Tax Law

Further Guidance on Foreign Financial Asset Reporting

[Editor's Note:  This narrative is derived from Rhoades & Langer, U.S. International Taxation and Tax Treaties, Chapter 9 (Matthew Bender).]

Virtually all individual taxpayers (and certain entities called "specified domestic entities") are required to report their financial assets in the year 2011.  Technically, the reporting begins earlier than that, but most reporting persons will be on a calendar year, so that is when the reporting requirement first takes effect.

The taxpayer needs to report all of his or her "foreign financial assets," which include foreign bank and securities accounts, foreign stocks, interests in certain foreign trusts; indeed, an interest in almost any foreign entity, and an interest in a contract or instrument that is issued by a foreign person or that has a foreign person as a party.  One makes that report on Form 8938 and files that form with his annual tax return.

Generally, a taxpayer who is required to disclose a foreign financial asset on Form 8938 with her annual tax return and does not is subject to a penalty of $10,000. [Temp. Treas. Reg. § 1.6038D-8T(a)  (Dec 12, 2011)]  That penalty may be abated upon showing reasonable cause for the taxpayer's failure to report.

A married couple that should have filed with their joint return the Form 8938 but either did not file it at all or filed an inaccurate form are subject to the penalty.  The real question is whether it is $10,000 each or jointly.  Temp. Treas. Reg. § 1.6038D-8T(b) (Dec. 12, 2011) answers that question by treating the couple as if they were a single person.  That same regulation specifies that the liability for the penalty, however, is joint and several.

The regulation does not address the "innocent spouse" issue, however.  IRC § 6015 ("Relief from joint and several liability on joint return") provides a method by which a so-called "innocent spouse" may avoid joint and several liability with respect to a joint tax return but, because that section is only available as to spouses that have filed a joint return with an understatement of tax, the section may not be available to the innocent spouse.  The Service might suspect that a cheating husband who is hiding assets from his wife would be reluctant to file the required form when some of those hidden assets are overseas.  One would hope that the cheated wife would be an innocent spouse under the foreign financial asset rules.

When the Service determines that the taxpayer should have filed Form 8938 but did not (or the form that was filed was deficient), the Service will notify the taxpayer by mail.  The taxpayer then has 90 days to file the form or face an additional penalty of $10,000 per month (or fraction of a month) that the form remains unfiled. [Temp. Treas. Reg. § 1.6038D-8T(c) (Dec 12, 2011).]   The maximum additional penalty is $50,000, which means that the total penalty would be, at its maximum, $60,000 for the failure to file one return.

Note that the regulation does not require the taxpayer to pay the penalty within that 90-day window; it just penalizes the taxpayer who fails to file the form within that window.

For a detailed discussion of foreign financial asset reporting, including valuation issues, penalties, revised statute of limitations rules, and specified domestic entities, see Rhoades & Langer, U.S. International Taxation and Tax Treaties, Chapter 9 (Matthew Bender).

Rhoades & Langer, U.S. International Taxation and Tax Treaties is also available in print at the LexisNexis® Store.


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