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Fba rrevise2012 linkedinversion_

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  • 1. Reporting of Foreign Financial Account and Foreign Financial Asset by IndividualsThis article is not intended to be a legal advice nor is an exhaustive discussion of FBAR or Form 8938 reporting requirements. Individuals must discuss their specific situation with their advisor before deciding whether or not they have reporting obligations under these or other applicable provisions. By: Ragini SubramanianUnder recent changes to the Bank Secrecy Act (BSA) and the Foreign Account TaxCompliance Act (FATCA), a US taxpayer, who holds interest in a foreign bank account orforeign assets, will be subject to self reporting requirements under: (1) The “FBAR” – Report of Foreign Bank and Financial Accounts, under Title 31 (the Bank Secrecy Act) of the United States Code. The form required to be filed is Form TD F 90-22.1, and/or (2) The “SSFFA” – Statement of Specified Foreign Financial Assets, under Title 26 (The Internal Revenue Code). The form required to be filed is Form 8938The penalties for failure to comply with these requirements are both civil and criminal.Under FBAR the civil penalties can be as low as $10,000 and as high as $100,000 or 50%of the balance in the foreign financial account. Under the SSFFA, the penalties can be aslow as $10,000 or as high as $50,000 plus other failure to file and accuracy relatedpenalties. FBAR/TD F 90-22.1 Reporting RequirementsFBAR or Form TD F 90-22.1 (hereinafter referred to as “the FBAR” or “TDF 90-22.1”) isrequired to be filed by a, (1) United States Person that is a United States Citizen or United States resident alien [ that meets the resident alien tests under 26 U.S.C. section 7701(b)], and (2) who has an interest or signature authority (3) over a foreign financial account (4) with the aggregate value exceeding $10,000 in a calendar yearBelow is a further dissection of these basic requirements.Note that FBAR is under Title 31 (Bank Secrecy Act) of the United States Code (and unlikeForm 8938 requirements, not under Title 26 – Internal Revenue Code). As such the taxrules relating to disregarded entities (e.g. single member LLC) do not apply with respect tothe FBAR reporting requirements and as such disregarded entities are required to fileFBAR. Similarly, the rule for residents of the United States possessions is different underthese two reporting regimes (as each of these regimes defines the term United Statesdifferently). Under FBAR United States includes the States, the District of Columbia, allUnited States territories and possessions (e.g. American Samoa, the Commonwealth of theNorthern Mariana Islands, the Commonwealth of Puerto Rico, Guam and the United StatesVirgin Island) and the Indian Islands as defined under Indian Gaming Regulation Act.Under Form 8938, the term United States does not include the US territories. For thepurposes of FBAR therefore, residents of some of these territories, owning foreign financialaccounts and meeting other FBAR requirements will have to file FBAR but possibly notForm 8938. But a US resident owning foreign financial account and meeting other Form8938 requirement will have to file both FBAR and Form 8938. Page 1 of 5
  • 2. Reporting of Foreign Financial Account and Foreign Financial Asset by IndividualsThis article is not intended to be a legal advice nor is an exhaustive discussion of FBAR or Form 8938 reporting requirements. Individuals must discuss their specific situation with their advisor before deciding whether or not they have reporting obligations under these or other applicable provisions. By: Ragini SubramanianLet’s see what an interest or signature authority over a foreign financial account is. Brieflystated, a US person has an interest in a foreign financial account if he/she is an owner ofrecord or holder of legal title. It does not matter whether the account is maintained for thebenefit of the US person or another person including a non resident alien. A person is saidto have signature authority over a foreign financial account if the individual can control thedisposition of assets held in a foreign financial account by a direct communication with theforeign financial institution in writing or otherwise.The next term to understand is – foreign financial account. A foreign financial account isan account located outside the United States. This includes an account maintained in abranch of a US bank that is located outside the United States. The financial accountincludes securities, brokerage, savings, demand, checking, deposit or time deposit, aninsurance policy with a cash value (such as a whole life insurance), shares in a mutualfund, commodities or futures account, and the list goes on and on.The reporting requirement arises when the aggregate value of the foreign financial accountexceeds $10,000. The aggregate value to be reported is the highest value of all theaccounts held by the individual at any time during the calendar year. If the account ismaintained in foreign currency, the account value reported is the highest value during thecalendar year converted to US$ using the Treasury’s Financial Management Service rate1on the last day of the calendar year. If the filer has financial interest in more than oneaccount each account is required to be separately stated and currency is convertedseparately for each account.Only one FBAR is required to be filed by married couples if the financial accounts arejointly held, provided the filing spouse reports the jointly owned accounts on a timely filedFBAR, and both spouses sign the FBAR. If these requirements are not met each spousemust file a separate FBAR, each reporting the entire value of the accountForm TD F 90-22.1 must be filed by June 30th of the year following the calendar year beingreported. FBAR is not filed along with the tax return, but is filed separately with theTreasury Department at the IRS Detroit Computing Center. Unlike Form 8938, noextension of time is granted to file this form. The FBAR is not considered filed until it isreceived by the Department of the Treasury. In other words, “in the mail-box” rule does notapply for timely filing of this form.FinCEN has now developed an electronic filing system2 to accept the FBAR form. Howeverthe current FinCEN e-file system allows for only one digital signature effectively requiringtwo forms (as opposed to one paper form) for some joint filers that meet the requirements(as discussed earlier) to file a single form. Until such time that FinCEN fully develops the e-file system, paper FBAR is accepted.1 www.fms.treas.gov2 http://bsaefiling.fincen.treas.gov/Enroll_Individual_Step_01.html. Page 2 of 5
  • 3. Reporting of Foreign Financial Account and Foreign Financial Asset by IndividualsThis article is not intended to be a legal advice nor is an exhaustive discussion of FBAR or Form 8938 reporting requirements. Individuals must discuss their specific situation with their advisor before deciding whether or not they have reporting obligations under these or other applicable provisions. By: Ragini SubramanianNote that the FBAR e-file system is separate from the IRS Form 8938 e-file system. Form8938 is filed along with tax return, whereas FBAR is filed independent of the tax return.While the FBAR is not filed as part of the income tax return, the taxpayer is reminded ofhis/her self reporting obligation at the time of the preparation of his/her income tax return.Form 1040 Schedule B – Interest and Ordinary Dividend, includes the question “whetherthe taxpayer has an interest in or signature authority in a foreign financial account……”.So a taxpayer cannot get away with non-filing of Form TD F 90-22.1 by giving an “I did notknow” excuse. And in any way when is the ignorance of law a valid excuse! SSFFA/Form 8938 Reporting RequirementsFrom 8938 is required to be filed by (1) a specified person (2) who has an interest in specified foreign financial asses, (3) and the value of those assets during the tax years (4) is more than the applicable reporting threshold.Form 8938 does not have to be filed, if the specified individual does not have to file his/herincome tax return for the tax year. This is true even if the value of the specified foreignfinancial assets is more than the reporting threshold.Below is the dissection of these basic requirements for filing Form 8938.A specified person includes specified individual and subject to future regulations a specifieddomestic entity. The applicability of FBAR and SSFFA to domestic entities is beyond thescope of this article. A specified individual includes a US citizen, a resident alien of theUnited States for any part of the tax year, a non resident alien who elects to be taxed asresident alien on his/her joint tax return, or a bona fide nonresident alien of AmericanSamoa or Puerto Rico. A person is a resident alien if he/she is treated as such under thegreen card test or the substantial presence test. And if the individual otherwise meetsthese tests but chooses to file as non resident alien by taking advantage of a U.S. IncomeTax Treaty, he/she must nevertheless file Form 8938 along with their Form 1040NR.A taxpayer is considered to have an interest in a specified foreign financial asset if he/sheis required to report any income, gains, losses, deductions, credits, gross proceeds ordistributions from holding or disposing of the asset. In this case it does not matter whethersuch income, deduction, etc. is actually received or not or it affects taxpayer’s tax liabilityfor the tax year.Now let’s see what a specified foreign financial asset under Form 8938 is. While thedefinition of what is considered reportable asset under Form 8938 is similar to that underFBAR, the Form 8938 definition is more expansive and inclusive of more items. With thatlet’s scratch the surface of Form 8938 definition. Briefly stated, the specified foreignfinancial asset include, Page 3 of 5
  • 4. Reporting of Foreign Financial Account and Foreign Financial Asset by IndividualsThis article is not intended to be a legal advice nor is an exhaustive discussion of FBAR or Form 8938 reporting requirements. Individuals must discuss their specific situation with their advisor before deciding whether or not they have reporting obligations under these or other applicable provisions. By: Ragini Subramanian (1) Foreign financial accounts (e.g. depository or custodial accounts) maintained by a foreign financial institution. Foreign financial institution is any financial institution that is not a US entity and satisfied one or more conditions laid out in the regulations (e.g., foreign mutual fund, foreign hedge fund, foreign equity fund). (2) Certain foreign financial assists (e.g. stock or securities issued by non US person, interest in a foreign entity, financial instrument or contract that has a non US issuer or counterparty) that are held for investment (as opposed to held for business) and not held in an account maintained in a financial institution.Under Form 8938 therefore the interest in foreign pension or foreign deferred compensationplan is reportable. So for those individuals who have lived and worked abroad for numberof years and have participated in foreign pension plans or deferred compensation plansoffered by their employers the Form 8938 reporting requirements will likely kick in if theyare otherwise required to file US income tax return’sThe reporting thresholds vary based on where the file lives. For those living in the UnitedStates lower thresholds apply and those living outside the US higher thresholds apply.The reporting thresholds for individuals living in the US are: • Unmarried individuals or individuals filing married filing separate return – the total value of the foreign financial asset on the last day of the tax year of more than $50,000 or any time during the tax year of more than $75,000 • The individual filing married filing joint return – the total value of the foreign financial asset on the last day of the tax year of more than $100,000 or at any time during the tax year of more than $150,000The reporting thresholds for individuals that live abroad3 are4: • Unmarried individuals or individuals filing married filing separate return – the total value of the foreign financial asset on the last day of the tax year of more than $2000,000 or any time during the tax year of more than $300,000 • The individual filing married filing joint return – the total value of the foreign financial asset on the last day of the tax year of more than $400,000 or at any time during the tax year of more than $60,000In most cases the value of the specified foreign financial asset is its fair market value. Anappraisal by third party is not required to come up with the fair market value. If fairmarket value is not readily available, the instructions to Form 8938 and regulations providespecific guidance. As long as the reporting threshold requirements are met, the value to bereported is the maximum value of the asset during the tax year. If the asset is maintainedin foreign currency, the asset value is reported preferably by converting foreign currency to3 A US citizen or a resident alien who is present in a foreign country at least 330 full days during any period of12 consecutive months that end in the tax year being reported.4 Recently IRS has provided a streamlined compliance procedure to help US taxpayeraboard to get up to date with US tax filing obligations. Page 4 of 5
  • 5. Reporting of Foreign Financial Account and Foreign Financial Asset by IndividualsThis article is not intended to be a legal advice nor is an exhaustive discussion of FBAR or Form 8938 reporting requirements. Individuals must discuss their specific situation with their advisor before deciding whether or not they have reporting obligations under these or other applicable provisions. By: Ragini SubramanianUS$ using the Treasury’s Financial Management Service rate5 on the last day of the taxyear.Form 8938 is required to be filed along with the income tax return. The filing deadline forincome tax return and therefore for Form 8938 is April 15th. The contemporaneous natureof the filing requirement is intended to prevent excuses for non-reporting under this regime.Now as to the question of how many Form 8938s should be filed. For a married individualthe answer to this question varies based on whether the asset is held jointly or individually,whether a married filing separate or married filing joint return is filed, whether each of thespouses is a specified individual and where do each of the spouse live (in the US or abroad).A detailed analysis may be required in each individual case. Generally however, if a jointreturn is filed and the asset is jointly owned by both spouses and both spouses live in theUS only one Form 8938 is required to be filed. Bottom LineBottom line, the recent changes to the BSA and FACTA have tightened the foreign financialaccount/assets reporting requirements as they apply to individuals. Many of the provisionsof the FBAR and SSFFA overlap and the taxpayer may have filing requirements under both.The overlap analysis is quite complex and will depend on each individual situation. Whilethe IRS has provided a lot of guidance in this area a careful analysis of individual’s filingstatus, type of financial holdings in foreign country, $ value of the financial holdings andsuch other factors must be undertaken to decide whether reporting if any required is underFBAR or SSFFA or both. Many taxpayers that hold a real estate in a foreign country maywonder if FBAR and/or SSFFA apply to them. While at first take the answer is no, aspecific taxpayer situation may warrant further analysis: for example, if the real estate isowned through an entity or a separate account is maintained to administer the rentalactivities. Note that nothing unless specifically excepted by BSA or FACTA, is beyond thescope of the FBAR and/or SSFA.5 www.fms.treas.gov Page 5 of 5