any depository or custodial account maintained by a foreign financial institution, as well as any equity or debt interest in a foreign financial institution, a cash value life insurance or annuity contract maintained by an insurance company or other foreign financial institution.  This also includes financial accounts maintained by an institution organized under the laws of a U.S. possession such as American Samoa, Guam, the Northern Mariana Islands, Puerto Rick or the U.S. Virgin Islands.
  • Foreign investment vehicles such as foreign mutual funds, foreign hedge funds and foreign private equity funds must all be reported.

B)   The following if they are held for investment and not held in an account maintained by an financial institution:

  • Stock or securities issued by someone that is not a 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.
  • This includes stock issued by a foreign corporation, a capital or profits interest in a foreign partnership, a note, bond debenture, or other form of indebtedness issued by a foreign person, an interest in a foreign trust or foreign estate, an interest rate swap, currency swap, basis swap interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement with a foreign counterparty, and an option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer.

C)   An interest in a social security, social insurance, or other similar program of a foreign government is not a specified foreign financial asset and does not need to be reported on Form 8938.

While the above list is exhaustive currently, it is important to note that this list is being updated and expanded.

For taxpayers living in the United States, if you are: unmarried or married filing separately, you must file if your specified foreign financial assets were more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year; married and filing jointly, you must file if your specified foreign financial assets were more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.  For taxpayers living outside of the United States, if you are: unmarried or married filing separately, you must file if your specified foreign financial assets were more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year; married and filing jointly, you must file if your specified foreign financial assets were more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.  To be considered as living outside the United States for purposes of Form 8938, you must satisfy the “presence abroad” test which requires that you are either: A U.S. citizen who has been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year; or a U.S. citizen or resident who is present in a foreign country or countries at least 330 full days during any period of 12 consecutive months that ends in the tax year being reported.

Under the newly released guidance, corporations and partnerships have the same filing threshold as unmarried or married filing separately individuals; they must file if the aggregate of their specified foreign financial assets were more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.