What is Form 8938 and How is it Different From an FBAR?

By Sebastien Chain and Tamara Woods

For tax year 2011, individual taxpayers with certain specified foreign financial assets found themselves subject to a new reporting requirement, Form 8938, Statement of Specified Foreign Financial Assets. Form 8938 is required if a taxpayer has a specified foreign financial asset in excess of various thresholds.  See Form 8938 – Foreign Reporting Trap for the Unwary.  Unlike Form T.D. 90-22.1, Report of Foreign Bank Account and Financial Accounts which is due by June 30th of every year, Form 8938 is attached to a taxpayer’s Form 1040.

Although many aspects of the Form 8938 and FBAR appear duplicative, the distinctions between the two are such that many taxpayers may find that only Form 8938 is required and not an FBAR or vice-versa.

On March 26, 2012, the IRS published a chart comparing the reporting requirements between Form 8938, Statement of Specified Foreign Financial Assets and T.D. 90-22.1, Report of Foreign Bank Account and Financial Accounts (“FBAR”).  A copy of this chart is found at this link.  This chart contains a basic overview of the fundamental similarities and differences between an FBAR and Form 8938.

The new Form 8938 has raised questions for taxpayers and tax practitioners alike.  As a result, the IRS published 14 questions and answers to anticipate the issues most likely to arise.  On June 7, 2012, the IRS added Q&A 15-23 on their website for Form 8938, Statement of Specified Foreign Financial Assets.

The guidance, as posted on the IRS website, is set forth below.  See http://www.irs.gov/businesses/corporations/article/0,,id=255061,00.html.

1. What are the specified foreign financial assets that I need to report on Form 8938? If you are required to file Form 8938, you must report your financial accounts maintained by a foreign financial institution. Examples of financial accounts include: Savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer.

And, to the extent held for investment and not held in a financial account, you must report stock or securities issued by someone who is not a U.S. person, any other interest in a foreign entity, and any financial instrument or contract held for investment with an issuer or counterparty that is not a U.S. person. Examples of these assets that must be reported if not held in an account include: stock or securities issued by a foreign corporation; a note, bond or debenture issued by a foreign person; 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; 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; a partnership interest in a foreign partnership; an interest in a foreign retirement plan or deferred compensation plan; an interest in a foreign estate; any interest in a foreign-issued insurance contract or annuity with a cash-surrender value.  The examples listed above do not comprise an exclusive list of assets required to be reported.

2. I am a U.S. taxpayer but am not required to file an income tax return. Do I need to file Form 8938? Taxpayers who are not required to file an income tax return are not required to file Form 8938.

3. Does foreign real estate need to be reported on Form 8938? Foreign real estate is not a specified foreign financial asset required to be reported on Form 8938. For example, a personal residence or a rental property does not have to be reported.

If the real estate is held through a foreign entity, such as a corporation, partnership, trust or estate, then the interest in the entity is a specified foreign financial asset that is reported on Form 8938, if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you. The value of the real estate held by the entity is taken into account in determining the value of the interest in the entity to be reported on Form 8938, but the real estate itself is not separately reported on Form 8938.

4. I directly hold foreign currency (that is, the currency isn’t in a financial account). Do I need to report this on Form 8938? Foreign currency is not a specified foreign financial asset and is not reportable on Form 8938.

5. I am a beneficiary of a foreign estate. Do I need to report my interest in a foreign estate on Form 8938? Generally, an interest in a foreign estate is a specified foreign financial asset that is reportable on Form 8938 if the total value of all of your specified foreign financial assets is greater than the reporting threshold that applies to you.

6. I acquired or inherited foreign stock or securities, such as bonds. Do I need to report these on Form 8938? Foreign stock or securities, if you hold them outside of a financial account, must be reported on Form 8938, provided the value of your specified foreign financial assets is greater than the reporting threshold that applies to you. If you hold foreign stock or securities inside of a financial account, you do not report the stock or securities on Form 8938. For more information regarding the reporting of the holdings of financial accounts, see FAQs 8 and 9.

7. I directly hold shares of a U.S. mutual fund that owns foreign stocks and securities. Do I need to report the shares of the U.S. mutual fund or the stocks and securities held by the mutual fund on Form 8938? If you directly hold shares of a U.S. mutual fund you do not need to report the mutual fund or the holdings of the mutual fund.

8. I have a financial account maintained by a U.S. financial institution that holds foreign stocks and securities. Do I need to report the financial account or its holdings? You do not need to report a financial account maintained by a U.S. financial institution or its holdings. Examples of financial accounts maintained by U.S. financial institutions include: U.S. Mutual fund accounts; IRAs (traditional or Roth); 401 (k) retirement plans; qualified U.S. retirement plans; and brokerage accounts maintained by U.S. financial institutions.

9. I have a financial account maintained by a foreign financial institution that holds investment assets. Do I need to report the financial account if all or any of the investment assets in the account are stock, securities, or mutual funds issued by a U.S. person? If you have a financial account maintained by a foreign financial institution and the value of your specified foreign financial assets is greater than the reporting threshold that applies to you, you need to report the account on Form 8938. A foreign account is a specified foreign financial asset even if its contents include, in whole or in part, investment assets issued by a U.S. person. You do not need to separately report the assets of a financial account on Form 8938, whether or not the assets are issued by a U.S. person or non-U.S. person.

10. I have a financial account with a U.S. branch of a foreign financial institution. Do I need to report this account on Form 8938? A financial account, such as a depository, custodial or retirement account, at a U.S. branch of a foreign financial institution is an exception to the general rule that a financial account maintained by a foreign financial institution is specified foreign financial asset. A financial account maintained by a U.S. branch or U.S. affiliate of a foreign financial institution does not have to be reported on Form 8938 and any specified foreign financial assets in that account also do not have to be reported.

11. I own foreign stocks and securities through a foreign branch of a U.S.-based financial institution. Do I need to report these on Form 8938? If a financial account, such as a depository, custodial or retirement account, is held through a foreign branch or foreign affiliate of a U.S.-based financial institution, the foreign account is not a specified foreign financial asset and is not required to be reported on Form 8938

12. I have an interest in a foreign pension or deferred compensation plan. Do I need to report it on Form 8938? If you have an interest in a foreign pension or deferred compensation plan, you have to report this interest on Form 8938 if the value of your specified foreign financial assets is greater than the reporting threshold that applies to you.

13. How do I value my interest in a foreign pension or deferred compensation plan for purposes of reporting this on Form 8938? In general, the value of your interest in the foreign pension plan or deferred compensation plan is the fair market value of your beneficial interest in the plan on the last day of the year. However, if you do not know or have reason to know based on readily accessible information the fair market value of your beneficial interest in the pension or deferred compensation plan on the last day of the year, the maximum value is the value of the cash and/or other property distributed to you during the year. This same value is used in determining whether you have met your reporting threshold.

If you do not know or have reason to know based on readily accessible information the fair market value of your beneficial interest in the pension plan or deferred compensation plan on the last day of the year and you did not receive any distributions from the plan, the value of your interest in the plan is zero. In this circumstance, you should also use a value of zero for the plan in determining whether you have met your reporting threshold. If you have met the reporting threshold and are required to file Form 8938, you should report the plan and indicate that its maximum is zero.

14. I am a U.S. taxpayer and have earned a right to foreign social security. Do I need to report this on Form 8938? Payments or the rights to receive the foreign equivalent of social security, social insurance benefits or another similar program of a foreign government are not specified foreign financial assets and are not reportable.

15. If I have to file Form 8938, am I required to report all of my specified foreign financial assets regardless of whether the assets have a de miminis maximum value during the tax year? If you meet the applicable reporting threshold, you must report all of your specified foreign financial assets, including the specified foreign financial assets that have a de minimis maximum value during the tax year. For exceptions to reporting, see Exceptions to Reporting on page 6 of the instructions for Form 8938.

16. I filed my income tax return but now realize that I should have filed Form 8938 with my return, what should I do? If you omitted Form 8938 when you filed your income tax return, you should file Form 1040X, Amended U.S. Individual Income Tax Return, with your Form 8938 attached.

17. Do I have to file both Form 8938 and Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)? The filing of Form 8938 does not relieve you of the separate requirement to file the FBAR if you are otherwise required to do so, and vice-versa. Depending on your situation, you may be required to file Form 8938 or the FBAR or both forms, and certain foreign accounts may be required to be reported on both forms.

18. I have numerous specified foreign financial assets to report on Form 8938. Is there a continuation sheet for the Form 8938? If you have more than one account or asset to report in Part I or Part II of Form 8938, or more than one issuer or counterparty to report in Part II of Form 8938, copy as many blank Parts I and/or II as you need to complete, and attach them to Form 8938. Check the “If you have attached additional sheets, check here” box at the top of Form 8938.

19. I directly hold tangible assets for investment, such as art, antiques, jewelry, cars and other collectibles, in a foreign country. Do I need to report these assets on Form 8938? No. Directly held tangible assets, such as art, antiques, jewelry, cars and other collectibles, are not specified foreign financial assets.

20. I directly hold precious metals for investment, such as gold, in a foreign country. Do I need to report these assets on Form 8938? No. Directly held precious metals, such as gold, are not specified foreign financial assets. Note, however, that gold certificates issued by a foreign person may be a specified foreign financial asset that you would have to report on Form 8938, if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you.

21. This tax year I sold precious metals that I held for investment to a foreign person. Do I have to report the sales contract on Form 8938? The contract with the foreign person to sell assets held for investment is a specified foreign financial asset investment asset that you have to report on Form 8938, if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you.

22. I have a safe deposit box at a foreign financial institution. Is the safe deposit box itself considered to a financial account? No, a safe deposit box is not a financial account.

23. Am I required to hire a certified appraiser or actuary to determine the fair market value of a specified foreign financial asset? For example, if I have a foreign defined benefit plan, am I required to obtain the services of an actuary? You may determine the fair market value of a foreign financial account for the purpose of reporting its maximum value based on periodic account statements unless you have reason to know that the statements do not reflect a reasonable estimate of the maximum value of the account during the tax year. For a specified foreign financial asset not held in a financial account, you may determine the fair market value of the asset for the purpose of reporting its maximum value based on information publicly available from reliable financial information sources or from other verifiable sources. Even if there is no information from a reliable financial information source or other verifiable source, you do not need to obtain an appraisal by a third party in order to reasonably estimate the asset’s maximum value during the tax year.

Overall, tax practitioners and taxpayers alike will continue to have questions as Form 8938 evolves, but the direction provided by the IRS is responsive to many of the general issues associated with the new filing requirement.

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