Business Entities Now Required to File FATCA Form 8938
Are you a U.S. citizen that conducts business overseas through one or more domestic entities, such as a U.S. corporation or partnership? If so, you (or more specifically, the entities that you own) may be subject to new IRS reporting obligations starting with the 2016 tax year.
After a series of false starts, the time has finally come for certain business entities to file the FATCA reporting form – Form 8938, “Statement of Specified Foreign Assets.” For the past several years, only individuals have been required to report their foreign assets to the IRS annually on Form 8938. Extension of the filing requirement to U.S. entities has been delayed pending the finalization of Treasury regulations specifying exactly which types of entities must file the form. On February 23, the regulations were finalized, and its provisions are effective for tax year 2016 and onwards.
Brief Introduction to Form 8938
The requirement to file Form 8938 was born out of legislation known as FATCA (the “Foreign Account Tax Compliance Act”). FATCA was enacted in 2010 with the goal of curtailing offshore tax evasion. As part of FATCA, beginning in 2011, U.S. citizens, including those living abroad, became obligated to report their holdings in foreign financial accounts and their foreign assets on an annual basis to the IRS, assuming certain asset value thresholds are met.
Regulations were proposed soon after, which extended the filing requirement to certain domestic entities, but finalization of the regulations was delayed due to the U.S. Treasury’s indecision regarding how to define which types of entities should be required to file the form.
Entities Now Required to File Form 8938
According to the final regulations, a “specified domestic entity” that is required to file Form 8938 is generally defined to include a domestic corporation or partnership if:
- The corporation or partnership is “closely held” (an 80% holding interest) by a U.S. citizen or resident alien (or certain nonresident aliens);
- At least 50 percent of the corporation or partnership’s gross income for the taxable year is “passive” income (e.g., dividends, interest, rent, royalties, annuities, etc.) 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; and
- The total value of the entity’s specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
It also includes a domestic trust if one or more of the trust’s current beneficiaries is a U.S. citizen or resident alien (or certain nonresident aliens) and the above asset value thresholds are surpassed.
Penalties for Failure to File the Form
Failure to file Form 8938 comes with a pretty severe penalty of $10,000 per form. The penalty is increased by $10,000 (up to a maximum of $50,000) for each 30-day period that the failure continues for more than 90 days after the IRS mails you a notice of your failure to file. Additional penalties can also be imposed if you underpay your tax as a result of a transaction involving a foreign financial asset that was not disclosed on the form.
The expansion of Form 8938 is just one example of a number of new reporting requirements that are reshaping the U.S. tax compliance horizon. At Expat Tax Professionals , we pride ourselves on closely monitoring the legislative changes that affect both individuals and entities with U.S. tax filing obligations. This allows us to provide our clients with the very best tax services and solutions.
By Ephraim Moss, Esq. & Joshua Ashman, CPA