Deadline to report Foreign Account Holdings

The deadline (June 30, 2012) for certain taxpayers to report accounts they hold in foreign banks and other financial institutions has gone by .

By June 30, 2012, citizens and residents of the United States, as well as domestic partnerships, corporations, estates and trusts, must generally file Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR) if:

An "Issue of Fundamental Fairness"  In a speech in April, IRS Commissioner Douglas H. Shulman said, "We view offshore tax evasion asan issue of fundamental fairness. Wealthy people who unlawfully hide their money offshore aren't paying the taxes they owe, while schoolteachers, firefighters and other ordinary citizens who play by the rules are forced to pick up the slack." Over the past four years, Shulman explained, the IRS has "significantly increased" the resources and focus on offshore tax evasion. The IRS has also given taxpayers a chance to come forward voluntarily and avoid criminal charges. Through the end of 2011, the IRS has had approximately 33,000 voluntary disclosures from individuals who came in under several special programs started in 2009. To date, these individuals have paid back taxes and penalties amounting to more than $4.4 billion. "We are now mining the information we have received to date and have launched our next wave of investigations on banks, bankers, intermediaries and taxpayers," Shulman said.

1. They have a direct or indirect financial interest in, or signature authority over, one or more accounts in a foreign country. This includes bank accounts, brokerage accounts, mutual funds, trusts or other types of foreign financial accounts.

2. The total value of the accounts exceeds $10,000 at any time during the calendar year.

Taxpayers also may be subject to FBAR compliance if they file an information return related to: certain foreign corporations (Form 5471); foreign partnerships (Form 8865); foreign disregarded entities (Form 8858); or transactions with foreign trusts and receipt of certain foreign gifts (Form 3520).
Some individuals are exempt.
Exceptions to the Reporting RequirementThere are FBAR filing exceptions for the following United States persons or foreign financial accounts:

• Certain foreign financial accounts jointly owned by spouses;
• United States persons included in a consolidated FBAR;
• Correspondent/nostro accounts;
• Foreign financial accounts owned by a governmental entity;
• Foreign financial accounts owned by an international financial institution;
• IRA owners and beneficiaries;
• Participants in and beneficiaries of tax-qualified retirement plans; and
• Certain individuals with signature authority over, but no financial interest in, a foreign financial account.

To determine eligibility for an exception, consult with your tax adviser.
Take the FBAR requirement seriously. Several legislative changes, as well as a clarification of the IRS's interpretation of the "willful standard," have led to increased enforcement and stiffer penalties for noncompliance of foreign account reporting requirements.

The IRS states that the form "is a tool to help the United States government identify persons who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad."

Failing to file an FBAR can result in the following penalties:

• A civil penalty of as much as $10,000 if the failure was not willful. This penalty may be waived if income from the account was properly reported on the income tax return and there was reasonable cause for not reporting it.
• A civil penalty equal to the greater of 50 percent of the account, or $100,000, if the failure to report was willful.
• Criminal penalties and time in prison.

Consult with your tax adviser if you have an interest in, or authority over, a foreign account. Your tax adviser can ensure you meet the reporting requirements and remain in compliance with the law.

The Hindu Business Line article - Disclosure initiative with a twist

The Finance Bill, 2012, requires all residents to provide information on foreign assets for taxation, and this includes dividends.

Anubhav Sharma, a US resident, returned to India from USA after a fairly long stint of employment. He stayed abroad for approximately 10 years, and while he was in the US, he invested in mutual funds and shares via a brokerage account. The dividends were reinvested, and taxes were paid as necessary in the US, as he filed a resident US return. Anubhav returned to India a few years ago when he was deputed by his company to oversee their India operations, and he has been working here ever since. Anubhav didn't redeem funds in his brokerage account, and the account continues to yield dividends on his investments, though no fresh investment was made post his return to India.

Anubhav has filed his India tax returns as a resident, since he surrendered his green card. He hasn't reported these dividends on his India return, as dividends are exempt from tax in India, and he assumed that this rule would apply to foreign dividends as well. Anubhav recently came across an article which explained in detail the provisions of the Finance Bill 2012 with reference to assets held abroad.

NEW TAX RULES

Though the Bill is yet to be passed in Parliament, the CBDT (Central Board of Direct Taxes) has already notified the new tax forms for this fiscal. The new rules require all residents, including those who aren't ordinarily resident, to provide information on overseas assets owned by them.

Having filed resident returns in USA, Anubhav is quite familiar with the provisions of the Banking Secrecy Act and the FBAR — Foreign Bank Account Reporting in USA which requires all US citizens and resident return filers to disclose all foreign financial assets in excess of $10,000. In fact, 2011 onwards, US requirements have become more stringent in that all citizens must now also file an additional form along with the US tax return, which not only discloses the assets abroad, but also lists the income earned from these assets and the schedule of the tax return on which the said income is listed. There is, of course, a threshold limit for the disclosure. So now, the disclosure ties to the tax return and makes sure that foreign income doesn't escape the tax net.

The Indian government has now embarked on a similar initiative. All resident filers (including those who aren't ordinarily resident) must declare details of bank accounts, financial interest in any entity, immovable property, as well as any foreign account for which they have signature authority. So far, it seems to only be a disclosure or information-reporting requirement. While this move may seem stringent, especially to expats whose status isn't ordinarily resident, one must analyse the move from a wider perspective.

TAXABILITY OF DIVIDENDS

This move is an effort to curb black money and widen the tax net. On the face of it, expats may claim that the rule is hard on them, since they aren't permanent residents of India. However, it must be noted that the US disclosure rules are also similar — one may not be a permanent resident or citizen but if one files a resident tax return, then one falls under the purview of the disclosure rules. In this light, Anubhav will need to show his foreign assets, namely the brokerage account, and he may need to consider taxability of dividends based on the Double Taxation Avoidance Agreement.

The Finance Bill isn't through yet, but another one of its related provisions also states that tax assessments may be reopened for the previous 16 years, in case any concealment is detected. There is ambiguity in this, since the normal statute of limitations requires that income tax records be maintained by taxpayers for a period of six years only. A similar conflict also arose in the US disclosure programme. The statute of limitations in USA is 3 years, so any adjustments to taxes prior to that period need taxpayer concurrence.

The last Offshore Voluntary Disclosure initiative programme in the US covered a period of eight years from 2003 to 2010. The conflict due to the statute of limitations was simply resolved by getting taxpayers to sign an agreement to reopen assessments for the whole 8-year period, in return for a reduced penalty framework. One can only guess that something along similar lines is being contemplated in the Indian scenario as well.

According to the finance ministry, the provisions are aimed at residents whose global income must be taxed in India, but there is still some ambiguity, and the CBDT may need to be very explicit regarding the qualifying conditions and threshold limits which will be used to determine if someone falls under the purview of these rules.

(The author is a Coimbatore-based chartered accountant.)

http://www.thehindubusinessline.com/features/mentor/article3311677.ece

Tax changes of 2011 to note!

Tax season is nearly over for the 2011 tax year: just about 10 days remain until Tax Day (remember that you have until April 17, 2012, to file your 2011 individual federal income tax return).

If you haven’t yet filed, here’s your chance to get caught up on what was new for the 2011 tax season:

1. There is no Schedule M and no Making Work Pay Credit.                         

    The Making Work Pay Credit which was available for taxpayers in 2009 and 2010 is not available for 2011. That means there is no Schedule M to file and there is no additional credit for the year.

2. There is a payroll tax cut for employees. 

For 2011 (and now, for 2012), employees who receive a form W-2 received a tax break of 2% on FICA contributions during the year: instead of paying in at 6.2% for Social Security taxes, contributions were 4.2% for Social Security taxes. Contributions for Medicare remained the same. The break is automatic (meaning no forms or schedules to fill out) and it will not affect your 2011 federal income tax return since it’s tied to Social Security payroll taxes. The benefit maxed out when you hit the Social Security cap ($106,800 for 2011). Taxpayers who didn’t pay into the Social Security system during the year will not receive a benefit.

3. There is a payroll tax cut equivalent for self-employed taxpayers. 

If you self-employed, you will receive the benefit of the payroll tax cut when you file your federal income tax return in the form of an adjustment to your SE (self employment) tax due. Your SE tax will be reduced by 2%; the SE tax rate of 12.4% is reduced to 10.4%.

4. There’s a new form in town, the federal form 1099-K. The federal form 1099-K, Merchant Card and Third Party Network Payments, is making its debut for the 2011 tax season. Taxpayers who have a credit card merchant account, Paypal account or similar account and otherwise meet the criteria will receive form 1099-K from their service provider.

5. You might see your health care benefits on your form W-2. 

Employers with more than 250 workers must beginreporting on the value of health care benefits paid on an employee’s behalf on forms W-2 in 2012. Some are already doing this for 2011 so if it pops up on your form W-2, don’t panic. The amount appears in Box 12, using code DD. It does not affect your taxable income.

6. Standard deductions haven’t changed much. 

The standard deduction rates are largely the same for 2011. They are $5,800 for single taxpayers or those married taxpayers filing separately, $11,600 for married taxpayers filing jointly and $8,500 for taxpayers filing as head of household. The additional standard deduction allowed for senior citizens and taxpayers who are legally blind is $1,150 for married taxpayers filing jointly and $1,450 for single taxpayers.

7. Personal exemptions haven’t changed much either. 

The personal exemption amount for 2011 is $3,700, an increase from $3,650 in 2010.

8. Brokers are now reporting your cost basis for certain stocks on your 1099-B. 

The 2011 federal form 1099-B,Proceeds From Broker and Barter Exchange Transactions, has new boxes for the date you bought a stock; your cost or basis (including adjustments for commissions and splits); whether your gain or loss was short or long term; and even if the transaction was a wash sale. The new requirements are only required for stock bought on or after Jan. 1, 2011; mutual funds bought on or after Jan. 1, 2012; and bonds, options and private placements bought on or after Jan. 1, 2013.

9. Yet, again, there’s band-aid relief for Alternative Minimum Tax (AMT).

There’s no real reform for AMT… again. What we do have is a small boost in the AMT exemption for 2011 to $74,450 for taxpayers filing jointly, $48,450 for single taxpayers and those filing as head of households, and $37,225 for married couples filing separately. Remarkably, it’s still not adjusted for inflation.

10.  You must check the box, if applicable, for Report of Foreign Bank and Financial Accounts (FBAR). 

No, this isn’t new but the IRS has made FBAR reporting a compliance issue. While FBAR forms aren’t due until June, you may need to to check the applicable box on Schedule B when you send in your return. And this time, the IRS swears that they really, really mean business.

So, there you have it: those are the most noteworthy changes taxpayers realized in the 2011 tax year. It’s a quick and dirty summary. Your situation may require a bit more detail so if you have any questions, check with your tax professional.

How to know if an IRS audit is round the corner?

With ever improving improved detection systems and computerized checks, the IRS can more easily identify red flags that trigger audits.

Contact typically starts with a letter requesting more information and can lead to in-person meetings. It is usually triggered by a tax return that contains something unusual, such as an above-average deduction or change in income from previous years. As long as the taxpayer can defend his filings with the proper paperwork and logic, he has nothing to worry about--other than the time it takes to respond.

Here are a few of the signs you need to take note of:

1. Earning a lot less money last year.

The IRS looks out for any major changes in income, which can signify that a taxpayer is under-reporting his earnings. As the IRS tracks historic data, people who suddenly start reporting much less income can be flagged for an audit.

2. High incomes.

According to IRS 2010 enforcement results, your chance of being audited triples once your income crosses $200,000.

3. Over-sized medical expenses.

Medical expenses - You only can deduct these costs to the extent they're greater than 7.5 percent of your adjusted gross income, and it's important to have detailed records.

Any higher-than-average deduction in any category will send out a signal to the IRS that all is not right.

4. You work for yourself. 

It might not seem fair, but being self-employed can raise red flags for the IRS, especially if you claim your home office and other costs as business expenses but don't earn much income. The best advice is to keep careful track of all paperwork so you can defend any deductions and credits you take.

Home offices -  You can only take a home office deduction if you regularly and exclusively use part of your home as your principal place of business. If your office doubles as the kids' playroom, forget about it. For details, see IRS Publication 587.

5. You claim losses from a hobby. 

While writing off business expenses can be legitimate, it's illegal to pretend a hobby is a business and then write off the related expenses. For example, if you enjoy woodworking, you might practice the craft on the weekends for fun. Doing so does not enable you to write off the cost of wood and tools. (If you were selling those creations online, that would be a different story.) The difference between a small business and a hobby is that a business "must be entered into and conducted with the reasonable expectation of making a profit."

6. Deducing home office (or car) expenses. 

While plenty of people can legitimately claim home office expenses on their taxes, some people do so incorrectly. Merely checking email from home after work, for example, does not justify a home office deduction. In order to qualify, the home office must be used for work only. Likewise, claiming a car as a business expense can also raise red flags; taxpayers doing this need to keep careful track of how much they use the car for business versus personal use.

7. You included expensive meals and entertainment costs among your deductions.

The IRS often double-checks these types of claims to make sure they are legitimate business expenses, says Perry.

8. You were particularly generous this year. 

The IRS is on the lookout for people who inflate their charitable donations, and the agency takes a close look at taxpayers who say they donated $500 or just under, since anyone who donates more than that amount must file form 8283. (And if you do donate more than $500, be sure to file that form.)

Charitable deductions. - You'll need a canceled check or dated receipt for any cash contributions, and contributions of $250 or more require a written acknowledgement from the charity. If you made a noncash contribution valued at more than $5,000, you'll need an expert appraisal to back up your claim.

9. You maintain an overseas bank account. 

The IRS has added more reporting requirements this year for people with money in foreign accounts. Failing to report one could trigger an audit.

10. Your numbers don't match. 

If numbers on various forms don't match or add up correctly, the IRS is likely to notice and look into any disparities. So treat your taxes like a final exam in algebra and check over all the numbers before submitting.

As long as you know you filed your paperwork properly, you can sit back and enjoy any refunds coming your way.

For more on getting through an IRS audit, refer to our earlier blogpost http://gkminc.blogspot.in/2011/11/how-to-get-through-irs-audit.html.

Failed to file FBAR for your offshore funds?

The failure to file a Foreign Bank Account Report TD F 90-22.1 (FBAR) for an offshore bank account has led to the seizure of an Alaska plastic surgeon's $4.6 million dollar account at a Seattle branch of Bank of America. According to the complaint filed in District Court Alaska plastic surgeon Michael Brandner was involved in a contested divorce proceeding with his wife, and decided to hide around $4.6 million from her by depositing the funds in a foreign bank account in Panama held in the name of a nominee offshore company. The complaint alleges that he drove the money from Alaska to Panama in the form of several cashier's checks. He was assisted in the transaction by an individual he met in Panama.

As luck would have it the person who Brandner sought assistance from got caught up in an investigation into a totally unrelated stock fraud scheme, and began cooperating with the government. Reading between the lines here it seems that the so-called cooperating witness spilled the beans on Brandner in order to try and get some leniency in whatever mess he was involved in. The cooperating witness told the government that he had advised Brandner of the obligation to file an FBAR reporting for the offshore Panamanian account on at least two occasions. 

The cooperating witness also advised Brandner that a new tax treaty with Panama might compromise the secrecy of his offshore account. Brandner then inquired if there was any other place he could hide the Panamanian funds. With the assistance of the cooperating witness created an offshore entity which then opened up an account at Bank of America held in the name of the foreign LLC. Homeland Security Investigations (HSI) then promptly seized the account in a civil in rem forfeiture action.

There are a number of lessons to be learned other than don't try and cheat your wife in a divorce action. Clients always ask our tax litigation attorneys variations of the question: "How is the IRS going to find out about my offshore bank account." The truth is that the IRS may not find out, but the consequences can be dire if they do. In Brandner's case he had the bad luck to trust someone who later came to have his own problems (which were not even tax problems) with the authorities. Always keep in mind that if two people know a secret it's not a secret. 

The government has attempted to use the civil forfeiture statute to seize 100% of the proceeds of offshore funds for failure to file an FBAR. It certainly significantly ups the stakes; especially since there is nothing to stop the IRS from criminally prosecuting Brandner for willfully failing to file an FBAR, or criminal tax fraud and that may be the next episode in this drama.

As a technical matter it is not clear to our tax litigation lawyers that the IRS has the right to seize the proceeds of an account simply because no FBAR was filed. 

If you have an undeclared offshore bank account it is past time for you to get solid advice from a tax litigation attorney about your options. 

Who must file new Form 8938?

For tax years beginning after March 18, 2010, certain individuals must file new Form 8938 to report the ownership of specified foreign financial assets if the total value of those assets exceeds the reporting threshold amount.

Who Must File?

Unless an exception applies, you must file Form 8938 if you are a specified person that has an interest in specified foreign financial assets and the value of those assets is more than the applicable reporting threshold.

Exception

If you do not have to file an income tax return for the tax year, you do not have to file Form 8938, even if the value of your specified foreign financial assets is more than the appropriate reporting threshold.

Specified individual: 

You are a specified individual if you are one of the following:

1. A U.S. citizen

2. A resident alien of the United States for any part of the tax year

3. A nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return

Specified foreign financial assets: 

Generally include the following assets:

1. Any financial account maintained by a foreign financial institution.

2. To the extent held for investment and not held in a financial account, any stock or securities issued by someone that is not a U.S. person, any interest in a foreign entity, and any financial instrument or contract with an issuer or counterparty that is not a U.S. person.

Reporting threshold: 

If the total value of your specified financial assets is more than the following:

	Taxpayer living in United States		Taxpayer living abroad
	On the last day of the tax year	Anytime during the tax year	On the last day of the tax year	Anytime during the tax year
Unmarried	$50,000	$75,000	$200,000	$300,000
Married filing jointly	$100,000	$150,000	$400,000	$600,000
Married filing separately	$50,000	$75,000	$200,000	$300,000

Form 8938 does not relieve you of the requirement to file FBAR form TD F 90-22.1

IRS penalties on submission of tax returns & FBAR forms

If you are a US Citizen residing abroad, you should prioritize prompt filing of  both US income tax returns and also FBAR forms every year (reporting non-US bank and financial accounts). US government numbers indicate that several million honest folks around the world have simply not been doing this.

After many years of requests, the IRS have at long last relented and agreed publicly not to charge penalties if there is “reasonable cause” for not sending in all of the forms on time. As with so much of the tax law, reasonable cause is a complicated concept which can only be decided based on the specific facts in each case.

The new IRS rule does mean that every time an FBAR is sent late the IRS is expecting a letter explaining why penalties should not be charged. This letter is a document that needs extremely detailed and careful drafting. Getting just a few words wrong could truly lead to huge penalties - in some cases even running into the millions of dollars.

Tips:
1. Ensure every FBAR has been filed for the last 6 years
2. If anything “irregular” shows up, file these late FBARs within the next few weeks, together with a reasonable cause request
3. Always – without fail – get a professional opinion on the reasonable cause wording because the risk is just too big for anyone to ever try to do this without help.

Filing Form 8938 Does Not Eliminate FBAR Filing

On December 19, 2011, temporary regulations were published in the Federal Register outlining new filing requirements for “specified persons” having an interest in specified foreign financial accounts (SFFAs).
January 9, 2012 by Janice Eiseman, JD, LLM
Code section 6038D, effective for tax years beginning after March 18, 2010, requires new filing requirements for “specified persons” having an interest in “specified foreign financial accounts.” (SFFAs). On December 19, 2011, Temporary Regulations were published in the Federal Register outlining these new filing requirements. Treasury Decision (T.D.) 9567,  76 F.R. 78594-01. The Internal Revenue Service (IRS) also issued Form 8938 (PDF), the form designed under section 6038D, along with instructions. Filing Form 8938, if applicable, is required for tax years ending after December 19, 2011. Consequently, clients meeting the filing requirements must file Form 8938 with their 2011 tax returns. The instructions provide a detailed summary of the Temporary Regulations. This article provides citations to the temporary regulations and its preamble to help you find information that may not be provided in the instructions.
Note: Filing Form 8938 does not eliminate Report of Foreign Bank and Financial Accounts (FBAR) filing. SFFAs reported on Form 8938 must be reported on an FBAR if required on the FBAR (Preamble, section 6D)). However, duplicative reporting of an SFFA is not required:
If a taxpayer completes information required in Part IV, Form 8938 and Reports an SFFA on timely filed Forms 3520 (PDF), 3520-A (PDF), 8621 (PDF), 5471 (PDF),8865 (PDF) or 8891 (PDF). Temp. Reg. §1.6038D-7T. This exclusion does not eliminate filing Form 8938; it simply eliminates listing SFFAs on Form 8938. These excluded SFFAs are still counted for purposes of calculating threshold reporting amounts. Temp.  Reg. §1.6038-2T(a)(6). Specified Persons
Which clients may have to file Form 8938 with their 2011 returns? The 2011 filing requirement does not apply to domestic entities. Proposed Regulations also published December 19, 2011, contain rules on which domestic partnerships, corporations and trusts will be required to file Form 8938. (Proposed Reg. §1.6038D-6, REG-130302-10, 76 F.R. 78594-01.) Until Proposed Regulation § 1.6038D-6 is issued as a final regulation, no domestic entity is required to file Form 8938. (Preamble, section 5.)
Generally, individual clients who are U.S. citizens and resident aliens, are subject to the filing requirement provided they hold interests in SFFAs meeting the threshold amounts. The list of “specified individuals,” who may have to file Form 8938, is set forth at Temp. Reg. §1.6038D-1T(a)(2). However, specified individuals are not required to file Form 8938 if they are not required to file a return with respect to such taxable year. Temp. Reg. § 1.6038-2T(a)(7).
Specified Foreign Financial Assets
SSFAs are composed of two classes distinguished by whether a foreign financial institution (as defined in code section 1471(d)(4)) is involved:
Financial accounts (defined in code section 1471(d)(2)) maintained by a foreign financial institution are reported on Part I, Form 8938 and, Other foreign financial assets (defined in Temp. Reg. §1.6038D-3T(b)) held for investment and not held in a foreign financial institution account are reported on Part II, Form 8938. Financial assets held in a financial account maintained at a foreign financial institution are not required to be separately listed. Temp. Reg. § 1.6038D-3T(a)(1).
Financial accounts maintained by U.S. payors, defined in Treasury Regulation § 1.6049-5(c)(5)(i), are excluded from the definition of SFFAs. Temp. Reg. §1.6038D-3T(a)(3)(i). Such payors include U.S. branches of foreign financial institutions and foreign branches of U.S. financial institutions. Also excluded are financial accounts for which the specified person uses mark-to-market accounting under section 475 for all of the holdings in the account. Temp. Reg. §1.6038D-3T(a)(3)(ii).
“Other foreign financial assets” listed in Temp. Reg. §1.6038D-3T(b)(1) come within one or more of the following three categories:
Stock or securities issued by a non-US person, A financial instrument or contract that has an issuer or counterparty, which is a non-US person and An interest in a foreign entity with special rules for foreign trusts and estates. A U.S. person is defined in section 7701(a)(30). To be an SFFA, the asset must fit under one of these categories and it must also be held for investment. If an asset is used in a trade or business, it is not an SFFA. Temporary Regulation §§ 1.6038D-3T(b)(4) and (5) set forth rules on determining whether an asset is used in a trade or business. They state that stock can never be considered as used in a trade or business. In Preamble section 2B, the IRS asks for comments on the trade or business provisions and the treatment of stock.
Financial assets are excluded if the specified individual uses mark-to-market accounting under section 475 for the asset. Temp. Treas. Reg. §1.6038B-3T(b)(2). Beneficial interest in a foreign trust or estate is not an SFFA unless the specified person knows or has reason to know based on readily accessible information of the interest. Receipt of a distribution from the foreign trust or estate constitutes actual knowledge. Temp. Reg. §1.6038D-3T(c).
Threshold Levels for Reporting
Your clients are not required to file Form 8938 unless they meet threshold levels set forth in Temp. Reg. §1.6038D-2T(a). Different types of taxpayers have different levels. For example, married taxpayers filing jointly living in the U.S. must file if the aggregate value of all SFFAs in which either individual holds an interest that exceeds $100,000 on the last day of the taxable year or more than $150,000 at any time during the taxable year. Individuals are considered tohold an interest in the SFFAs owned by their disregarded entity. They are considered to hold an interest in the SFFAs held by their grantor trust, except for domestic investment or bankruptcy trusts. They do not hold an interest in SSFAs owned by a partnership, corporation, trust (except for grantor trust rule set forth in prior sentence) or an estate solely because they are a partner, shareholder or beneficiary. Temp. Reg. § 1.6038D-2T(b)(3).
Detailed rules on how to value an SFFA are set forth in Proposed Treasury Regulation § 1.6038D-5T. If the SFFA is valued in a foreign currency, then the currency must be converted to U.S. dollars using the currency exchange rate on the last day of the taxable year even if the asset has been disposed of prior to the last day of the taxable year. Temp. Reg.  §1.6038D-5T(c).
Consequences of Not Filing Form 8938
Failure to file can result in a penalty of $10,000, which can be increased up to $50,000 for failure to file after IRS notification. No penalty will be imposed if the specified person can show the failure is due to reasonable cause and not due to willful neglect. (Temp. Reg. §1.6038D-8T.) There is a 40-percent penalty on an understatement of tax attributable to any undisclosed foreign financial asset, which includes assets with respect to which information is required under section 6038D. I.R.C. § 6662(j).
Failure to file extends the statute of limitations for the tax year until the taxpayer provides the required information. If the failure is due to reasonable cause and not willful neglect, then the statute is extended only with regard to the items relating to the failure rather than the entire tax year (I.R.C. § 6501(c)(8)). Furthermore, the statute is extended to six years after the return is filed if the taxpayer omits $5,000 from gross income attributable to an SFFA without regard to the reporting threshold or any reporting exceptions under section 6038D(h)(1)  (I.R.C. § 6501(e)(1)).