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Impact of Form 8938 on the International Tax Compliance Structure

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The new IRS Form 8938 is not just another tax form that a taxpayer needs to file. Its reach and impact on taxpayer compliance and IRS ability to verify it are far more profound.

Yet, while the addition of Form 8938 to the long list of international tax compliance forms has created a burst of interest among various international tax attorneys (as evidenced in their writings), a very important assessment of the impact of Form 8938 on the rest of the IRS international tax compliance structure appears to be missing in these writings. It is this crucial strategic aspect of the new Form that I wish to address in this article.

Pre-8938 Structure of the IRS International Tax Compliance Requirements

In order to assess the impact of the IRS Form 8938 on the rest of the international tax compliance requirements, it is necessary to briefly explore the pre-8938 (or pre-FATCA (Foreign Account Tax Compliance Act) international tax compliance structure.

Prior to Form 8938, the IRS has already imposed a tremendous variety of reporting requirements on U.S. taxpayers with economic ties to the overseas. First and foremost, the FBAR (the Report on Foreign Bank and Financial Accounts) already forced the disclosure of the foreign bank and financial accounts which are either owned by the U.S. taxpayers or over which these taxpayers have signatory or other authority. Moreover, the FBAR disclosure is tied to the taxpayers’ tax returns through Section III of Schedule B.

From the business side, the IRS required the taxpayers to file a relevant tax form if to report partial or full ownership of a business entity (or if the taxpayer were a director or officer of such entity), including a disregarded business entity. The most prominent examples are Forms 5471, 8865, and 8858. On top of that, Form 3520 and 3520-A address foreign trust ownership and income issues.

Then, there are numerous other reporting requirements addressing such diverse issues as foreign gifts and inheritances, PFIC (Passive Foreign Investment Company) income, Controlled Foreign Corporations, and so on.

In essence, the IRS managed to cover huge areas of international economic activity with various forms and regulations. Moreover, in the past decade, all of these forms were supported by a radical, almost atrocious, increase in penalties in case of non-compliance.

Main Enforcement Problem With Pre-8938 Structure

If the IRS had all of these tools before FATCA, why did the IRS then need any additional forms?

A careful analysis reveals that, despite the presence of the multitude of various forms, it is still not easy to spot a taxpayer’s non-compliance or address all of the non-compliance issues in a given situation for one important reasons – these forms are not connected. Prior to FATCA, there was no form that would allow the IRS to immediately assess the extent of a taxpayer’s non-compliance.

Moreover, despite the number of various tax compliance forms, a lot of information still escaped the IRS. For example, suppose that T (a U.S. taxpayer) owns 15 percent of a business entity B in a country X; other owners are not U.S. taxpayers under any definition. Let us further suppose that business entity B possesses characteristics of a corporation and of a partnership. Assuming all other conditions are met, if B is a foreign corporation, then T would have to file Form 5471. However, if B is a partnership (and assuming all other conditions are met), T would not have to file Form 8865. T was able to classify it as a partnership for U.S. tax purposes, therefore, he needs to file neither Form 5471 nor 8865, leaving the IRS with no information (again, assuming this information would not fall under any other reporting requirement) of T’s foreign business ownership.

Form 8938 is a “Catch-All” Form That Fixes Enforcement Problem for the IRS

This is where Form 8938 comes in. In an example above, the Form 8938 may potentially force T to disclose the ownership information that did not need to be disclosed on Form 8865. If T is particularly unlucky, the IRS may decide to challenge his classification of the business entity, require him to file Form 5471 and impose non-compliance penalties under Form 5471.

This is just one possible scenario. In fact, Form 8938‘s reach is far more ambitious – it is the catch-all form that the IRS desired so much. The Form is directly tied to Forms 3520, 3520-A, 5471, 8621, 8865 and 8891. Moreover, it forces the taxpayers to re-state their foreign bank and financial accounts that should be reported on the FBAR, thereby allowing the IRS to identify with ease if a taxpayer has not complied with the FBAR requirements. Then, it imposes additional reporting requirements that may potentially expose any other taxpayer non-compliance (as in example above).

If that were not enough, failure to file Form 8938 will render the filing of a tax return incomplete, keeping the Statute of Limitations open until the Form is actually filed.

Impact of Form 8938: Breeding Ground for IRS Audits

Thus, Form 8938 is not just another tax compliance form. Rather, it is a fundamental, crucially-important tool which the IRS needs in order to effectively identify potential taxpayer non-compliance.

Hence, the most likely consequence of Form 8938 will the commencement of numerous IRS audits and investigations (which will also feed on the mountain of information obtained by the IRS through various voluntary disclosure programs) of the potentially non-compliant taxpayers. I also expect that the IRS ability to identify and challenge problematic classifications will be increased manifold.

Contact Sherayzen Law Office for Help With Form 8938

If you need help with Form 8938 or you are worried about your tax compliance exposure in light of Form 8938 or any other form, contact Sherayzen Law Office. Our experienced international tax firm will guide you through the complex web of international tax requirements, identify potential problem areas, create a plan of action to deal with these problems, and implement the plan while providing zealous ethical IRS representation.

IRS Form 8938 and Revised Form 8621 Filing Requirements Under Notice 2011-55

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The IRS recently released Notice 2011-55, partially suspending certain Foreign Account Tax Compliance Act (“FATCA”) information reporting requirements until Form 8938, (Statement of Specified Foreign Financial Assets), and a revised Form 8621, (Return by a Shareholder of a Passive Foreign Investment Company or a Qualified Electing Fund) are released.

It is important to note that while the reporting requirements of Forms 8938 and revised Form 8621 have been partially suspended, they have not been excused for taxpayers. Thus, taxpayers should be aware that until the new forms are issued, tax preparation may be necessary in order to be in compliance and avoid severe penalties.

FATCA Reporting Requirements

Congress enacted FATCA as part of the Hiring Incentives to Restore Employment Act (“HIRE” Act). Included in FATCA is the additional information reporting requirements of IRC Sections 6038(D) and 1298(f).

Under 6038(D), taxpayers who hold more than $50,000 in the aggregate in any financial account maintained by a foreign financial institution, or in any foreign stock, interest in a foreign entity (including a foreign trust, or financial instrument with a foreign counterpart that is not held in a custodial account of a financial institution) are subject to file a Form 8938 with their annual return.

IRC Code Section 1298(f) requires a U.S. person who is a shareholder in a passive foreign investment company (“PFIC”) to file an annual report, Form 8621. Notice 2011-55 states that the IRS will be issuing a revised Form 8621. Once the revised form is issued, individuals must retroactively file the revised Form 8621 for tax years beginning after the date of the HIRE Act (March 18, 2010).

The IRS is planning on also issuing further regulations regarding these reporting requirements.

Notice 2011-55

IRS Notice 2011-55 provides that the IRC 6038D Form 8938 reporting requirements are suspended until the form is released. Additionally, as noted above, for U.S. shareholders of PFIC’s who were not previously required to file Form 8621 under the current requirements before the enactment of Section 1298(f), reporting requirements are suspended (but not excused) until the revised Form 8621 is released. Taxpayers who are already required to file Form 8621 under the current instructions must continue to file the form.

When the IRS issues the revised forms, taxpayers who must file will be required to attach the appropriate forms to their next information return or tax return, completed for the suspended tax year. Failure to file (or to properly file) Form 8938 and/or Form 8621 for the suspended tax year may result in the extension of the statute of limitations under section 6501(c)(8), and penalties may also be applied.

A Form 8938 or revised Form 8621 filed for a suspended tax year with a timely filed information or tax return will generally be treated as having been filed in the date that the income tax or information return for the suspended tax year was filed.

Subject to certain exceptions, the statute of limitations for assessment of tax will not expire until three years after Form 8938 and/or revised Form 8621 is received by the IRS.

FBAR Requirements Not Affected

The IRS stated in Notice 2011-55 that the filing requirements of FinCEN Form 114 formerly Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts; “FBAR”) are not suspended under the notice.

Contact Sherayzen Law Office For Experienced Legal Help

This article is intended to give a brief summary of these issues, and should not be construed as legal or tax advice. Tax planning and reporting often necessitates an experienced understanding of complex regulations, statutes, and case law, and penalties for failure to comply can be substantial. If you have further questions regarding your own tax circumstances, Sherayzen Law Office offers professional advice for all of your Federal, international, cross-border, and state tax needs. Call or email for a consultation today.