Friday, December 16, 2011

IRS Pronouncements on Section 6038D 2011 Filings for Foreign Assets (12/16/11)

The IRS published yesterday temporary and proposed regulations regarding the Section 6038D filing requirement.  As previously noted, the Form 8938 is used, and will commence for tax years after March 18, 2010.   The IRS web page for the Form 8938 is here. The IRS explains in a web page titled Explanation of Section 6038D Temporary and Proposed Regulations, here.  The actual proposed and temporary regs are here and here, respectively, The following is from the version of the IRS Explanation web page dated 12/15/11, with some of the items simply cut and pasted from that web page:.

1. The foreign asset reporting requirement applies to individuals required to file 1040 or 1040-NR and to domestic entities, although only the individual form, Form 8938, is available now.

2. The taxpayer characteristics for the filing is more nuanced, and in some respects more favorable, than the statute.
a. Unmarried taxpayers living in the US: The total value of specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year 
b. Married taxpayers filing a joint income tax return and living in the US: The total value of  specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year 
c. Married taxpayers filing separate income tax returns and living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.  
d. Taxpayers living abroad. 
i. Status is other than a joint return and the total value of specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or 
ii. Married filing joint return and the value of specified foreign assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year. These thresholds apply even if only one spouse resides abroad.
e. Married individuals who file a joint annual return for the taxable year will file a single Form 8938 that reports all of the specified foreign financial assets in which either spouse has an interest.
3. Assets Covered (some of these are just cut and paste)
a. Both foreign financial and non-financial assets are covered. 
b. Exceptions from reporting are made for assets reported on certain other tax forms. These include: Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, or Form 8891. The value of specified foreign financial assets reported on these forms are included in determining  the total value of assets for Form 8938 purposes, but the assets do not need to be reported on Form 8938. In this situation, the taxpayer identifies on Form 8938 which and how many of these form(s) report the specified foreign financial assets.     
c. A beneficial interest in a foreign trust or a foreign estate is not a specified foreign financial asset of a specified person unless the specified person knows or has reason to know of the interest. 
d. For Section 6038D purpose, an individual has an interest in the financial account if potential tax attributes or transactions related to the account would be reported on the individual’s tax return. The concept of signature authority does not apply for Section 6038D purposes.
4. Noncompliance.
a. Taxpayers required to file Form 8938 who do not are subject to penalties – a $10,000 failure to file penalty, an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40 percent penalty on an understatement of tax attributable to non-disclosed assets. 
b. The statute of limitations is extended to six years after a taxpayer’s return is filed if the taxpayer omits $5,000 from gross income attributable to a specified foreign financial asset, without regard to the reporting threshold or any reporting exceptions. 
c. If the taxpayer fails to file or properly report an asset on Form 8938, the statute of limitations for the taxable year is extended until the taxpayer provides the required information. If the failure is due to reasonable cause, the statute of limitations is extended only with regard to the item or items related to such failure and not the entire tax year.
5. FBAR filing is required.

6. Entity filing is required pursuant to the proposed regs.  There is no form yet to make the filing.


  1. It is still unclear whether real estate (a house) in foreign country needs to be reported or not.

    Any idea folks ?

  2. To Anonymous @ 12/16/11 2:46 pm:

    I have not parsed all of this, but I would be stunned if real eatate were not included. Certainly, at a minimum, I think the intent is clear to require inclusion of all foreign assets that could have tax implications. Certainly income producing real estate has tax implications and should be included.

    What about foreign real estate that might have no tax implications? I don't know the answer that question (not sure that such real estate exists), but I think that if it gets excluded there will be some specific indication of the exclusion.

    Jack Townsend

  3. Jack, a vacation home abroad (or a first home for expats!) is an example of foreign real estate that might have no tax implications or POSITIVE tax implications (if a mortgage on the property was being paid ).

  4. Unless it is a rental home, there is no tax implication.

    In China, all homes are leasehold. A home value is supposed to going down (except bubbles). There is not even a real market value gain.

    Back to this new form, I think it will eventually replace FBAR. FBAR was passed many years ago and the balance is way too low (10K). It makes sense to have a limit to 50K (or peak at 75K).

    This 75K seems to be IRS' magic number. In OVDI, it is the dividing line between minnow and whale -:).

    Happy filing !!!

  5. Land of the incrementally slightly-less-free...

  6. Thanks Jack for this posting. I see that Robert Woods at Forbes has given these new IRS provisions some attention also

    Under the title:

    "IRS Exempts Many Expats From FACTA"

    Which is a bit misleading. The title was designed to attract attention. Mission accomplished, I suppose, but a better title would be:

    "IRS Exempts some Expats from one little provision of FACTA if you meet complicated technical threshold definitions."

    He was referencing the IRS Release of Guidance on Foreign Financial Asset Reporting,,id=251216,00.html

    The thing that frustrates me about the way the IRS goes about dealing with these stupid Statutes that Congress passes, is by making them so damn complicated to the nth degree squared. You still have to spend about as much time and effort (LCUs) (maybe more) just reading the guidelines to see if you meet their all their technical definitions and thresholds, let alone do all the calculations necessary to determine your compliance requirements. It would probably take less time just to fill out the ridiculous form in the first place. If fact, that is what I probably will do just to make them have to do more work to process it even if I am not technically required to do so.


    Further, this form 8938, is really nothing but another vehicle for the US government to extract new penalties for failure to file or failure to file correctly. The value of the form is otherwise worthless. It is doubling down of the ridiculous FBAR penalty regime.

    So now, if I miss estimate the value of my assets, exceed some limit either at year end, or a high amount mid year due to some market swing, or FX rate fluctuation, and / or if I am slightly over the new limits, and fail to file the form because I thought I was under, I will be subject to a new penalty. This is just so absurd I am beginning not to appreciate the comedy of it all anymore. Those living in the US with all their assets on the homeland, don't have to file any similar information or state their assets just because they reside in that sacred land. So now we have two classes of citizens. How discriminatory is that? Because I choose to live elsewhere, I am enslaved with these newest requirements, and you living with Dorothy in Kansas with the Wizard of Oz are not! This is an empire running amuck. I am beginning to think Ron Paul looks more and more moderate and reasonable compared to the regulatory extremist running Congress and the IRS. Never thought I would have said that.

  7. If Chinese and Indian gov also impose the same kind law as FBAR to those immigrants in USA, that would force a lot into collecting food stamps here.

    Sorry, I forgot "american exceptionalism"

  8. All,
    I read the instructions for Form 8938 again. I am still not sure if real estate has to be included. If it does, how do we find it's fair market value?

    I do agree with Just Me - American living overseas are being discriminated now, with potential for heavy penalties for just not filing a paper form, which is just an informational requirement.

    Maybe we need to contact Amy and ask her to be our voice again - IRS is just going crazy on millions of Americans living overseas.

    Also, it's time to vote for a sensible candidate for the White House. Had thought the current guy was a reasonable person - look what's happening to millions of us!

  9. AB...

    Have you listened or watched any of the GOP reality show debates? Where do you hear any sensibility coming from that group? Ron Paul maybe, but he is too extreme for the faction of the conservatives he is trying to reach, and more libertarian than even me. Maybe, the real sensible person is hidden away somewhere, waiting to be revealed later.

    This breaking news just in: DES MOINES (The Borowitz Report) – A growing number of conspiracy theorists believe that the Republican candidates who keep showing up for televised debates are impostors and that the actual GOP candidates are tied up in a warehouse somewhere.

    “There’s no way that these people are the actual candidates,” said Tracy Klugian, a leading conspiracy theorist who subscribes to the warehouse theory. “The American people need to stand up and demand the return of the real ones.”

    That is tongue in check of course but maybe America is incapable of producing sensible politicians any more given how the money game works that elects them. Maybe the sensible ones really are tied up in a warehouse somewhere.

    The current guy in the White House is certainly disappointing letting the technocrats loose at the IRS as he has. Who are these guys that write such regulations anyway? Have you ever met one? I find it very difficult to relate to how their brains work and the delight they must get from constructing their tortured regulations. They must get a complexity high or a rush of endorphins each time they construct a new circular exemption that leads through ever expanding paragraphs and pages of mind numbing rules to understand how or when to comply.

    I am bewildered by it all. And to think, this is a result of a Civil War citizenship taxation statute that still exists 150 years later.

    Go figure!

    ij... I am watching with interest to see how the Chinese respond to FATCA. I just read an interesting speculation on this at Risk Net.

    Go to Google News, and then in the search box type in the following title:

    "Chinese banks will avoid Fatca, observers warn"

    That should get you around the pay wall, and be able to read the article.

    On comment from the article: David Rosenbloom, one of the report's authors, comments: "While I haven't spoken to any Chinese tax officials, I have to assume that they're not going to just willingly comply with the US rules. I find it hard to believe China is going to say, ‘oh well, these are the US rules, we'll just comply and have our banks sign up'. That doesn't seem to me like the behavior I'd expect from China."

    We shall see. :)

  10. Just Me, I did watch some of the GOP debates initially, but lost interest - have no patience or time to watch Perry & Co anymore. So, don't know who to support next year, but really want a sensible person in charge of the nation. We already had a lost decade since 2001 and can't take another one, if things go the way they are.

    On the reporting requirements and penalties for failure to report (various IRS forms 8938 etc) - we should seek for equal treatment with our fellow citizens living in America. If they agree to report all their assets and agree to the penalties associated for non-compliance, I can accept this as a fair application of rules and regs. Having just one set of citizens so burdened with compliance a d informational requests is just not equal justice. This is a fundamental violation of Bill of Rights. This awareness has to be highlighted. How do we do this?

  11. AB: exactly right.

    Just Me: Yes the Forbes article got it wrong; it is not FATCA relief as suggested by the title. Now that I look at it, it is really not 8938 relief.

    You all are very much invited to visit the Isaac Brock Society. We are trying to pull together in our protest against the United States to tax US persons everywhere in the world, particularly in Canada. Thanks.

  12. AB

    The only way that I know of to increase awareness is work with organizations like American Citizens Abroad (ACA) that is trying to apply some lobbying efforts on our behalf in DC. I contribute to their cause. And then I make a pest out of myself by emailing most every reporter that writes something about the issue. :)

  13. I question whether foreign direct real estate ownership (no partnership or joint venture) falls under the category of "other specified financial assets" that need to be reported. The proposed and temporary regs track the draft instructions, and many practitioners were of the opinion that such assets are not covered. A personal home arguably is not "held for investment". Furthermore, any kind of direct real estate ownership, whether or not for investment is not (i) a financial account; (ii) stock or security; (iii) a financial instrument or contract issued by or that has a counterparty other than a US person; or (iv) an interest in a foreign entity. It would be a big stretch to try to cram a direct real estate ownership into item (iii) above.

    I was glad to see that foreign social security or similar government social insurance was excluded from reporting, but the language governing foreign pensions,etc. is still quite vague. "For purposes of determining the aggregate value of specified foreign financial assets in which a specified person has an interest, if the specified person does not know or have reason to know based on readily accessible information the fair market value of the person’s interest in a foreign estate,
    foreign pension plan, or foreign deferred compensation plan during the taxable year, the value to be included in determining the aggregate value of the specified foreign financial assets is the fair market value, determined as of the last day of the taxable year, of the currency and other property distributed during the taxable year to the specified person as a beneficiary or participant." Er, excuse me, but what the f*** does that mean? If you have a foreign defined benefits plan with no cash value, how the hell do you conclude whether "the specified person does not know or have reason to know based on readily accessible information the fair market value of the person’s interest in a foreign estate, foreign pension plan, or foreign deferred compensation plan during the taxable year"? Who knows the fair market value of their vested pension benefits years before they retire? What efforts must be made to obtain "readily accessible information"?

    Anyone living abroad needs to get in touch with Democrats and Republicans Abroad and their US representatives and give the party hacks an earful during election season. American Citizens Abroad ( -- unfortunately based in Switzerland) also is engaging in a major lobbying effort to roll back FATCA and other burdensome expat taxation and reporting requirements.

    America was the single leading force behind globalization, and now it is doing its best to undermine its global position and make the lives of US expats untenable. Foreign banks are throwing out their US customers. Companies don't want to hire Americans who have to report company bank balances on the FBAR if they have signature authority. This is a distinct competitive disadvantage for the US, and our relative power in the world is waning.

  14. To AB December 17 10:11 am

    You asked the question of how one finds the FMV of a home. In my country, both the banks and real estate agents keep records of what the market price of a home is in a particular area.  

    Just Me mentioned in one of his posts that he used taxation valuations from his local council.

    Most important is that you document your valuation source in case any questions come up.

    There is absolutely nothing good to say about these new reporting requirements, although I can say that if it was not for them, I might have just led an ordinary life like anyone else in my country of residence. Thanks to them and OVDI, I have made so many new friends at the banks and tax authorities in my country of residence.  Before, I would have been just like any other citizen of my country of residence and had little to do with either. Now, not only do I know them on a first name basis and keep them challenged with new documentation requests for things which are totally irrelevant to the way of life in my country of residence,  but I also get to perpetuate the idea that Americans are demanding and different.  Thank you IRS!  Thank you FATCA!

  15. Jack, ij, others - Do we need to include homes that we own on form 8938 ? Based on some of the articles out there it seems the homes owned by one or spouse or both are not suposed to be included but its not certain. PLease see these links:

    What are your thoughts ?


    1. Homes owned directly are not included in Form 8938. The form covers "specified foreign financial assets." Homes held through entities are not directly reported but the ownership interest in the entity may be includible.



    2. Jack & others,
      Is direct ownership of foreign land (example,
      say, owning a quarter acre of land, or farm
      land) reportable on form 8938? It does not seem
      like a "specified foreign financial asset"
      based on my cursory reading of 8938 instructions.
      Please share your thoughts..


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