FACTA provisions of the 2010 Hiring Incentives to Restore Employment Act
Nov 17, 2011
The IRS recently launched yet another initiative to identify taxpayers with potential taxable holdings abroad. This new initiative, which is part of the FACTA provisions of the 2010 Hiring Incentives to Restore Employment Act and is pursuant to IRC Section 6038D, has been recently supported with IRS draft instructions. Essentially it will require certain individuals holding interests in Specified Foreign Financial Asset (SFFA) above certain dollar thresholds to report these interests separately on New IRS Form 8938 as part of the taxpayer’s 1040 filing. The Form 8938 is still in draft but should be finalized by the IRS around the end of November 2011 with the first effective year of reporting to start with 2011.
Proposed Form 8938 Filing Thresholds
Specified individuals required to file Form 8938 includes all U.S. citizens and tax residents as follows:
- Single & Married Filing Separate Taxpayers, living in US with SFFAs exceeding in value:
> $50K on last day of the year, or
> $75K at any point of time during the year
- Married Filing Joint Taxpayers, living in US with SFFAs exceeding in value:
> $100K on last day of the year, or
> $150K at any point of time during the year
- Single & Married Filing Separate Taxpayers, living outside US and meet BFR or PPT* with SFFAs exceeding in value:
> $200K on last day of the year, or
> $300K at any point of time during the year
- Married Filing Joint Taxpayers, living outside US and meet BFR or PPT* with SFFAs exceeding in value:
> $400K on last day of the year, or
> $600K at any point of time during the year
*Meet BFR or PPT refers to IRC Section 911 relating to the Bona Fide Residence Test (full calendar year abroad) or Physical Presence Test (330 days out of 365 days abroad).
What is an SFFA?
SFFAs have initially been broadly defined as generally “any financial account maintained by a foreign financial institution. A financial account would include depository and custodial accounts maintained by a foreign financial institution as well as any equity or debt interests in that institution. Foreign mutual funds, foreign equity funds, and foreign hedge funds are all included. Other foreign investment vehicles may also be covered by this statute. Other financial assets such as foreign corporation stock and foreign partnership/trust interests that are held as investments but not held in an account also appear to be defined as a SFFA. An SFFA may also include options, restricted stock or RSUs of a foreign corporation. One exception is an account maintained by a US payer would NOT be regarded as a SFFA. A US Payer includes domestic branches of foreign banks AND a foreign branch/subsidiary of a US institution.
In addition to not meeting the above thresholds or not having certain interests defined as SFFAs, a taxpayer who has already reported the SFFA on another form (listed below) need not report the asset again on Form 8938. Instead, the taxpayer simply identifies on Form 8938 the other form’s reporting. The list includes:
- Form 3520 – Annual Foreign Trust & Gift Return
- Form 5471 – Information Return of US persons with respect to Certain Foreign Corporations
- Form 8621 – Return by a Shareholder of a PFIC or QEF
- Form 8865 - Information Return of US persons with respect to Certain Foreign Partnerships
- Form 8891 – Beneficiaries of Certain Canadian RRSPs
Note however that Form TDF 90-22.1 Report of Foreign Bank Accounts is not listed above, which means that taxpayers potentially have to file BOTH forms if the requirements for each are met.
When/how to File
Form 8938 is required to be filed with Form 1040 (unlike Form TDF 90-22.1 which is filed separately by June 30th each year for the previous year’s holdings). Effective date is for the 2011 year or for years commencing after 3/18/10. The penalty for noncompliance by the due date with extensions may be up to $10,000. Additional failure to file penalties may ensue after IRS notice. Failure to file the form will ALSO keep open the statute of limitations for that year, meaning the IRS can still audit the return even after 3 years if the form is not filed timely.
GMT recommends the following actions on the part of companies with mobile assignees regarding this new filing requirement:
1) Companies should alert their foreign assignee population to this new development with the requirement that all assignees comply with the statute effective this coming tax season for 2011 year filings.
2) Due to the penalties involved and non-commencement of the statute of limitations for improper or incomplete filings, alert your assignees to work with GMT to identify SFFAs which may be captured by this legislation.
3) GMT will follow-up with all assignees covered by their Company programs with the start of next busy season to begin accumulating the required information for these additional filings.
Should you need any immediate assistance regarding the above, please do not hesitate to contact us. We can help!
Your Global Mobility Tax Team