New IRS Regulations on Reporting Obligations of Foreign Financial Assets by Domestic Entities

By Luca Cantelli, Esq.

On February 23, 2016, the Treasury Department published the final regulations for reporting of foreign financial assets by domestic entities.

As part of the Foreign Account Tax Compliance Act (FATCA), individual taxpayers and certain domestic entities are required to annually report to the U.S. IRS, on Form 8938, information about their foreign financial assets as defined by regulations, if the aggregate value of such assets is greater than $50,000 on the last day of the year, or above $75,000 at any time during the year.  The final regulations set out which domestic entities must file Form 8938.

Certain U.S. corporations (Delaware Corporations, for example), partnerships (Delaware Limited Liability Companies, for example), and trusts holding foreign financial assets are required to file form 8938.   A closely held corporation or partnership owned by a U.S. citizen or resident and whose main activity is to generate passive income, will be subject to the reporting requirement.  Likewise, a U.S. trust holding certain foreign financial assets for the benefit of a person who at any time during the taxable year is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the trust, will be required to file Form 8938.  Certain entities are excepted from reporting by the final regulations.  Entities that are not required to file an annual return with the IRS with respect to that taxable year are not required to file Form 8938.

Failure to report foreign financial assets on Form 8938 may result in a penalty of $10,000 and a penalty up to $50,000 for continued failure after IRS notification.

The regulations apply to taxable years beginning after December 31, 2015.

Our international tax attorneys are able to answer any additional questions regarding these new IRS regulations. Please contact us via our online form or call 212.267.7600.

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