What are Specified Foreign Financial Assets, How is it Defined

What is a Specified Foreign Financial Asset, Form 8938

The Form 8938 is required by U.S. Persons (including individuals and domestic entities) in any year that they meet the threshold requirement based on the value of their specified foreign financial assets. Form 8938 is a relative newcomer to the world of international tax law reporting and was introduced in 2012 in accordance with the 2011 tax return filing. One common question we receive is what is considered to be a specified foreign financial asset.

• • • Does it include bank accounts?

    • What about investment accounts or mutual funds?

    • Is pension also required

What is a Specified Foreign Financial Asset, Form 8938

What is a Specified Foreign Financial Asset?

Let’s take a brief introductory look at how the Internal Revenue Service defines specified foreign financial assets for Form 8938 reporting purposes.

Types of Specified Foreign Financial Assets

As provided by the IRS:

Specified foreign financial assets include the following assets

• • • “Financial accounts maintained by a foreign financial institution.

      • The following foreign financial assets if they are held for investment and not held in an account maintained by a financial institution.

        • Stock or securities issued by someone that is not a U.S. person (including stock or securities issued by a person organized under the laws of a U.S. possession).

        • Any interest in a foreign entity.

        • Any financial instrument or contract that has an issuer or counterparty that is not a U.S. person (including a financial contract issued by, or with a counterparty that is, a person organized under the laws of a U.S. possession). For foreign financial assets excepted from reporting, see Assets Not Required To Be Reported, later.”

What is a Financial Account for Form 8938 Purposes?

• • • “Financial Account

      • “A financial account is any depository or custodial account (under Regulations section 1.1471-5(b)(1)(i) or (ii)) maintained by a foreign financial institution as well as any equity or debt interest in a foreign financial institution (other than interests that are regularly traded on an established securities market) or any cash value life insurance or annuity contract maintained by an insurance company or other foreign financial institution.

      • A specified foreign financial asset includes a financial account maintained by a financial institution that is organized under the laws of a U.S. possession (American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Islands).”

What is a Foreign financial institution

• • • “In most cases, a foreign financial institution is any financial institution that is not a U.S. entity and satisfies one or more of the following.

      • It accepts deposits in the ordinary course of a banking or similar business. 

      • It holds financial assets for the account of others as a substantial part of its business.

      • It is engaged (or holds itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities.”

Other Specified Foreign Financial Assets

• • • “Examples of other specified foreign financial assets include the following, if they are held for investment and not held in a financial account.

      • Stock issued by a foreign corporation.

        • A capital or profits interest in a foreign partnership.

        • A note, bond, debenture, or other form of indebtedness issued by a foreign person.

        • An interest in a foreign trust or foreign estate.

        • 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.”

Assets held for investment

• • • • “You hold an asset, including a partnership interest, for investment if you do not use it in, or hold it for use in, the conduct of any trade or business. Stock is not considered used or held for use in the conduct of a trade or business.

      • If you are required to file Form 8938, in addition to reporting retirement and pension accounts and nonretirement savings accounts described in Regulations section 1.1471-5(b)(2)(i), you must report retirement and pension accounts, nonretirement savings accounts, and accounts satisfying conditions similar to those described in Regulations section 1.1471-5(b)(2)(i) that are otherwise excluded from the definition of a financial account by an applicable Model 1 IGA or Model 2 IGA.

      • Thus, such accounts are subject to uniform reporting rules and must be reported without regard to whether the account is maintained in a jurisdiction with an IGA.”

 Interests in Specified Foreign Financial Assets

• • • • “You have an interest in a specified foreign financial asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the asset are or would be required to be reported, included, or otherwise reflected on your income tax return. You have an interest in a specified foreign financial asset even if no income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the asset are included or reflected on your income tax return for this tax year.”

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.