International Tax Issues Update: What You Need to Know
There are a couple of changes related to businesses required to file Form 8938 (when they were previously exempt) and individuals who are not eligible for U.S. Social Security Numbers needing to renew their Individual Taxpayer Identification Number (ITIN) numbers that impact the 2016 filing season. A few of the issues and requirements necessary to account for these changes are outlined below.
Business Entities Now Required to File Form 8938
New for the 2016 tax year, some business entities are now required to file Form 8938 to report specified foreign financial assets. Historically, only individuals were required to file this form, which is often criticized for being duplicative of the foreign bank account reports (FBAR), especially when reporting foreign bank accounts. However, Regulations were finalized in 2016, with provisions effective tax year 2016 and beyond, related to specific entities and their filing requirements.
According to the final Regulations, entities (called “specified domestic entities”) required to file Form 8938 generally include domestic corporations or partnerships if:
- The corporation or partnership is “closely held” (80 percent of the vote or value or 80 percent of the profits or capital interests) by a U.S. citizen or resident alien (in limited cases can include certain nonresident aliens);
- At least 50 percent of the corporation or partnership’s gross income for the taxable year is considered to be passive income (including but not limited to dividends, interest, rent, royalties, etc.) or at least 50 percent of the corporation or partnership’s assets for the taxable year are assets that produce or are held for the production of passive income; and,
- The total value of the entity’s specific foreign financial assets is more than $50,000 on the last day of the year or more than $75,000 at any time during the year.
Note, a domestic trust that has one or more U.S. persons as a current beneficiary has the same reporting thresholds indicated above.
The failure to file Form 8938 can result in penalties of $10,000 per form. The penalty increases by $10,000 for each 30-day period (limited to $50,000) beginning 90 days after the IRS mails a notice of failure to file.
Individuals that are not eligible for a U.S. Social Security Number must have an ITIN assigned to them by the IRS in order to file a U.S. tax return. Many previously issued ITINs expired as of Jan. 1, 2017.
ITINs with middle digits of 78 and 79 expired on Jan. 1, 2017. Additionally, any ITINs that were not used on a tax return for tax years 2013, 2014 or 2015 also expired Jan. 1, 2017. If you plan to file a tax return and claim a refund during 2017 or later, you need to renew your ITIN. If your ITIN is only being used on informational returns (e.g. Form 1099), an ITIN renewal is not necessary.
In order to renew an ITIN, you must submit a completed Form W-7 (Application for IRS Individual Taxpayer Identification Number) and all required identification documents to the IRS. The documents that need to be attached to the Form W-7 can be hard to obtain. First, you must submit documentation to establish your identity and foreign status. There are 13 acceptable documents that can help you support your foreign status or identity that are defined in the instructions to Form W-7. Second, you must submit original documents, or certified copies of these documents from the original issuing agency, to support the information on the Form W-7. Any documentation provided must be current and not expired.
If you file your tax return before receiving the ITIN renewal paper, the return will be processed and treated as timely filed but will not include any exemptions and/or credits and no refund will be paid. Once the ITIN is renewed, the exemption and credits will be processed and any refund will be paid. It can take nine to 11 weeks to get notification of an ITIN renewal (via the mail on a Form CP565).
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