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IRS Releases Rules on Reporting Foreign Financial Assets for Tax Years Ending after December 31, 2015

IRS Releases Rules on Reporting Foreign Financial Assets for Tax Years Ending after December 31, 2015

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The IRS released Treasury Decision 9752, which now mandates that certain domestic corporations, partnerships, trusts and individuals are subject to Form 8938, Statement of Specified Foreign Financial Assets.

A domestic corporation or partnership that (a) directly or indirectly holds foreign financial assets, and (b) has at least 50 percent of its gross income or assets as passive, will have to report said foreign financial assets.

Corporations or partnerships may use either fair market value or book value to determine the value of their assets (as reflected on the entity’s balance sheet and as determined under either a U.S. or an international financial accounting standard). The Treasury Department and the IRS believe that a 50 percent passive assets or income threshold appropriately captures situations in which individuals may use a domestic corporation or partnership to circumvent certain reporting requirements.

Treasury Decision 9752 adopts several modifications to the term “passive income” for these reporting purposes, including:

  • An exemption from the definition of passive income for active business gains or losses for the sale of commodities;
  • An exemption from the definition of passive income for rents and royalties derived through an active trade or business; and
  • Inclusion of notional principal contracts in the definition of passive income, as defined by Reg §1.466-3(c)(1).

An aggregation principle exists whereby domestic corporations and partnerships that have an interest in specified foreign financial assets and are closely held by the same individual are treated as a single entity.

A domestic trust may be subject to reporting as well if it has an interest in foreign financial assets with an aggregate value exceeding the reporting threshold, and an individual that is a “current beneficiary.” A current beneficiary includes any holder of a general power of appointment, whether or not exercised, that was exercisable at any time during the tax year, but does not include any holder of a general power of appointment that is exercisable only on the death of the holder.

Failure to comply with reporting foreign financial assets can lead to harsh IRS penalties. If you have any questions or concerns related to foreign tax compliance or reporting, please reach out to a member of Withum’s International Services Team at international@withum.com.

Mark Farber, CPA, Partner Mark Farber, CPA, Partner
212-751-9100
mfarber@withum.com
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Stroh-CJ CJ Stroh, Esq.
609-520-1188
cstroh@withum.com

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To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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