The Hiring Incentives to Restore Employment (HIRE) Act added IRC Section 6038D, requiring an individual taxpayer with an aggregate balance of more than $50,000 in foreign financial assets to file a disclosure statement (Form 8938, Statement of Foreign Financial Assets) with his or her income tax return, typically starting with the 2011 tax year for calendar year individuals. The penalty for failure to disclose the required information under Section 6038D for any taxable year will generally be $10,000. Separate significant penalties also exist for underpayments of tax that are attributable to undisclosed foreign financial assets.
Some examples of foreign assets and investments that must be disclosed are:
• Foreign bank accounts;
• Foreign pension assets;
• Foreign brokerage accounts; and,
• Interests in foreign partnerships and hedge funds.
Individuals should work with their investment advisors to create an inventory of all of their offshore assets that may potentially be subject to this new reporting requirement, and discuss these foreign assets with their tax advisor. To the extent possible, affected individuals may wish to consider disposing of their foreign assets prior to January 1, 2011 in order to avoid these additional disclosure requirements.
It should be noted that this new reporting requirement for foreign financial assets under Section 6038D is separate and distinct from the reporting of foreign bank and financial accounts (Form TD F 90-22.1, commonly referred to as FBAR) under the Bank Secrecy Act. Individuals may be required to file one, the other, or both reports, depending upon the specific facts.