Reporting Obligations of U.S. Beneficiaries of Foreign Trusts and New Form 8938

In 2010, Congress enacted the Foreign Account Tax Compliance Act (FATCA) as part of the Hiring Incentives to Restore Employment Act ("the HIRE Act"), and the legislation amended the Internal Revenue Code with the goal of increasing foreign account tax reporting and compliance. [The Hiring Incentives to Restore Employment Act, Pub L No 111-147, 111th Cong, 2d Sess (March 18, 2010).] the provisions of FATCA were new reporting requirements for U.S. beneficiaries of foreign trusts pursuant to IRC Section 6038D. [The Hiring Incentives to Restore Employment Act, Pub L No 111-147, 111th Cong, 2d Sess, § 301(c) (March 18, 2010).] In December 2011, the Department of the Treasury and IRS issued temporary and proposed regulations for Section 6038D and also issued new Form 8938, Statement of Specified Foreign Financial Assets, which is to be attached to a taxpayer's return...

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Reporting Obligations Under IRC Section 6038D. FATCA added IRC Section 6038D (Information With Respect to Foreign Financial Assets) to the Internal Revenue Code. Section 6038D imposes new reporting requirements on any individual holding an interest in a specified foreign financial asset during a taxable year if the total value of such assets exceeds a threshold amount, and Section 6038D has implications for U.S. beneficiaries of foreign trusts...

New Section 5038D Regulations. At the end of 2011, the Treasury issued proposed and temporary regulations providing guidance on the reporting obligations under Section 6038D. The preamble to the temporary regulations states that the regulations "[i]n particular . . . provide guidance relating to the requirement that individuals attach a statement to their income tax return to provide required information regarding foreign financial assets in which they have an interest." [TD 9567, 76 FR 78553-78566.]

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Discussion of Form 8938. ... Form 8938, Statement of Specified Foreign Financial Assets, has been issued by the Service to facilitate taxpayer reporting of the ownership of specified foreign financial assets if the total value of those assets exceeds the "reporting threshold". Individual U.S. taxpayers that hold specified foreign financial assets with an aggregate value exceeding a specified threshold amount must report information about those assets on new Form 8938. This form must be attached to the taxpayer's annual income tax return (including Forms 1040, 1040NR, 1041, 1065, 1120, and 1120-S). This reporting requirement applies where the individual has an interest in the specified foreign financial assets in tax years starting after March 18, 2010. [IRC § 6038D(a); Temp Treas Reg 1.6038D-4T.]...

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Failure to File a Form 8938. The failure to file Form 8938, that includes the information required by IRC Section 6038D(c) and Temporary Regulations Section 1.6038D-4T with respect to any tax year at the time and in the manner described in IRC Section 6038D(a) and Temporary Regulations Section 1.6038D-2T, will result in the imposition of a penalty of $10,000. [Temp Reg § 1.6038D-9T(a).] However, nopenalty will be imposed if the failure is shown to be due to reasonable cause and not due to willful neglect. [Temp Reg § 1.6038D-8T(e).] Married individuals filing joint returns are subject to penalties as if they were a single specified person. Married specified individuals who file a joint annual return are joint and severally liable for any penalties. [Temp Reg § 1.6038D-8T(b).] Furthermore, if any failure to comply with the reporting requirement of IRC Section 6038D and the regulations continues for more than 90 days after the date the IRS mails a notice of the failure to file the Form 8938, the specified individual is required to pay an additional penalty of $10,000 for each 30-day period (or fraction thereof) during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000 for each failure. [Temp Reg § 1.6038D-8T(c).] Furthermore, accuracy-related penalties apply in the case of any portion of an underpayment attributable to any undisclosed foreign financial asset understatement. [Temp Reg § 1.6038D-8T(f)(1); IRC § 6662(j).]In addition, failure to comply with the reporting requirements of IRC Section 6038D and the regulations, or any underpayment related to such failure, may result in criminal penalties under IRC Sections 7201, 7203, 7206, et seq., or other provisions of Federal law. [Temp Reg § 1.6038D-8T(f)(2).]

Conclusion. Practitioners should carefully review the new temporary and proposed regulations that were issued at the end of 2011 and that provide guidance on the reporting obligations under IRC Section 6038D. Practitioners should also review the instructions for new Form 8938, Statement of Specified Foreign Financial Assets, in determining the reporting obligations of U.S. beneficiaries of foreign trusts with respect to specified foreign financial assets.

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LEXIS users can access the complete commentary HERE. Additonal fees may apply. (Approx. 18 pages.)

RELATED LINKS: For more information on the reporting requirements with respect to foreign trusts, see:

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