Wednesday, June 15, 2011

New Draft Section 6038D Income Tax Form -- FBAR Like Form for the Form 1040 (6/15/11)

Readers will recall that recently enacted Section 6038D of the Code. See my prior blog titled Foreign Financial Information - New Provisions (5/3/10). The IRS has a new draft Form 8938 (as of 6/21/11) to implement the requirement. Note the following:
  1. As to foreign financial accounts, the draft Form 8938 would require more information than required by the FBAR (at least current and past iterations of the FBAR). Specifically, it asks if the account was opened or closed during the year. Part I, 1c(1) & (2). It also asks information about the conversion to U.S. dollars in stating the maximum amount. Part I, 1f.
  2. The draft Form 8938 goes farther than the FBAR in requiring information about "Other Foreign Assets" -- assets other than financial accounts -- and asks for similar information about these assets. Part II.
  3. The draft Form 8938 asks for a "Summary of Tax Items Attributable to Specified Foreign Financial Assets." Part III. I suppose this is a gentle reminder to taxpayers to report those items elsewhere on the return and a roadmap for where they are reported.
  4. The draft Form 8938 asks taxpayers to identify foreign financial assets excepted by other forms (such as Form 3521, 5471). Part IV.
This is yet another reason for taxpayers with foreign financial account(s) problems to resolve them in a way that there is no carryforward noncompliance.  Of course, the 2010 FBAR is due by 6/30/11 (must be actually filed by that date rather than just mailed) and, in my judgment, any plan to deal with the past problems must include this 2010 FBAR filing as a must.  Then the issue of how and whether to do something affirmative to mitigate the criminal and civil penalty risk for past failures must be addressed.  Just a reminder, if taxpayers want to address it through the 2011 OVDI, they have until 8/31/11, and requires significant advance work prior to that date.

Addendum on 6/21/11:  The IRS today issued Notice 2011-55 which provides in pertinent part:
Individuals with reporting requirements under section 6038D may have to file an income tax return for a taxable year before the IRS releases Form 8938. This notice suspends the requirement for these individuals to attach Form 8938 to income tax returns that are filed before the release of Form 8938.

Similarly, PFIC shareholders that would not be required to file Form 8621 under the current Instructions to such form may, under section 1298(f), have to file an income tax return or information return (e.g., Form 1065) for a taxable year beginning on or after March 18, 2010, but before the IRS releases revised Form 8621. Pending the release of the revised Form 8621, modified to reflect the requirements of section 1298(f), this notice suspends the section 1298(f) reporting requirement for taxable years beginning on or after March 18, 2010, for PFIC shareholders that are not otherwise required to file Form 8621 as provided in the current Instructions to Form 8621. PFIC shareholders with Form 8621 reporting obligations as provided in the current Instructions to Form 8621 (e.g., upon disposition of stock of a PFIC or with respect to a qualified electing fund under section 1293) must continue to file the current Form 8621 with an income tax or information return filed prior to the release of the revised Form 8621.

Following the release of Form 8938 or revised Form 8621, individuals and PFIC shareholders for which the filing of Form 8938 or 8621 has been suspended under this notice for a taxable year (suspended taxable year) will be required to attach Form 8938, Form 8621, or both, as appropriate, for the suspended taxable year to their next income tax or information return required to be filed with the IRS.

Under section 6501(c)(8), the period of limitation for assessment of tax with respect to periods for which reporting is required under sections 6038D or 1298(f) will not expire before three years after the date on which the IRS receives Forms 8938 or 8621, as appropriate, for the taxable year. A Form 8938 or 8621 filed for a suspended taxable year with a timely filed income tax or information return (taking into account extensions) as required by this notice will be treated as having been filed on the date that the income tax or information return for the suspended taxable year was filed. The failure to furnish Forms 8938 and 8621 for the suspended taxable year as described in this notice may result in the extension of the period of limitation for the suspended taxable year under section 6501(c)(8), and penalties may apply.

Compliance with sections 6038D and 1298(f) does not relieve a person of the responsibility to file Form TD F 90-22.1, "Report of Foreign Bank and Financial Accounts," (FBAR) if the FBAR is otherwise required to be filed.
Addendum on 7/11/11:

The link to the draft Form 8938 is to the draft as of 6/21/11.


  1. I was looking at the form just this morning. A lot of detailed information required there, and they have even tried to remove duplicate reporting with other forms.

    Interestingly, they don't require you to indicate when an account was opened. I wonder if this is because that would be potentially incriminating information for people who haven't filed FBARs.

    And the penalty under IRC 6038d, while hefty, pales in comparison to FBAR penalties.

  2. I think that this new form is a clear indicator as to the future intent of the government to discourage offshore tax evasion. It is a lot more detailed than FBAR and when incorporated into the regular tax filing regime will further make it more difficult to claim ignorance and or nonwillfulness as to undeclared reportable offshore assets. I could not agree more with Jack that it is likely a very good idea to clear up past noncompliance and remain compliant going forward. You have to wonder if IRS will have another initiative other than the traditional disclosure program once OVDI is closed.


  3. Jack, if a tax payer has a life insurance policy, valued at say 5000$ in a foreign country, which under the present circumstances would not be listed on the FBAR, would now have to go on form 8938 hereafter?

  4. I just wished the government with all their wisdom could have just one form. What is wrong with just one! I thought tax simplification was the goal. Not that the drug dealers or terrorist would use either form!

    If this form 8938 is to be required now, then do away with the FBAR. I mean, really, how many ways and times do they need the information? Is this just a trap, where if your forms are in conflict due to some typo, then they have another reason for a penalty?

    If the FBAR had been part of the 1040 income tax filing process in the first place, the knowledge level may have been much higher and the need for all these OVDIs and OVDPs might actually have been less.

    Also, if reporting of foreign accounts is so important for the empire, then make a BIG NOTE on the front of the 1040. That will assure that all know the IRS is looking for our offshore income to tax it.

  5. To Anonymous re comment at 11:23 am,

    Keep in mind that the 6038D reporting does not kick in until foreign assets are $50,000 in the aggregate. Once that threshold is reached, I think you would have to analyze the nature of the insurance policy to see if it meets the definitions. (A similar drill is, I think, required under the FBAR for foreign policies called life insurance but which have characteristics of financial accounts.)

    Jack Townsend

  6. One more thing to remember is that the FBAR form can be shared with other agencies, while this form is a tax form and cannot be shared because of tax privacy rules. I suppose Congress could have waived privacy regulations for some subset of this information to be shared with other agencies.

    The FBAR form was obscure, but I think the Schedule B question about a foreign bank account was not obscure (at least for anyone filling a schedule B).

    I would assume that home tax software will incorporate this form to make it easier for duplication to be avoided. Of course, some forms like the PFIC form are not handled by popular tax SW packages

  7. Here is a link to a hearing by the U.S. Senate Finance Committee on ponzi schemes(Madoff) and offshore tax evasion. The hearing took place in 2009 and Doug Schulman was a key witness. If you have the patience to watch the entire thing, note how Max Baucus the committee chair urges Mr. Schulman to really hammer down on offshore evasion. That is why IRS is full steam ahead on this with no mercy. They have support from important committee's in congress as well as the president. This is a huge contrast to when congress sought to tone down IRS aggressiveness in the past. The IRS has the green light to hammer anyone with these issues. They have taken action to quash offshore evasion and have the support they need to do it. Its only going to get worse. This new tax form will be a part of that new reality along with FATCA when it kicks in. The unfortunate thing is that the disclosure programs have been pretty much one size fits all as far as penalties go. They want and need the money and excuses will not work.


  8. Anon123 wrote: "I think that this new form is a clear indicator as to the future intent of the government to discourage offshore tax evasion."

    I think the intent is broader: to discourage the flow of capital outside the country, even if it is a tax-compliant and disclosed flow.

    As another example, look at foreign corporations. There is nothing illegal in a US taxpayer owning a foreign corporation. But the IRS Controlled Foreign Corporation (CFC) rules and regulations, documentary requirements and penalty regime make it extremely burdensome and difficult for a US taxpayer to own a foreign corporation.

  9. Anonymous on 6/15 at 11:23am said: "if a tax payer has a life insurance policy, valued at say 5000$ in a foreign country, which under the present circumstances would not be listed on the FBAR . . . "

    This may not be accurate. If the the foreign life insurance policy has a cash value, then it is subject to the new FBAR rules.

  10. To Asher Rubinstein,
    How does a policy with a cash value of 5000$ need to be listed on the FBAR. As I understand it only if the value of the asset is >10,000$ does it have to be listed on the FBAR. Am I wrong?

  11. i think Asher meant "aggregated value", that means it should be included in calculation. if you have only life insurance policy with 5000, you do not need to file FBAR

  12. Yes, aggregate value of all foreign accounts, insurance and financial accounts combined. Thanks, ij.


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