New regulations designed to uncover information on foreign assets owned by U.S. taxpayers have been implemented by the IRS. Where taxpayers have an interest in one or more specified foreign financial assets (explained below) exceeding certain threshold amounts, additional information must be included in their tax return. This required information includes, but is not limited to, the name and address of the financial institution, stock or financial instrument issuer, or foreign entity; account numbers; asset values; status of the account (open or closed); acquisition and disposal dates; and foreign currency rates.
For taxpayers living in the United States, the thresholds are assets that have an aggregate fair market value (FMV) exceeding either $50,000 on the last day of the tax year or $75,000 at any time during the tax year or $100,000 and $150,000, respectively, for married taxpayers filing a joint annual return. Higher threshold amounts apply for U.S. taxpayers living abroad.
Specified foreign financial assets are depository or custodial accounts at foreign financial institutions, and, to the extent not held in an account at a financial institution, include (a) stocks or securities issued by foreign persons, (b) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (c) any interest in a foreign entity.
In general, a taxpayer has an interest in a specified foreign financial asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions attributable to the holding or disposition of the specified foreign financial asset are or would be required to be reported, included, or otherwise reflected by the taxpayer on an annual return. However, to comply with the reporting requirements, a taxpayer has an interest in a specified foreign financial asset even if no income, gains, losses, deductions, credits, gross proceeds, or distributions are attributable to the holding or disposition of the specified foreign financial asset for the tax year.
Example 1: Reporting requirement for an unmarried individual.
Brenda is not married and does not live abroad. She sold her only specified foreign financial asset prior to year-end when its value was $125,000. Brenda has to provide information on the asset since she satisfies the reporting threshold. Even though she does not hold any specified foreign financial assets on the last day of the tax year, she did own specified foreign financial assets of more than $75,000 during the tax year.
Example 2: Reporting requirement for joint filers.
Mark and Julie file a joint income tax return and do not live abroad. They jointly own a single specified foreign financial asset valued at $60,000. They do not have to provide information on the asset since they do not meet the reporting threshold for married taxpayers filing jointly of more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
A taxpayer who fails to provide the required information is subject to significant penalties. Please call us to discuss the significance of this new reporting requirement or any other tax compliance or planning issue.