Alert: IRS issues guidance on Form 8938 filing requirements

On June 7, 2012, the IRS provided additional guidance on foreign financial assets that must be reported on Form 8938, specifically the reporting of tangible assets, collectibles, and gold.  The IRS clarified that tangible assets held directly do not have to be reported, but that “certificates” in tangible assets will be considered a specified foreign financial asset that must be reported.  Other guidance and clarifications were added to the IRS’s Frequently Asked Questions list.

U.S. individual taxpayers were first required to report specified foreign financial assets on Form 8938 (Statement of Specified Foreign Financial Assets - IRS Form 8938) that is includable on 2011 Forms 1040.  Form 8938 required disclosure of (1) foreign deposit and custodial accounts and (2) other foreign financial assets.  The IRS had previously provided guidance in a Frequently Asked Question format regarding “other foreign financial assets” but the questions lacked guidance on certain tangible assets, collectibles, and gold holdings.  With the IRS’s recent additions to their Basic Questions and Answers on Form 8938 (Form 8938 Basic Q), taxpayers now have more guidance on when tangible assets, collectibles, and gold do not have to be reported.

The IRS provided guidance on the reporting of specified foreign financial assets:

Taxpayers who meet the minimum filing thresholds (see our earlier Tax Alert at International Tax Alert Nov 2011) must report all specified foreign financial assets, including those with a de minimis value.

Taxpayers with foreign tangible assets (art, antiques, jewelry, cars, and other collectibles) or precious metals (i.e., gold) will generally not be required to report those assets on Form 8938 if the assets are held directly.  However, if tangible assets or precious metals are held through “certificates issued by a foreign person,” the indirect ownership would be considered a specified foreign financial asset.  This is consistent with prior informal IRS guidance regarding the reporting of land – i.e., land held directly is not reportable, but land held in a foreign trust is a specified foreign financial asset.

The IRS clarified that a foreign safe deposit box will not be considered a financial account.

The issue of required valuations continues to be an area with some uncertainty.  The valuation of deposit and custodial accounts can, generally, be reliably valued based on account statements, but the valuation of other specified foreign financial assets may not be as readily determinable.  The IRS indicated that valuations based on “information publicly available from reliable financial information sources or from other verifiable sources” may be used.  However, they further clarify that if this information is not available, “[a taxpayer does] not need to obtain an appraisal from a third party in order to reasonably estimate the asset’s maximum value during the year.”  While this does not provide much assistance, it should be noted that asset values are provided for information only.  The valuation of income from foreign assets is still subject to calculation under rules found in the Internal Revenue Code and the Regulations.

Lastly, the IRS also stated that taxpayers who did not submit a Form 8938 on their originally filed Form 1040 may submit the Form 8938 with a properly amended Form 1040X.  The IRS did not note whether penalties related to the late filing would be waived.  A “reasonable cause” statement should be attached to the amended return to have the best opportunity to avoid a penalty assessment.

For more information on individual filing requirements for Form 8938, please contact us using the information in the sidebar.