IRS has today notified the posting of the final regulations, effective December 12, 2014, TD 9706, Reporting of Specified Foreign Financial Assets, and removing the temporary regulations. The regulations can be found on the FATCA – Regulations and Other Guidance page in the For Individual Taxpayers section.
The IRS addressed such issues as dual residents, valuation challenges, foreign currency, virtual currency (left for another time), retirement accounts and insurance policies. Below are the highlights of the changes for my readers.
Dual Resident Taxpayers
A comment recommended an exemption from the section 6038D reporting requirements be included for an individual who is a dual resident taxpayer and who, pursuant to a provision of a treaty that provides for resolution of conflicting claims of residence by the United States and the treaty partner, claims to be treated as a resident of the treaty partner. In such a case, a dual resident taxpayer may claim a treaty benefit as a resident of the treaty partner and will be taxed as a nonresident for U.S. tax purposes for the taxable year (or portion of the taxable year) that the individual is treated as a nonresident.
The final rule adopts this recommendation for a dual resident taxpayer who determines his or her U.S. tax liability as if he or she were a nonresident alien and claims a treaty benefit as a nonresident of the United States as provided in § 301.7701(b)–7 by timely filing a Form 1040NR, ‘‘Nonresident Alien Income Tax Return,’’ (or such other appropriate form under that section) and attaching a Form 8833, ‘‘Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).’’ The Treasury Department and the IRS have concluded that reporting under section 6038D is closely associated with the determination of an individual’s income tax liability.
Because the taxpayer’s filing of a Form 8833 with his or her Form 1040NR (or other appropriate form) will permit the IRS to identify individuals in this category and take follow-up tax enforcement actions when considered appropriate, reporting on Form 8938, “Statement of Specified Foreign Financial Assets,’’ is not essential to effective IRS tax enforcement efforts relating to this category of U.S. residents.
Individuals Resident in the United States Under Non-Immigrant Visas
A number of comments requested an exemption from the section 6038D reporting requirements for foreign executives and employees resident in the United States under non-immigrant H, L, or E visas. The final rule does not adopt this recommendation. Because all U.S. residents are taxable on worldwide income, excluding categories of residents from the scope of section 6038D reporting is not consistent with the purposes for which the provision was enacted.
Persons That Do Not Owe U.S. Tax for the Taxable Year
The final rule does not adopt any change. If the law requires the filing of a tax return, however, information reported on a Form 8938 concerning the taxpayer’s specified foreign financial assets is an important component of that return, even if no tax liability is shown. Requiring this filing will aid the IRS in devising effective enforcement programs with respect to such returns.
Assets Held by a Disregarded Entity
A number of comments requested clarification of the section 6038D reporting requirements with respect to specified foreign financial assets held by an entity disregarded as an entity separate from its owner under § 301.7701–2 of this chapter (a disregarded entity). In response to these requests, and consistent with instructions to Form 8938, the final rule provides in § 1.6038D–2(b)(4)(iii) that a specified person that owns a foreign or domestic entity that is a disregarded entity is treated as having an interest in any specified foreign financial assets held by the disregarded entity.
As a result, a specified person that owns a disregarded entity (whether domestic or foreign) that, in turn, owns specified foreign financial assets must include the value of those assets in determining whether the specified person meets the reporting thresholds in § 1.6038D–2(a) and, if so, must report such assets on Form 8938.
Jointly Owned Assets (§ 1.6038D–2(c))
A number of comments requested clarification of aspects of the rules in § 1.6038D–2(c) and (d) relating to joint owners of a specified foreign financial asset. These comments have been adopted.
Specifically, the final rule clarifies that each of the joint owners of a specified foreign financial asset who are not married to each other must include the full value of the asset (rather than only the value of the specified person’s interest in the asset) in determining whether the aggregate value of such specified individual’s specified foreign financial assets exceeds the applicable reporting thresholds, and each joint owner must report the full value of the asset on his or her Form 8938.
In addition, the final rule clarifies that, in the case of joint owners who are married to each other and file separate returns, each joint owner of a specified foreign financial asset must report the full value of the asset (rather than only the value of the specified person’s interest in the asset) on the individual’s Form 8938, even if both spouses are specified individuals and only one-half of the value of the asset is considered in determining the applicable reporting thresholds under § 1.6038D–2(c)(3)(i).
Retirement and Pension Accounts and Certain Non-Retirement Savings Accounts
These final regulations modify the definition of a financial account for purposes of section 6038D in order to require consistent reporting under section 6038D with respect to retirement and pension accounts and certain non- retirement savings accounts regardless of whether the account is maintained in a jurisdiction treated as having in effect a Model 1 IGA or Model 2 IGA. For financial accounts that are maintained by a foreign financial institution that is not located in a jurisdiction treated as having in effect a Model 1 IGA or Model 2 IGA, the definition of a financial account in the final rule continues to include the retirement and pension accounts and non-retirement savings accounts described in § 1.1471–5(b)(2)(i), consistent with the section 6038D coordination rule in that section.
Reporting on Both FinCEN Form 114 and Form 8938
A number of comments recommended that a foreign account reported on FinCEN Form 114, ‘‘Report of Foreign Bank and Financial Accounts,’’ (formerly Form TD F 90–22.1, ‘‘Report of Foreign Bank and Financial Accounts’’) (an FBAR), should not be required to be reported on Form 8938. he final rule does not adopt this recommendation.
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Extension of Time for QIs, WPs, and WTs to Apply Certain Requirements of the Joint Account Option under the QI Agreement, the WP Agreement, or the WT Agreement.This email applies to certain entities that apply to enter into or have entered into the Qualified Intermediary (QI) Agreement published in Revenue Procedure 2014-39, 2014-29 I.R.B. 151, and certain entities that apply to enter into or have entered into the Withholding Foreign Partnership Agreement or Withholding Foreign Trust Agreement, published in Revenue Procedure 2014-47, 2014-35 I.R.B. 393.
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