By: Mary Vasilescu
For tax years starting after December 31, 2015, the Internal Revenue Service (IRS) has expanded the criteria for reporting Specified Foreign Financial Assets, or SFFAs. SFFA’s for this purpose are foreign financial accounts maintained at a foreign financial institution and other foreign financial assets held for investment purposes.
Enacted in 2010 as a section of FATCA or the “Foreign Account Tax Compliance Act”, Section 6038D of the Internal Revenue Code requires U.S. taxpayers who own specified foreign financial assets to report them on the federal tax return by attaching form 8938 “Statement of Specified Foreign Assets” starting with the tax year 2011. Prior to January 1, 2016 this reporting applied only to individual taxpayers if their assets’ value exceed a set threshold. However, the final regulations under Section 6038D extend the reporting to domestic entities “formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets”. Specified domestic entities include trusts, partnerships, and domestic corporations—including S corps.
You are a specified domestic entity if you match one of the following:
A closely held domestic corporation or partnership and:
- At least 50 percent of the corporation's or partnership's gross income for the taxable year passive income, or
- At least 50 percent of the assets held by the corporation or partnership for the taxable year are assets that produce or are held for the production of passive income.
A domestic trust with one or more specified persons/domestic entities as a current beneficiary.
For these tests, all domestic corporations and domestic partnerships that are closely held by the same specified individuals and that are connected through stock or partnership interest ownership with a common parent corporation or partnership are treated as owning the combined assets and receiving the combined income of all members of that group.
Specified domestic entities must file Form 8938 for tax years commencing after 2015 if the value of SFFAs exceeds $50,000 on the last day of the tax year, or $75,000 during any time of the tax year. There is an exception for duplicative reporting for SFFAs reported on other international information returns that are timely filed with the IRS.
The failure to file a Form 8938 carries a penalty of $10,000 per form. If the failure continues for more than 90 days after the day on which IRS mails a notice of the failure then the IRS may assess an additional penalty of $10,000 for each 30-day period (or fraction of the 30-day period) during which the failure continues after the 90-day period has expired. This additional penalty can't exceed $50,000 for each failure.
Entities with foreign financial accounts are advised to consult with their tax advisor to establish if they have a form 8938 filing requirement. Form 8938 is required in addition to the Foreign Bank Account Reporting (FBAR) or FinCEN Form 114.
For more information on final regulations, click here to visit the IRS website.
Mary Vasilescu advises clients on the formation, structure and taxation of business ventures, start-up enterprises and joint ventures in the U.S. and abroad, including mergers and acquisitions, restructuring, and international tax planning. Reach Mary at 973.994.9400 or firstname.lastname@example.org.