FBAR, Form 8938 Filing Requirements Leading to Confusion, Some Practitioners Say

Taxpayers and practitioners continue to grapple with confusion over layers of requirements to report foreign financial assets to the government on two separate forms, stakeholders told BNA in recent interviews.

The two reporting regimes, Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), and the brand new Form 8938, Statement of Specified Foreign Financial Assets, have some similarities but many differences that are creating difficulties even as IRS works to help taxpayers comply, some practitioners said.

Taken together, the two sets of requirements are a complex facet of the government’s increased focus on learning about overseas assets held by U.S. taxpayers, practitioners said.

With respect to the FBAR and the Form 8938, “The notion of this overlapping regime is utterly ridiculous to the average taxpayer,” Andy Mattson, a certified public accountant with Mohler, Nixon & Williams, Campbell, Calif., told BNA May 25.

Rules Stem From Different Areas of Law.

The FBAR is used by taxpayers to report their foreign bank accounts to the government. The Form 8938 implements new tax code Section 6038D, which recently took effect under the Foreign Account Tax Compliance Act.

Form 8938 requires taxpayers to report a broad range of “specified foreign financial assets,” with significant differences from the FBAR. The two regimes stem from different areas of the law and have different aims, which practitioners said is difficult for many taxpayers to understand.

“I think that’s the main area of confusion that I keep hearing about,” Michelle Koroghlanian, a technical manager with the American Institute of Certified Public Accountants, said in a May 24 interview.

She pointed out that the FBAR and the Form 8938 are “two very different, separate systems.”

Contrast Between Regimes.

FBAR stems from the Bank Secrecy Act and is aimed at gathering information to help the government stop money laundering and other types of illegal activity, Koroghlanian said.

By contrast, Koroghlanian said, the Form 8938 implements part of the Internal Revenue Code and is specifically aimed at ensuring taxpayers are disclosing their overseas assets to IRS.

“A lot of people who are preparing the reporting don’t necessarily understand that background,” she said.

The Internal Revenue Service has stressed since the Form 8938 was first unveiled in January (245 DTR G-6, 12/21/11) that it is different from the FBAR, and that taxpayers may have to file both even if some of what is reported is similar on both forms.

IRS unveiled a comparison chart in March (67 DTR G-3, 4/9/12) detailing similarities and differences.

While in general, taxpayers must only report their foreign financial accounts on the FBAR, assets such as hedge funds, equity funds, and pension funds must be revealed on the Form 8938.

Koroghlanian called the chart “a wonderful idea” and said taxpayers would appreciate any further clarity IRS could provide on which assets need to be reported.

More Guidance Sought.

“We’re all trying to interpret the rules and figure out whether they apply to Asset X,” Koroghlanian said. “What is or is not required to be filed would be helpful, especially because of the penalties that could apply.”

She said it is her understanding that IRS already is trying to do some internal matching of the information it is receiving on these forms, and that process is likely to step up as other parts of the Foreign Account Tax Compliance Act move forward.

In addition to the Section 6038D reporting, another key facet of that legislation is its requirement that foreign banks report U.S.-owned accounts to IRS or face, in some cases, a 30 percent withholding tax.

Eventually, she said, as the government begins to get this information from banks, IRS is likely to begin matching that external bank information to what taxpayers report on their returns.

‘Lots of Uncertainties.’

Mattson told BNA May 25 that even the FBAR by itself is creating difficulties for taxpayers. Under regulations issued in February 2011, “there are a lot of subtleties that people don’t understand,” he said.

He said there are “lots of uncertainties” in the FATCA regulations as well.

For example, he said, while taxpayers are required to report foreign interests in partnerships and foreign company stock on the Form 8938, there is no guidance on valuation. This makes it tough for taxpayers to know if they have met the threshold that would require reporting, Mattson said.

The accountant also said there is an apparent conflict between the guidance (REG-130302-10, T.D. 9567) IRS issued on Section 6038D reporting in December 2011 (241 DTR GG-1, 12/15/11) and a subsequent set of frequently asked questions and answers the agency issued in February.

Mattson said the conflict comes in the area of the treatment of foreign rental property.

Under the FAQ, IRS said foreign real estate such as a personal residence or a rental property does not have to be reported as a specified foreign financial asset. However, according to Mattson, there is language under the rules that appears to contradict this stance with regard to rental property.

Guidance Sought on Valuation, Rental Property.

Guidance on valuation and rental property issues is needed as IRS works on the rules, he said.

Mattson said that in general, determining what needs to be reported on which form is a difficult exercise—one that even creates a struggle for practitioners.

“None of this stuff is intuitive,” he said. “I get questions from my partners at my firm. People want to comply, but it’s really confusing.”

But IRS has been dealt a difficult hand by Congress in addressing these issues, he said.

“I think that to a certain extent, the people who are working on this at the IRS have been given an impossible task,” said Mattson, who serves on AICPA’s FBAR Task Force. “Congress provided no guidance. They basically said, `Here’s this mess and you deal with it.’ ”

Speaking to BNA May 24, Joseph Calianno, an attorney with Grant Thornton LLP and chair of AICPA’s International Taxation Technical Resource Panel, said he believes IRS has been doing a good job of communicating to taxpayers the central idea that even if taxpayers file one of the two forms, that does not alleviate the requirement to file the other one if it would be otherwise required.

Separate Reporting Requirements Stressed.

“Each one is a separate filing that you have to do,” he said. “Filing the FBAR does not relieve you of filing the Form 8938 if that is otherwise required.”

Kevin Packman, an attorney with Holland & Knight LLP in Miami, said he believes the reporting requirements for the FBAR and the Form 8938 are simply too complex.

“You shouldn’t have to get yourself legal counsel or a CPA to fill out these forms,” he told BNA in a May 25 interview. “This area is ripe for confusion, no matter what you do with charts and guidance, because the rules are so different.”

He cited the differences in what must be reported, such as the wide range of filing thresholds, different filing times, and potential penalties associated with failure to file as problematic.

Differences Outlined.

In some key differences, taxpayers are required to report on Form 8938 but not the FBAR:

• foreign stock or securities held in a foreign financial account at a foreign financial institution,
• foreign stock or securities not held in a financial account,
• foreign mutual funds, and
• foreign hedge funds and foreign private equity funds.

For purposes of determining who must file, for Form 8938, the United States does not include the U.S. territories, while resident aliens of both U.S. territories and territory entities are subject to FBAR reporting.

The Form 8938 filing threshold is $50,000 on the last day of the tax year or $75,000 at any time during the tax year, with higher thresholds applying to married individuals filing jointly and individuals living abroad.

By contrast, FBAR reporting applies to financial accounts that are worth $10,000 or more at any time during the calendar year.

Among a range of other differences, the two forms also define when someone has an interest in an account differently and impose different penalties.

Penalties Detailed.

For Form 8938, taxpayers face up to a $10,000 penalty for failure to disclose and an additional $10,000 for each 30 days of nonfiling after IRS notice of a failure to disclose. The penalty has a maximum of $60,000 on the civil side, but criminal penalties are also possible.

For the FBAR, non-willful failure to report carries a penalty of up to $10,000. However, if the failure is willful, IRS can impose a penalty up to the greater of $100,000 or 50 percent of the account balance, with criminal penalties also possible.

Packman said despite taxpayer concerns, there is little chance that the government would either eliminate the FBAR or make the Form 8938 filing requirements lighter for those who do file the FBAR.

“That can’t happen because they’re two different bodies of law,” the Holland & Knight attorney said. “Some people think you don’t have to do the FBAR if you do the 8938, and that’s clearly not the case.”

Expatriation on the Rise.

Packman said that the reporting for foreign financial accounts and assets has gotten so onerous and confusing that a number of his clients are considering expatriating or have already done so.

“We’re getting more phone calls about expatriation than we’ve fielded at any time since 2008,” he told BNA. “It’s being driven by the overlying confusion and frustration. U.S. citizens are feeling like they’ve never been less proud of being American.”