Is Form 8938 required by “Green Card Holders” who are nonresidents by “treaty tie breaker”? – Any exemption is the result of “IRS grace”

Summary:

The context: Form 8938 was created by the IRS to meet the reporting requirements mandated by Internal Revenue Code S. 6038D. S. 6038D was mandated by S. 511 of the HIRE Act.

On March 18, 2010 President Obama signed the HIRE Act into law. The HIRE Act had two targets. The first target was the Foreign Financial Institutions that were willing to do business with U.S. citizens. The second target was Americans citizens who attempted to do business with any “non-U.S. bank or other financial institution.

The first target – Foreign Financial Institutions: The HIRE Act introduced Chapter 4 of Subtitle A – AKA FATCA – into the Internal Revenue Code. Pursuant to Chapter 4 Foreign Financial Institutions are threatened with a 30% sanction for failing to “Review, Identify and Report” those who the U.S. claims as “U.S. persons“. The Canadian FATCA lawsuit, launched by the Alliance For The Defence of Canadian Sovereignty, is related to the reporting requirements imposed on the banks.

The second target – American citizens attempting to use Foreign Financial Institutions outside the United States: The second group is composed of “individuals” who are required to disclose information to the IRS. The HIRE Act imposed extraordinary reporting requirements on Americans abroad. The most visible – Form 8938 – is an intrusive form that is aimed at targeting “individuals”. The term “individuals” means every human life form on the planet.  The U.S. based “FATCA Legal Action” lawsuit (which was condemned by Democrats abroad), is a lawsuit that is primarily intended to attack the requirements imposed on individual Americans abroad.

Internal Revenue Code Section 6038D and “Foreign Asset Disclosure”

A previous post discussed the interaction among: the Internal Revenue Code, tax treaty tie breaker rules and whether a Green Card Holder is a U.S. resident for FATCA purposes. This post is to discuss the form 8938 requirement and how it applies to Green Card Holders (resident aliens) who are deemed by treaty to be “nonresidents” under a treaty “Tie Breaker” rule.

The statute – Internal Revenue Code Section 6038D – gives the “Secretary” (meaning IRS) the right to create specific exemptions. “Nonresident aliens” is one group that the IRS is allowed to specifically exempt from the form 8938 requirement. Green Card Holders are statutory “resident aliens” under S. 7701(b) of the Internal Revenue Code. Yet, in some cases “Green Card Holders” can be treated as “nonresident aliens” pursuant to a tax treaty.

What is a “Treaty Tie Breaker” rule?

It’s possible for a person to be treated as a “tax resident” of two countries. In this case a Tax Treaty can be used to determine in which country the person is a “tax resident”. For example Section 2 of Article IV of the Canada U.S. Tax Treaty says:

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:

(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);

(b) if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;

(c) if he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and

(d) if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

(Note that the “Treaty Tie Breaker” rules are available to “Green Card” holders. The treaty “savings clause” prevents U.S. citizens from being treated solely as a resident of Canada.)

So, what do the IRS regulations say?

On December 29, 2014 the IRS removed the temporary regulations (which are described here) and issued final Form 8938 reporting rules. The final regulations, which took effect on December 29, 2014 (making them applicable for years 2014 and onward), make it clear that Green Card Holders, who pursuant to a treaty tie-breaker provision, are treated as “nonresidents” (nonresident aliens) are NOT required to file Form 8938.

Specifically, the IRS confirms that:

1. Dual resident taxpayers

A comment recommended an exemption from the section 6038D reporting requirements be included for an individual who is a dual resident taxpayer and who, pursuant to a provision of a treaty that provides for resolution of conflicting claims of residence by the United States and the treaty partner, claims to be treated as a resident of the treaty partner. In such a case, a dual resident taxpayer may claim a treaty benefit as a resident of the treaty partner and will be taxed as a nonresident for U.S. tax purposes for the taxable year (or portion of the taxable year) that the individual is treated as a nonresident. The final rule adopts this recommendation for a dual resident taxpayer who determines his or her U.S. tax liability as if he or she were a nonresident alien and claims a treaty benefit as a nonresident of the United States as provided in § 301.7701(b)–7 by timely filing a Form 1040NR, “Nonresident Alien Income Tax Return,” (or such other appropriate form under that section) and attaching a Form 8833, “Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).” The Treasury Department and the IRS have concluded that reporting under section 6038D is closely associated with the determination of an individual’s income tax liability. Because the taxpayer’s filing of a Form 8833 with his or her Form 1040NR (or other appropriate form) will permit the IRS to identify individuals in this category and take follow-up tax enforcement actions when considered appropriate, reporting on Form 8938, “Statement of Specified Foreign Financial Assets,” is not essential to effective IRS tax enforcement efforts relating to this category of U.S. residents.

Why this makes sense …

Form 8938 is for the purpose of requiring the reporting of “Foreign Financial Assets” to the IRS. A “nonresident alien” is subject to U.S. taxation on ONLY U.S. source income. Therefore, to require a “nonresident alien” to report information about non-U.S income, would be to require the reporting of information that was irrelevant to U.S. tax liability.

Note that for the tax years of 2011, 2012 and 2013 all Green Card Holders (whether subject to the Treaty Tie Breaker rules or not) were required to file – in addition to all other relevant information returns – Form 8938.

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Unless exempted by the IRS: Every “individual” on the planet is required to disclose their non-U.S. assets to the IRS!

Part 1: Prologue: President Obama explains why the world must disclose non-U.S. assets to the IRS

You will note that President Obama’s attitude seems to reflect the U.S. penchant for “territorial overreach” which has of late been topical.

Part 2: Internal Revenue Code – 6038D – It applies to the world, unless you are exempted by the IRS

– The law is only for the purpose of providing for the legality of the IRS Regulations

Internal Revenue Code Section 6038D “is U.S. law” and by its plain terms applies to everyone on the planet. The only people exempted from the scope of Section 6038D are those who the IRS specifically exempts. (Perhaps Section 6038D compliance should be checked at the point of entry into the United States?) The law applies to everyone!

26 U.S. Code § 6038D – Information with respect to foreign financial assets

(a) In general Any individual who, during any taxable year, holds any interest in a specified foreign financial asset shall attach to such person’s return of tax imposed by subtitle A for such taxable year the information described in subsection (c) with respect to each such asset if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amount as the Secretary may prescribe).

(b) Specified foreign financial assets For purposes of this section, the term “specified foreign financial asset” means—(1)any financial account (as defined in section 1471(d)(2)) maintained by a foreign financial institution (as defined in section 1471(d)(4)), and
(2) any of the following assets which are not held in an account maintained by a financial institution (as defined in section 1471(d)(5))—(A)any stock or security issued by a person other than a United States person,
(B)any financial instrument or contract held for investment that has an issuer or counterparty which is other than a United States person, and
(C)any interest in a foreign entity (as defined in section 1473).

(c) Required information The information described in this subsection with respect to any asset is:(1)In the case of any account, the name and address of the financial institution in which such account is maintained and the number of such account.
(2)In the case of any stock or security, the name and address of the issuer and such information as is necessary to identify the class or issue of which such stock or security is a part.
(3) In the case of any other instrument, contract, or interest—(A)such information as is necessary to identify such instrument, contract, or interest, and
(B)the names and addresses of all issuers and counterparties with respect to such instrument, contract, or interest.
(4)The maximum value of the asset during the taxable year.

(d) Penalty for failure to disclose(1) In general If any individual fails to furnish the information described in subsection (c) with respect to any taxable year at the time and in the manner described in subsection (a), such person shall pay a penalty of $10,000.
(2) Increase in penalty where failure continues after notification If any failure described in paragraph (1) continues for more than 90 days after the day on which the Secretary mails notice of such failure to the individual, such individual shall pay a penalty (in addition to the penalties under paragraph (1)) of $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of such 90-day period. The penalty imposed under this paragraph with respect to any failure shall not exceed $50,000.

(e) Presumption that value of specified foreign financial assets exceeds dollar threshold If—(1)the Secretary determines that an individual has an interest in one or more specified foreign financial assets, and
(2)such individual does not provide sufficient information to demonstrate the aggregate value of such assets,
then the aggregate value of such assets shall be treated as being in excess of $50,000 (or such higher dollar amount as the Secretary prescribes for purposes of subsection (a)) for purposes of assessing the penalties imposed under this section.

(f) Application to certain entities To the extent provided by the Secretary in regulations or other guidance, the provisions of this section shall apply to any domestic entity which is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if such entity were an individual.

(g) Reasonable cause exception No penalty shall be imposed by this section on any failure which is shown to be due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information is not reasonable cause.

(h) Regulations The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance which provide appropriate exceptions from the application of this section in the case of—(1)classes of assets identified by the Secretary, including any assets with respect to which the Secretary determines that disclosure under this section would be duplicative of other disclosures,
(2)nonresident aliens, and
(3)bona fide residents of any possession of the United States.
(Added Pub. L. 111–147, title V, § 511(a), Mar. 18, 2010, 124 Stat. 109.)

Interestingly, the statute requires “dual citizens” who are resident in their country of residence to obey U.S. law even if it means violating the laws of the country where they reside.

Early and interesting commentary on Internal Revenue Code S. 6038D is found in the following article by Michael Miller and Ellen Brody here.

Part 3: Law by regulations – The Treasury regulations (and the fate of all life forms on the planet) are here …

https://www.law.cornell.edu/cfr/text/26/1.6038D-2

https://www.law.cornell.edu/cfr/text/26/1.6038D-3

https://www.law.cornell.edu/cfr/text/26/1.6038D-4

https://www.law.cornell.edu/cfr/text/26/1.6038D-5

All of which is summarized by the IRS here …

https://www.irs.gov/businesses/corporations/do-i-need-to-file-form-8938-statement-of-specified-foreign-financial-assets

Part 4: The relationship between Form 8938 and Mr. FBAR is described here …

https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements

John Richardson