FedTax Foreign Reports

Temporary Relief for New Foreign Reporting Requirements.

By Stuart R. Josephs, CPA
The August 2010 California CPA discussed the requirement to report information with respect to foreign financial assets under new IRC Sec. 6038D. The October 2010 issue indicated that the IRS form was not yet released for disclosing interests in specified financial assets under Sec. 6038D. This requirement was added to the Internal Revenue Code by the 2010 Hiring Incentives to Restore Employment (HIRE) Act (P.L. 111-147) enacted March
18, 2010.

The HIRE Act also added Sec. 1298(f), effective March 18, 2010, to require U.S. persons who are passive foreign investment company (PFIC) shareholders to file an annual report containing such information as the IRS may require. Before Sec. 1298(f)’s enactment, PFIC shareholders were required to file Form 8621 in certain circumstances.

On April 6, 2010, the IRS published Notice 2010-34 which provided that PFIC shareholders not otherwise required to file Form 8621 annually before Sec. 1298(f)’s enactment would not be required to file an annual report under Sec. 1298(f) for tax years beginning before March 18, 2010.

The IRS intends to issue regulations under secs. 6038D and 1298(f) and release Form 8938, “Statement of Specified Foreign Financial Assets,” and a revised Form 8621, modified to reflect Sec. 1298(f)’s requirements.

New Rules
An individual required to report an interest in one or more specified foreign financial assets under Sec. 6038D will be required to attach Form 8938 to the individual’s income tax return for the tax year to report the required information.

A PFIC shareholder required to report information under Sec. 1298(f) must attach the revised Form 8621 to the PFIC shareholder’s income tax return or information return (e.g., Form 1065 “U.S. Return of Partnership Income”) for the tax year to report the required information.

Interim Guidance
IRS Notice 2011-55 (IRB 2011-29, July 18, 2011) suspends these new information reporting requirements until the IRS releases Form 8938 and revised Form 8621.

Individuals with reporting requirements under Sec. 6038D may have to file an income tax return for a tax year before the IRS releases Form 8938. Notice 2011-55 suspends this requirement for these individuals to attach Form 8938 to income tax returns that are filed before Form 8938’s release.

Similarly, PFIC shareholders that would not be required to file Form 8621 under the current instructions to that form may, under Sec. 1298(f), have to file an income tax return or information return (e.g., Form 1065) for a tax year beginning after March 17, 2010, but before the IRS releases revised Form 8621. Pending release of revised Form 8621, modified to reflect Sec. 1298(f)’s requirements, Notice 2011-55 suspends the Sec. 1298(f) reporting requirement for tax years beginning after March 17, 2010, for PFIC shareholders that are not otherwise required to file Form 8621 as provided in the current instructions to Form 8621.

PFIC shareholders with Form 8621 reporting obligations as provided in the current Form 8621 Instructions (e.g., upon disposition of PFIC stock or with respect to a qualified electing fund under Sec. 1293) must continue to file the current Form 8621 with an income tax return or information return filed before the release of revised Form 8621.

Following the release of Form 8938 or revised Form 8621, individuals and PFIC shareholders for which the filing of Form 8938 or 8621 has been suspended under Notice 2011-55 for a tax year (suspended tax year) will be required to attach Form 8938, Form 8621, or both, as appropriate, for the suspended tax year to their next income tax return or information return required to be filed with the IRS.

Statute of Limitations
Under Sec. 6501(c)(8), the period of limitation for assessment of tax with respect to periods for which reporting is required under secs. 6038D or 1298(f) will not expire before three years after the date on which the IRS receives Forms 8938 or 8621, as appropriate, for the tax year. A Form 8938 or 8621 filed for a suspended tax year with a timely filed income tax return or information return (taking into account extensions), as required by Notice 2011-55, will be treated as having been filed on the date that the income tax return or information return for the suspended tax year was filed. The failure to furnish Forms 8938 and 8621 for the suspended tax year, as described in Notice 2011-55, may result in the extension of the period of limitation for the suspended tax year under Sec. 6501(c)(8) and penalties may apply.

FBAR Requirements
Compliance with secs. 6038D and 1298(f) does not relieve a person of the responsibility to file Form TD F 90-22.1, “Report of Foreign Bank and Financial Accounts,” (FBAR) if the FBAR is otherwise required to be filed.
Stuart R. Josephs, CPA, has a San-Diego-based Tax Assistance Practice that specializes in assisting practitioners in resolving their clients’ tax questions and problems. Josephs is chair of the Federal Subcommittee of CalCPA’s Committee on Taxation.