Final regulations on reporting by individuals of foreign financial assets to IRS

The Treasury Department and IRS yesterday released for publication in the Federal Register final regulations (T.D. 9706) concerning the requirement that individual taxpayers report to the IRS specified foreign financial assets for tax years beginning after March 18, 2010 (the date of enactment of the FATCA rules).

The final regulations provide guidance relating to the requirement that individuals attach a statement to their income tax return to provide required information regarding specified foreign financial assets in which they have an interest. Proposed regulations addressing the application of these rules to domestic entities remain in proposed form and will be finalized at a later date.

These regulations finalize regulations that were proposed in December 2011, and remove corresponding temporary regulations. Among the items addressed in the final regulations or in the preamble to the final regulations are measures concerning:

• The reporting requirements of dual resident taxpayers
• Individuals who are residents of the United States under non-immigrant visas
• Persons that do not owe U.S. tax for the tax year
• Reporting threshold amounts
• Employees who are seconded to work in the United States
• Clarifications of reporting requirements for certain assets, such as nonvested property under section 83, assets held by a disregarded entity, and jointly owned assets

The final regulations, which have an effective date of Dec. 12, adopt a recommendation that dual resident taxpayers who determine their U.S. tax liabilities as nonresident aliens and claim a treaty benefit are exempt from reporting on their tax returns specified foreign financial assets under tax code section 6038D.
Other provisions of the regulations, or the preamble, address short-term accounts, assets in an account maintained by a foreign financial institution, life insurance with a cash surrender value, assets held for investment or not used in the taxpayer’s business, certain hedging transactions, employment contracts, shares of foreign companies traded on public stock exchanges, investments in social security or social insurance programs, interests held in foreign trust, among other topics.

The final regulations declined to adopt requests made, in comments to the proposed regulations, to eliminate duplicate reporting related to Form 8938 and the requirement to report foreign financial accounts on FinCEN Form 114 (generally referred to as the “FBAR”). Also, the preamble to the final regulations notes that the IRS and Treasury Department are considering the proper treatment of virtual currency under section 6038D and request comments on this topic.