What Does IRC 6038D, FATCA & Form 8938 Require Taxpayers Report?

How IRC 6038D and FATCA & Form 8938 Intersect

How IRC 6038D and FATCA & Form 8938 Intersect

What does IRC 6038D, FATCA & Form 8938 Require: Internal Revenue Code Section 6038D was enacted in association with the development of FATCA. The Foreign Account Tax Compliance Act requires certain US Persons to report specified foreign financial assets to the IRS. The code section came to life in 2010, when the US created the Foreign Account Tax Compliance Act.  In addition, IRC 6501 (Statute of Limitations) also went through a bit of an overhaul, with 6501(e)(1) revised to include the 6-year statute of limitations for certain foreign income attributed to 6038D.

Let’s go through the basics of IRC 6038D & 6501(e)(1).

6038D: Information with Respect to Foreign Financial Assets

Let’s go through the basics of 26 USC 6038D:

IRC 6038D(a)

• • • Any individual who, during any taxable year, holds any interest in a specified foreign financial asset shall attach to such person’s return of tax imposed by subtitle A for such taxable year the information described in subsection (c) with respect to each such asset if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amount as the Secretary may prescribe).

IRC 6038D(d)(1) Penalty

• • • If any individual fails to furnish the information described in subsection (c) with respect to any taxable year at the time and in the manner described in subsection (a), such person shall pay a penalty of $10,000.

IRC 6038D(d)(2) Increase In Penalty 

• • • If any failure described in paragraph (1) continues for more than 90 days after the day on which the Secretary mails notice of such failure to the individual, such individual shall pay a penalty (in addition to the penalties under paragraph (1)) of $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of such 90-day period.

    • The penalty imposed under this paragraph with respect to any failure shall not exceed $50,000.

What does this Mean?

This code section was introduced in 2010. The purpose of the code section is to codify the reporting requirements under FATCA (Foreign Account Tax Compliance Act).

What is FATCA?

We have several resources on our website available for FATCA Reporting and other FATCA related issues.

As provided by the IRS: 

• • • The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to combat tax evasion by U.S. persons holding accounts and other financial assets offshore. The Treasury Department and the IRS continue to develop guidance concerning FATCA. For current and more in-depth information, please visit FATCA.

    • Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. There are serious penalties for not reporting these financial assets (as described below). This FATCA requirement is in addition to the long-standing requirement to report foreign financial accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) (formerly TD F 90-22.1).

    • FATCA will also require certain foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The reporting institutions will include not only banks, but also other financial institutions, such as investment entities, brokers, and certain insurance companies. Some non-financial foreign entities will also have to report certain of their U.S. owners.

    • Therefore, if you set up a new account with a foreign financial institution, it may ask you for information about your citizenship. FATCA provides special (and lessened) reporting requirements about the U.S. account holders of certain financial institutions that do not solicit business outside their country of organization and that mainly service account holders resident within it. In order to qualify for this favorable treatment, however, the local foreign financial institution cannot discriminate by declining to open or maintain accounts for U.S. citizens who reside in the country where it is organized.

Reporting by U.S. Taxpayers Holding Foreign Financial Assets

• • • FATCA requires certain U.S. taxpayers who hold foreign financial assets with an aggregate value of more than the reporting threshold (at least $50,000) to report information about those assets on Form 8938, which must be attached to the taxpayer’s annual income tax return. The reporting threshold is higher for certain individuals, including married taxpayers filing a joint annual income tax return and certain taxpayers living in a foreign country (see below).

    • As of January 2013, only individuals are required to report their foreign financial assets. At a later time, a limited set of U.S. domestic entities also may have to report their foreign financial assets, but not for tax years starting before 2013. There are some exceptions to the requirement that you file Form 8938. For example, if you do not have to file a U.S. income tax return for the year, then you do not have to file Form 8938, regardless of the value of your specified foreign financial assets. Also, if you report interests in foreign entities and certain foreign gifts on other forms, you may just list the submitted forms on Form 8938, without repeating the details.

    • You may have to complete and file other reports about foreign assets, such as FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) (formerly TD F 90-22.1), in addition to Form 8938.

What does this Mean?

It means that when a Taxpayer is considered a US Person (whether they reside in the US or abroad) and has certain assets that qualify as specified foreign financial assets, they may have a FATCA requirement on Form 8938.

Form 8938

Form 8938 used to report foreign assets in accordance with 6038D. We also have several resources dedicated to Form 8938.

As provided by the IRS

• • • Use Form 8938 to report your specified foreign financial assets if the total value of all the specified foreign financial assets in which you have an interest is more than the appropriate reporting threshold. See Types of Reporting Thresholds, later.

    • Unless an exception applies, you must file Form 8938 if you are a specified person (see Specified Person, later) that has an interest in specified foreign financial assets and the value of those assets is more than the applicable reporting threshold.

    • If you are required to file Form 8938, you must report the specified foreign financial assets in which you have an interest even if none of the assets affects your tax liability for the year. See Specified Individual, Specified Domestic Entity, and Types of Reporting Thresholds, later. Exception if no income tax return required.

    • If you do not have to file an income tax return for the tax year, you do not have to file Form 8938, even if the value of your specified foreign financial assets is more than the appropriate reporting threshold. Specified Person A specified person is either a specified individual or a specified domestic entity, defined later. 

What does this Mean?

It means that some Taxpayers who meet the requirements of FATCA and 6038D will have a reporting requirement for FATCA on Form 8938. The Form 8938 is filed with a Taxpayer’s US Tax Return. The form is similar to the FBAR (which has been around since 1970) but has additional reporting requirements — and is filed directly with the IRS and not FinCEN.

6501(e)(1) 

• • • IRC § 6501(e)Substantial Omission Of Items —

    • Except as otherwise provided in subsection (c)—

      • IRC § 6501(e)(1)Income Taxes — In the case of any tax imposed by subtitle A—

      • IRC § 6501(e)(1)(A)General Rule — If the taxpayer omits from gross income an amount properly includible therein and—

      • IRC § 6501(e)(1)(A)(i)— such amount is in excess of 25 percent of the amount of gross income stated in the return, or

      • IRC § 6501(e)(1)(A)(ii)— such amount—

      • IRC § 6501(e)(1)(A)(ii)(I)— Is attributable to one or more assets with respect to which information is required to be reported under section 6038D (or would be so required if such section were applied without regard to the dollar threshold specified in subsection (a) thereof and without regard to any exceptions provided pursuant to subsection (h)(1) thereof), and

      • R.C. § 6501(e)(1)(A)(ii)(II)— is in excess of $5,000, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time within 6 years after the return was filed.

What does this Mean?

It means in some situations, Taxpayers with more than $5,000 of income associated with FATCA related assets will be subject to a 6-year statute of limitations instead of 3-years (3-years is the typical statute of limitations).

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