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Form 8938 and Others – Headaches for Fund Investors

February 16, 2011
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I was reading TNT today and the following jumped at me. It was a comment by Jane A. Bruno about Form 8938, the FBAR and the recently enacted reporting obligations that affect US residents that live and work abroad. The comment had some well reasoned remarks and observations and a pleading tone asking Treasury to discontinue this avalanche of information collection and reporting requirements that could drive taxpayers mad.  The comment reminded me that it is tax season and that many fund investors will be filing their individual tax returns soon.  Well, in the last few years it seems that there has been plenty of developments in this area but nothing definitive has come up thus far in the form of guidance.

What new forms and reporting requirements should fund investors pay attention to?  First, they should pay attention to the form mentioned in the heading – Form 8938.  That form applies not only to citizens living abroad but to all kinds of fund investors.  Last year Congress enacted  IRC 6038D.  That section basically requires any individual that has an interest in a foreign financial asset valued at more than $50,000 in the aggregate to report the maximum value of the account.  The Government plans to use Form 8938 for this reporting.  So far this form is in draft form and Treasury has requested comments.  It is not clear when this form will be finalized and put in circulation but considering that  Treasury will most likely require people to file the form as soon as possible, the form will proably be finalized soon.  What is a financial asset?  Well, the definition basically cross-references to the newly enacted FATCA law (IRC 1471 et seq).  The FATCA law clearly encompasses foreign investment funds (maybe some exceptions will be in place soon, but as of now, pretty much all foreign private equity, hedge funds and venture capital funds appear to be included).  What does this mean?  It means that investors in these funds will have to file this form.  Well, this begs the question of course how you determine the highest value of the financial asset/account (i.e. the value of the interest in the fund).  One would guess that the metric is FMV which in turn could put some investors in a predicament.  For some funds FMV may not be easy to determine and this information may be hard to get. Not entirely clear whether the IRS is considering this right now.

What else?  In addition to the above form, the PFIC reporting law changed.  Now under new IRC 1298(f) everybody will have to file Form 8621 or some other form that Treasury conceives for this purpose.  Prior to this law investors in offshore hedge or private equity funds treated as corporations had to file the form either if they made a QEF election or in few other limited circumstances.  Apparently there is no revised form or instructions as of now.  At least Treasury has provided some relief in respect of this filing requirement. In Notice 2010-34 Treasury provided that “[s]hareholders of a PFIC that were not otherwise required to file Form 8621 annually prior to March 18, 2010, will not be required to file an annual report as a result of the addition of § 1298(f) for taxable years beginning before March 18, 2010.”

Lastly, a discussion about investment funds, investors and filing requirements would be nothing without mentioning FBAR. Sadly, things are not entirely clear regarding whether fund investors have to file FBARs for years 2010 and after.  As I mentioned in other posts on this blog Notice 2010-23 provided relief for calendar years 2009 and earlier. However, no regulations are finalized that address whether investors in non-mutual funds (i.e. hedge, private equity or venture capital) have to file FBARs and the new FBAR form remains in draft form.  Due to this state of affairs some practitioners advise that FBAR forms should be filed protectively.  As a separate matter, an FBAR form may be required if the investor has a signature authority over bank accounts held by the fund.  One can only hope that Treasury will soon come up with clear and definitive guidance regarding FBAR and the other forms applicable to investors.  It is worthwhile to keep an eye on all of these forms and any future guidance that comes up on this subject. The penalties for noncompliance could be harsh and correcting the mistakes could be costly.  Of course, these forms are in addition to any other forms an investor may have to file such as Form 5471, 8865 and so on.

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