“Filing US income tax returns made more challenging (1st of 2 parts)” by Rogelanne E. Ofiaza-Villarubia (February 20, 2012)

SUITS THE C-SUITE By Rogelanne E. Ofiaza-Villarubia
Business World (02/20/2012)

(First of two parts)

United States (US) tax filers, including US citizens, US resident aliens and other nonresident aliens who file income tax returns with the US Internal Revenue Service (IRS) — take heed: The effort, time and money spent on preparing a US income tax return has significantly increased in the recent years.

The US IRS recently revived the Offshore Voluntary Disclosure Program (OVDP) whereby taxpayers who have not reported and disclosed their offshore assets are given an opportunity to comply with the IRS rules and guidelines on offshore accounts. Unlike previous programs, the IRS has not specified a deadline for disclosing unreported offshore assets, as the program will remain open “for an indefinite period.” Clearly, the IRS is not only encouraging but enforcing full compliance with the rules on offshore accounts disclosure.

Foreign Account Tax Compliance Act (FATCA)

US tax filing is now made even more challenging on both personal and global levels. A US tax filer now needs to understand the “FATCA,” a tax mandate that imposes significant new reporting responsibilities on US tax filers and on many of the financial institutions that they deal with. FATCA was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act.

The FATCA requires foreign financial institutions to report information to the IRS about financial accounts held either by US taxpayers or by foreign entities in which US tax filers possess substantial ownership interests.

Similarly, US taxpayers whose “specified foreign financial assets” exceed certain thresholds must report to the IRS information about those foreign assets on the new Form 8938. The reporting threshold varies, depending on where the US taxpayer lives and on his or her return filing status. Interestingly, the filing threshold is lower for those who live in the US than for those who live overseas.

Statement of Foreign Financial Assets (Form 8938)

Form 8938 must be attached to the US income tax return and be filed by the due date (including extensions) for that return. When the form is required, the highest value during the tax year of each specified foreign financial asset must be reported.

Who must file

The following persons must file Form 8938 if their foreign financial assets meet certain thresholds:

• a US citizen;

• a person who was a US resident alien for any part of the tax year;

• a nonresident alien who makes an election to file a joint income tax return with a US citizen or resident alien spouse, and who thus agrees to be taxed on worldwide income;

• a nonresident alien who is a bona fide resident of American Samoa or Puerto Rico.

Filing threshold

Unmarried US-resident taxpayers must file Form 8938 if their specified foreign financial assets exceed $50,000 on the last day of the tax year, or $75,000 at any time during the year.

Married US-resident taxpayers who choose not to file joint income tax returns with their spouses are subject to the same thresholds (over $50,000 of specified foreign financial assets on the last day of the tax year, or over $75,000 at any time during the year).

Married US-resident taxpayers who file joint returns must file Form 8938 if their specified foreign financial assets exceed $100,000 on the last day of the tax year, or $150,000 at any time during the year.

An unmarried US taxpayer whose tax home is in a foreign country and who meets one of the “presence abroad” tests described below need not file Form 8938 unless their “specified foreign financial assets” exceed $200,000 on the last day of the tax year, or $300,000 at any time during the tax year.

The following taxpayers satisfy the “presence abroad” test:

• a US citizen who has been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year;

• a US citizen or resident who is present in a foreign country or countries at least 330 full days during any period of 12 consecutive months that ends in the tax year being reported.

Married taxpayers with tax homes outside the US and with sufficient presence abroad, who choose not to file jointly, have the same thresholds.

Overseas US taxpayers who are married and file joint returns do not have to file Form 8938 unless their “specified foreign financial assets” exceed $400,000 on the last day of the tax year, or $600,000 at any time during the tax year.

In determining whether a US taxpayer satisfies the reporting threshold, he or she must include the value of all specified foreign financial assets, including assets that are reported on some other form, such as Form 5471 (Information Return of US Persons with Respect to Certain Foreign Corporations) or Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund).

“Specified Foreign Financial Assets” and determining their values for disclosure on Form 8938 will be discussed in next week’s column.

Rogelanne E. Ofiaza-Villarubia is a director of SGV & Co. and is a US and Philippine CPA.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.