“Filing US income tax returns made more challenging (2nd of 2 parts)” by Rogelanne E. Ofiaza-Villarubia (February 27, 2012)

SUITS THE C-SUITE By Rogelanne E. Ofiaza-Villarubia
Business World (02/27/2012)

(Second of two parts)

In last week’s column, we talked about the US IRS’ Offshore Voluntary Disclosure Program (OVDP). This program aims to give US tax filers a chance to disclose any offshore account that meets the IRS rules and guidelines. Unlike the amnesties implemented in 2009 and 2011, the OVDP has no set deadline. While it does not provide as much penalty relief as the previous programs, the OVDP offers penalties that are lighter than those imposed on people who fail to come forward voluntarily.

We also introduced the Foreign Account Tax Compliance Act (FATCA) and how it will affect tax filing by US citizens and residents who own “specified foreign financial assets.” FATCA requires more extensive disclosure on Form 8938 that should be attached to the US income tax return.

What are “Specified Foreign Financial Assets?”

• Financial accounts maintained by a foreign financial institution;

• The following, if they are held for investment and not held in an account maintained by any financial institution:

– Stock or securities issued by someone that is not a US person,

– Any interest in a foreign entity and

– Any financial instrument or contract that has an issuer or counter-party that is not a US person.

Some examples may include:

• stock issued by a foreign corporation;

• a capital or profits interest in a foreign partnership;

• note, bond, debenture, or other form of indebtedness issued by a foreign person;

• an interest in a foreign trust or foreign estate;

• an interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement with a foreign counter-party;

• an option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counter-party or issuer.

On the other hand, the following overseas financial accounts and the assets held in such accounts are not specified foreign financial assets and do not have to be reported on Form 8938:

• a financial account that is maintained by a US payer, such as a US financial institution;

• a financial account that is maintained by a dealer or trader in securities or commodities if all of the holdings in the account are subject to the mark-to-market accounting rules for dealers in securities, or if an election is made under Section 475(e) or (f) for all of the holdings in the account.

DETERMINING THE VALUE OF SPECIFIED FOREIGN FINANCIAL ASSETS

To determine the value of a specified foreign financial asset for disclosure on the new Form 8938, the US taxpayer has to refer to the asset’s fair market value.

Specified foreign financial assets denominated in a foreign currency must be converted to US dollars. Taxpayers must use as the exchange rate the US Treasury Department’s Financial Management Service foreign currency exchange rate for purchasing US dollars. If no Financial Management Service exchange rate is available, they may use another publicly available foreign currency exchange rate for purchasing US dollars and disclose the rate on Form 8938.

FAILURE TO FILE FORM 8938

If the taxpayer does not file, or fails to report a specified foreign financial asset on Form 8938, he may be liable to a $10,000 penalty.

An additional penalty may apply if the IRS notifies a taxpayer of a possible delinquency and the taxpayer still fails to disclose and file the form. Moreover, the statute of limitations may remain open for all or a part of a taxpayer’s US income tax return until three years after the date when the taxpayer files Form 8938.

For years, certain US tax filers have had to report overseas financial accounts to the US Treasury using Form TD F 90-22.1. Form 8938 does not replace Treasury Form TD F 90-22.1; neither does filing one of these forms excuse failure to file the other.

Although the forms are similar, there are key differences, including different filing thresholds and somewhat different asset coverage.

For further details on the new Form 8938, the taxpayer may refer to the form instructions recently issued by the IRS
(http://www.irs.gov/instructions/i8938/ch01.html). If there are more concerns or questions regarding Form 8938, now is the time to get in touch with US tax return preparers and US tax legal advisers.

Although many may conclude that the FATCA will be more tedious and arduous for US taxpayers to prepare, in the long-term, complying with the new tax rules makes very good sense, given the potential penalties.

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

Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

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.