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Specified Domestic Entity: Passive Test | FATCA Form 8938 Lawyer & Attorney

This article is published as part of a long series of articles on the Specified Domestic Entity (“SDE”) Definition. In a previous article, I stated that the term “formed or availed of” consists of two legal tests: the Closely-Held Test and the Passive Test. Since I already explained the general requirements of the Closely-Held Test in another article, I would like to focus today on the Passive Test.

The Passive Test: Background Information

Starting tax year 2016, business entities classified as SDEs may be required to attach Form 8938 to their US tax returns. What entity is considered to be SDE? The answer is found in Treas. Reg. §1.6038D-6(a): “a specified domestic entity is a domestic corporation, a domestic partnership, or a trust described in IRC Section 7701(a)(30)(E), if such corporation, partnership, or trust is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets.”

I already explained in a previous article that “formed or availed of” is a term of art and a requirement that an entity meets two legal tests: the Closely-Held Test and the Passive Test.

The Passive Test: General Requirements

The Passive Test consists of two threshold requirements: the Passive Income Threshold and the Passive Assets Threshold. If one of these Thresholds is satisfied, the Passive Test is met and a business entity would be considered as formed or availed of for the purposes of holding specified foreign financial assets. Let’s explore these two requirements in more detail.

The Passive Test: the Passive Income Threshold

The Passive Income Threshold is satisfied if “at least 50 percent of a corporation’s or a partnership’s gross income for the taxable year is passive income.” Treas. Reg. §1.6038D-6(b)(1)(ii). The definition of passive income includes:

“(A) Dividends,

(B) Interest;

(C) Income equivalent to interest, including substitute interest;

(D) Rents and royalties, other than rents and royalties derived in the active conduct of a trade or business conducted, at least in part, by employees of the corporation or partnership;

(E) Annuities;

(F) The excess of gains over losses from the sale or exchange of property that gives rise to passive income described in paragraphs (b)(3)(i)(A) through (b)(3)(i)(E) of this section;

(G) The excess of gains over losses from transactions (including futures, forwards, and similar transactions) in any commodity, but not including –

(1) Any commodity hedging transaction described in section 954(c)(5)(A), determined by treating the corporation or partnership as a controlled foreign corporation; or

(2) Active business gains or losses from the sale of commodities, but only if substantially all the corporation or partnership’s commodities are property described in paragraph (1), (2), or (8) of section 1221(a);

(H) The excess of foreign currency gains over foreign currency losses (as defined in section 988(b)) attributable to any section 988 transaction; and

(I) Net income from notional principal contracts as defined in § 1.446-3(c)(1).” Treas. Reg. §1.6038D-6(b)(3).

The Treasury Regulations also contain certain exceptions to the definition of passive income (for example, for dealers).

The Passive Test: the Passive Assets Threshold

The Passive Assets Threshold is satisfied if at least 50 percent of the assets held by a corporation or a partnership for the taxable year “are assets that produce or are held for the production of passive income.” Treas. Reg. §1.6038D-6(b)(1)(ii). Such assets are called “passive assets”. Id.

The percentage of passive assets held by a corporation or a partnership during a taxable year is determined based on “the weighted average percentage of passive assets (weighted by total assets and measured quarterly).” Id. This is very similar to the PFIC test.

The regulations allow for two different methods of valuation of the assets for the purpose of the Passive Asset Threshold. The first method is Fair Market Value of the assets. The second method is valuation of assets based on the “book value of the assets that is reflected on the corporation’s or partnership’s balance sheet.” Id. Surprisingly, both US and an international financial accounting standard are permitted for the purpose of the valuation of assets (usually, only US GAAP is allowed).

Contact Sherayzen Law Office for Professional Help with FATCA Form 8938 Compliance

If you are concerned about whether your entity is required to file Form 8938 or you have any other FATCA-related questions, please contact Sherayzen Law Office for professional help. Sherayzen Law Office is an international tax law firm that specializes in the US international tax compliance, including FATCA Form 8938 compliance. We have helped hundreds of US taxpayers with their FATCA requirements and We can help You!

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Specified Domestic Entity Form 8938 Filing Threshold | FATCA Lawyer

The Specified Domestic Entity Form 8938 filing threshold is likely to be very easily satisfied by the majority of Specified Domestic Entities. With the major tax return filing deadlines just two or three months away (depending on whether an entity is a corporation, a partnership or a trust), every Specified Domestic Entity must assess whether it is required to file FATCA Form 8938. Failure to do so may result in imposition of Form 8938 penalties by the IRS.

Specified Domestic Entity Form 8938 Filing Threshold

For tax years beginning after December 31, 2015, a Specified Domestic Entity must file Form 8938 if the total value of its Specified Foreign Financial Assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year. This is an incredibly low Specified Domestic Entity Form 8938 filing threshold that pretty much means that virtually all Specified Domestic Entities will have to file a Form 8938.

Transition Years Are Most Dangerous

Transition tax years 2016, 2017 and 2018 are likely to be the most dangerous for Specified Domestic Entities. Since the Specified Domestic Entity Form 8938 filing threshold is very low and the awareness of the Specified Domestic Entity Form 8938 filing obligation is limited to a small number of specialized tax professionals, there can be no doubt that many Specified Domestic Entities will fail to comply with their Form 8938 filing obligations and may face steep Form 8938 penalties.

Contact Sherayzen Law Office for Help with the Specified Domestic Entity Form 8938 Filing Obligations

If your business or a trust is classified as a Specified Domestic Entity and your entity failed to file FATCA Form 8938,  contact Sherayzen Law Office for professional help. Our international tax law firm specializes in helping business and individuals with their US international tax compliance requirements, including Form 8938, and with their offshore voluntary disclosures involving a Form 8938.

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FATCA Form 8938 Foreign Life Insurance Reporting | FATCA Lawyers

FATCA Form 8938 Foreign Life Insurance Policy reporting is one of the most obscure US tax requirements with which many US taxpayers fail to comply. In this article, I would like to explore FATCA Form 8938 foreign life insurance policy reporting.

FATCA Form 8938 Foreign Life Insurance Reporting: Types of Foreign Life Insurance Policies

In a previous article, I already described the three main types of foreign life insurance policies: traditional policies, cash-surrender non-investment policies and investment policies. The traditional policies refer to straightforward life insurance policies with no cash-surrender value; in essence, this is the traditional understanding of what a life insurance policy should be – a sum of money paid out at death to a policy beneficiary.

The cash-surrender non-investment policies are foreign life insurance policies that have cash-surrender value which, usually, can be obtained at any point prior to the maturity of the policy. There is usually no income associated with a policy, but this is not always the case. The cash-surrender value grows over time mostly through premiums, automatic increases in value and a system of bonuses.

Finally, the investment policies are foreign life insurance policies with a cash-surrender value which largely depends on the growth in investments which underlie the policy. While there might be a death benefit to the policy, the investment life insurance policies are usually simply investment accounts wrapped into a life insurance format. Assurance Vie policies in France is a typical example of such a foreign life insurance policy.

FATCA Form 8938 Foreign Life Insurance Reporting: What is Form 8938

FATCA Form 8938 is a relatively recent addition to the already large list of the U.S. international tax forms; yet, it is already the most comprehensive form in the IRS arsenal. FATCA Form 8938 was born out of the feared Foreign Account Tax Compliance Act (FATCA) and it was first due with the 2011 tax return.

FATCA Form 8938 basically requires the reporting of three types of assets. First, it almost duplicates FBAR with respect to reporting foreign bank and financial accounts (with important exceptions, such as signatory authority accounts); more information with respect to these accounts, however, must be supplied by the reporting taxpayer. Second, FATCA Form 8938 introduces the requirement to disclose the ownership of a whole new class of assets which normally would not be reported on any tax form (e.g. paper stock certificates). These are so-called “Other Specified Foreign Assets”. Finally, FATCA Form 8938 requires the taxpayer to report whether he disclosed any assets on Forms 5471, 8865, 8621, 3520 and 3520-A.

FATCA Form 8938 has its own set of independent penalties associated with Form 8938 noncompliance.

FATCA Form 8938 Foreign Life Insurance Policy Reporting Requirements

FATCA Form 8938 Foreign Life Insurance Policy reporting is very similar to the FBAR Foreign Life Insurance Policy reporting. In general, the traditional life insurance policies with no cash-surrender values are ordinarily not reportable (although, there are exceptions). On the other hand, cash-surrender non-investment policies and investment policies should be reported on FATCA Form 8938.

This is just the general guidance. The determination of whether your specific foreign life insurance policies should be reported on FATCA From 8938 must be left to an international tax attorney; I strongly discourage any attempt by US taxpayers to make this determination without professional legal assistance.

Contact Sherayzen Law Office for Help With FATCA Form 8938 Foreign Life Insurance Policy Reporting

You should contact the experienced international tax law firm of Sherayzen Law Office for any legal help with your FATCA Form 8938 Foreign Life Insurance Policy reporting. Foreign life insurance policies can be extremely complex and the US reporting requirements associated with them vary from country to country. Sherayzen Law Office has accumulated tremendous experience in dealing with foreign life insurance policies from Australia, Canada, New Zealand, Europe and Asia.

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FBAR and Form 8938 Filings Continue to Grow

On March 15, 2016, the IRS announced that there was continuous growth in the FBAR and Form 8938 filings. While the IRS attributes this growth in FBAR and Form 8938 filings to the greater awareness of taxpayers, one cannot underestimate the impact of the FATCA letter and the increasing knowledge of foreign financial institutions with respect to U.S. tax reporting requirements.

Background Information for the FBAR and Form 8938 Filings

FBAR and Form 8938 are the main forms with respect to reporting of foreign financial accounts and (in the case of Form 8938) “other specified assets”. The Report of Foreign Bank and Financial Accounts, FinCEN Form 114 (commonly known as “FBAR”) should be filed by U.S. taxpayers to report a financial interest in or signatory authority over foreign financial accounts if the aggregate value of these accounts exceeds $10,000. This form is associated with draconian noncompliance penalties.

IRS Form 8938 was created by the famous Foreign Account Tax Compliance Act (“FATCA”). Generally, U.S. citizens, resident aliens and certain non-resident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds the required thresholds (the lowest threshold is $50,000, but it varies by taxpayer). The noncompliance with respect to Form 8938 may result in additional penalties, including $10,000 per form.

IRS Registers Sustained Increase in the FBAR and Form 8938 Filings

Compliance with FBAR and, later, Form 8938 is one of the top priorities for the IRS according to the IRS Commissioner John Koskinen. Recent statistics with respect to the FBAR and Form 8938 filings support the conclusion that the IRS has been largely successful in achieving this task.

The IRS states that the FBAR filings have grown on average by 17 percent per year during the last five years, according to FinCEN data. In fact, in 2015, FinCEN received a record high 1,163,229 FBARs.

Similar, but far less successful trends can be seen with respect to Form 8938 filings. In 2011, the IRS received about 200,000 Forms 8938, but the number rose to 300,000 by the tax year 2013. However, it seems to have stagnated at the same number judging from the statistics for the tax year 2014.

While the lower number of Forms 8938 could be explained by the novelty of the form as well as higher thresholds, it appears that some Forms 8938 might not also be filed due to mistaken calculation of the asset base used to determine whether Form 8938 filing requirements were met.

Nevertheless, overall, it appears that the FBAR and Form 8938 filings have grown sufficiently for the IRS to be satisfied with its progress.

Contact Sherayzen Law Office for Professional Help with Your FBAR and Form 8938 Filings

U.S. international tax law is incredibly complex and the penalties are excessively high. If you were supposed to file FBARs and Forms 8938 in the past, but you have not done so, you need to contact Sherayzen Law Office as soon as possible. Mr. Sherayzen and his legal team will thoroughly analyze your case, assess your potential tax liabilities, determine the available voluntary disclosure options, and implement (including the preparation of all legal documents and tax forms) the voluntary disclosure option that fits your case best.

Contact Us Today to Schedule Your Confidential Consultation!