Form 8938

These additional foreign financial assets are reported on Form 8938, a "Statement of Specified Foreign Financial Assets," as part of the annual income tax return. Individuals' holding such foreign assets are required to report these holdings in their tax return using ITR-2 or ITR-3, whichever is applicable. Individuals are required to provide exhaustive details of the foreign assets held by them in the Schedule FA of the ITR form. Reporting of such foreign assets is to be done on the basis of the foreign assets acquired during the relevant accounting period of the foreign country. The finance ministry has issued a clarification on how to fill income tax returns for FY for resident Indians holding foreign assets.

Like FinCEN form 114, there are reporting exemptions, but they differ from those of form 114. You do not have to report an account held in a foreign branch of a U.S. bank. Domestic mutual funds that invest in foreign stocks or securities or private equity funds are exempt. If held directly, personal property, such as jewelry and art, real estate, currency, and precious metals held abroad are all exempt. In addition, there are different monetary penalties that may apply if an individual fails to timely submit a required information reporting form related to foreign assets.

To fully understand the problem, it is necessary to understand what the reporting requirements for foreign assets are. You must report the maximum value of the foreign financial assets or financial accounts with foreign financial institutions, and certain other foreign non-account investment assets. The assets are reported in U.S. dollars using the end of the taxable year exchange rates.

Such individuals were facing problems in reporting foreign assets in the ITR wherever the financial year in India differed from that of the country in which the asset is held. The Central Board of Direct Taxes has issued a clarification dated August 27 regarding the above. In the circular the CBDT has clarified that only foreign assets acquired as per the relevant accounting period of the foreign country have to be reported while filing income tax returns for the financial year . Part III of Schedule B requires the taxpayer to check a box to report an interest in or signature authority over any financial account located in a foreign country; a segregated foreign retirement account arguably triggers this reporting requirement.

The monetary thresholds that must be met before an individual is required to submit one of these forms differ depending upon the form and, in certain cases, the individual’s status. For example, the obligation to file an FBAR is triggered when an individual has foreign bank accounts with an aggregate high balance of $10,000 at any point during the tax year. The obligation to file Form 8938, however, depends on the filing status of the individual and whether the individual resides in the United States or abroad. Within this range are additional reporting thresholds for single taxpayers residing abroad and married taxpayers residing in the United States. Finally, Form 3520 has different reporting triggers depending on the nature of the foreign asset.

Under the law, U.S. citizens, resident aliens, and certain nonresident aliens are required to report worldwide income from all sources including foreign bank and financial accounts. Required reporters must pay taxes on income from these accounts at their individual tax rates. The IRS recognizes that there are many legitimate reasons for U.S. taxpayers to have offshore accounts such as convenience, investing, and to facilitate international banking transactions. However, U.S. taxpayers are prohibited under law from using offshore accounts, including foreign banks, security accounts, and trusts, to avoid paying tax.

Beginning in 2011, the IRS has added Form 8938 to the individual 1040 tax return, further tightening the noose on taxpayers failing to report ownership of overseas accounts. The sanctions for not completing and attaching the form include numerous severe civil penalties and potential prosecution followed by a term in federal prison. Every tax year, U.S. taxpayers are required to report any financial assets held outside the country to the Department of the Treasury if those assets have a combined value greater than $10,000. If the combined value of those assets exceed $50,000, additional reporting to the Internal Revenue Service is also required for individual taxpayers.

There is also a 40% underpayment penalty for any tax deficiencies relating to foreign assets that were not properly reported on Form 8938. The penalty for failing to report an interest in a foreign trust on Form 3520 is the greater of $10,000 or 35% of the gross value of any property transferred to the foreign trust or any distributions from the trust.

When such foreign assets exist, the failure to check "Yes" on Part III of Schedule B—or even worse, checking "No"—is often viewed in a negative light by the IRS, and may be asserted as evidence that the taxpayer is attempting to evade taxation. If you are a U.S. citizen or resident and you have a financial interest in, or signature authority over, a non-U.S.

A U.S. person must file Form 3520 to report a foreign gift or distribution from a foreign estate that exceeds $100,000. Form 3520 must also be filed by a U.S. person to report the creation of a foreign trust, ownership of a foreign trust, transfers of money or property to a foreign trust, or distributions from a foreign tax credit carryback trust. Here is a summary of the Reporting Requirements for Foreign Assets.

The penalty for failure to file an FBAR is $10,000 for each nonwillful violation, and the greater of $100,000 or 50% of the account value for each willful violation. The penalty for failure to file a required Form 8938 is $10,000 for each 30-day period during which the Form 8938 is not filed, with a maximum continuing failure-to-file penalty of $50,000.