A US Person that owns US entities like corporations or partnerships that conduct cross-border business may have a Form 8938 (Statement of Specified Foreign Financial Assets) filing obligation. IRS defines Specified Individuals as:
- US citizens
- Resident Aliens of the US
- Non-Resident Aliens who makes an election to be treated as resident alien for purposes of filing a joint income tax return
- Non-Resident Aliens who are bona fide residents of American Samoa or Puerto Rico
- Individuals that have an interest in specified foreign financial assets that require to be reported
- Individuals that the aggregate value of their specified foreign financial assets is more than the reporting threshold
Since 2011, Specified Individuals have been required to report their Specified Foreign Financial Assets via IRS Form 8938. However, the requirement for Specified Domestic Entities was deferred until the final regulations were released in February, 2016. The reporting threshold for the Specified Foreign Financial Assets of Specified Domestic Entities is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
What is a Specified Domestic Entity?
- A closely held domestic corporation that receives at least 50 percent of its gross income from passive income, or at least 50 percent of its assets produce or are held for the production of passive income.
- A closely held domestic partnership that receives at least 50 percent of its gross income from passive income or at least 50 percent of its assets produce or are held for the production of passive income.
- A domestic trust that has one or more specified persons (a Specified Individual or a Specified Domestic Entity) as a current beneficiary.
The US Tax compliance landscape is continually changing. IRS is closing the circle on non-compliant taxpayers. Through Form 8938, all specified US Persons (including those living abroad) are obligated to report their foreign financial accounts and assets on an annual basis to IRS. This now applies to certain corporations and partnerships.
US Persons that own Specified Domestic Entities ought to keep in mind that IRS has cross-reference checks. For instance, the Foreign Banks may have to report the owners of these entities through the FATCA report (IRS Form 8966). Moreover, Form 8938 asks for the Global Intermediary Identification Number (GIIN) of the Financial Institution. So, IRS has more sources of information to cross-reference. The more information that IRS can cross-reference, the more revenue it can raise. Consequently, it will be able to assess more penalties and sanctions – this is now the case for certain Specified Domestic Entities.
US Persons that own domestic companies that conduct offshore transactions that don’t fall under the current definition of Specified Domestic Entities should take this as a warning. IRS could expand the definition of Specified Domestic Entity in a future guidance. Business owners should not be victims of their own making. If you are a business owner with ownership in business entity that conducts offshore transactions, consult your tax specialist.