Hypothetical:
I'm a green card holder living in Florida with my wife. Years ago, I opened a Swiss bank account, which I've jointly owned since then with a girlfriend I have on the side. Since opening it, I've funded the account with distributions from a foreign pension plan, which is from my prior career (before I moved to the U.S.). My wife, a U.S. citizen with whom I file taxes jointly, doesn't know about the account, the pension plan, or even the prior career. On January 15 of last year, my girlfriend withdrew the full balance (about $150,000) and “ghosted” me. Shaken by the experience, I immediately closed the account and have been loyal to my wife ever since. Can I avoid filing a Form 8938 for last year? I love my wife. Our family, work, friends, and assets are all here. We're getting along these days, and I don't want to alert her to the affair, even if I'm out of the withdrawn funds.
We'll set aside the wisdom of your life choices and focus on information-reporting obligations under I.R.C. § 6038D. Your question, as phrased, is narrow in scope and addresses only one of the reporting implications that may arise from the facts.(1)
Preliminary issues:
Are you a “specified person”?
First, as a green card holder, you're a “[r]esident alien of the United States” and thus, by extension, a “specified individual” and “specified person” under Treas. Reg. § 1.6038D-1(a). See Code section 7701(b) and Treas. Reg. § 301.7701(b)-1(b). Indeed, aside from the Swiss account, your entire life in recent years has been in Florida.
Did you hold an interest in a specified foreign financial asset?
Second, let's consider the extent of your interest(s), if any, in “specified foreign financial assets.” See Code section 6038D(a). You informally reference a “Swiss bank account.” If you engaged the firm, I'd need to verify that the account is, in fact, a “specified foreign financial asset.”
- Assume the account is a “financial account” because it is a “depository account maintained by [a bank].” See Code section 1471(d)(2)(A); Treas. Reg. § 1.1471-5(b) (defining financial account, depository account, etc.).
- Further assume the bank is a well-known financial institution organized under Swiss law, and we can readily conclude it is a “foreign financial institution” under Code section 6038D(b)(1). See Code section 1471(d)(4); Treas. Reg. § 1.1471-5(d).(2)
- Although the general definition of “specified foreign financial asset” appears met, Treas. Reg. § 1.6038D-3 carves out exceptions. Most relevant, the exception for “[a]ccounts maintained by U.S. payors,” in turn, relies on the “U.S. payor” definition under Treas. Reg. § 1.6049–5(c)(5)(i). In certain instances, U.S. branches of foreign banks qualify, and accounts they maintain are thereby excepted. Before continuing, we'd want to be sure you were not, in fact, referring to such a branch. (Over the years, I've observed individuals make casual references or characterizations that have required clarification before an engagement could begin in earnest.)
Suppose no exception applies. As a result, you're a “specified person” who, as recently as last year, held an interest in at least one “specified foreign financial asset.”
What reporting threshold applies?
Your reporting threshold is based on your classification as a married “specified individual” and joint filer.(3) You and your wife meet the threshold if the total value of all specified foreign financial assets in which either you or she held an interest exceeded one or both of the following:
- $100,000 on the last day of the taxable year; or
- $150,000 at any time during the taxable year.
Treas. Reg. § 1.6038D-2(a)(2) (boldface and underlines added). You closed the account in January of last year, so the $150,000 level is the relevant criterion.(4) At least two questions remain.(5)
How does joint ownership of the Swiss account affect the determination of value in applying such threshold?
To apply the threshold, let's first identify the asset's value that you must take into account. For this purpose, we'll turn to the default rule for joint ownership, under Treas. Reg. § 1.6038D-2(c)(1)(i).
Specifically, as a “specified person” and “joint owner of a specified foreign financial asset,” you “must include the entire value of the specified foreign financial asset” for this purpose.(6) (Boldface and underline added). Thus, you must use 100% of the Swiss account's value for your measurement relative to the reporting threshold.
Okay, but what is the account's value?
Assume we obtain clarification from the (hypothetical) questioner concerning the amount on deposit last year. We learn the account held 138,400 Swiss francs at all times prior to the withdrawal and closure in January of that year. If we use the U.S. Treasury Department's Bureau of the Fiscal Service foreign currency exchange rate (the “Bureau Rate”) on December 31, 2022, we convert this value to approximately $149,946.(7) This falls below the previously referenced threshold.
But wait. What about an interest in the foreign pension plan?
Lest we forget, you appear to have an interest in the foreign pension plan itself, which is distinct from the Swiss account funded with its distributions. This interest is likely a “specified foreign financial asset,” and it probably will cause you to exceed the aggregate-value reporting threshold.(8) To be sure, you haven't provided all relevant facts, and we can certainly dive into them, such as the source of the pension, the extent of “readily accessible information” on its fair market value, and the timing and extent of distributions. But based on the limited facts provided, the reporting requirement is a near certainty. Not to mention, we haven't considered any other potential “specified foreign financial assets,” including any in which your wife has an interest.
Ultimately, you and your wife should have an honest and transparent discussion about all issues arising from this situation. In this regard, you would be well served by consulting with a professional regarding all potential tax and reporting issues your actions have caused.
(1) Indeed, your problems may extend well beyond Form 8938, depending on the circumstances.
(2) Of note, Switzerland has in effect a Model 2 IGA. The institution in question is treated as a FATCA Partner Financial Institution therein.
(3) Your level is more than that applying to a specified individual who is unmarried (or married filing separately) but less than that applying to certain individuals living abroad.
Based on the facts, as provided, it is unlikely that either you or your wife is a “qualified individual” under Code section 911(d)(1). On this assumption, you can't take advantage of the higher “living abroad” thresholds. Among other apparent disqualifications, your “familial, economic, and personal ties” are predominantly in Florida, by all accounts. See Haskins v. Comm'r of Internal Revenue, 820 Fed. Appx. 994, 995 (11th Cir. 2020) (quoting Harrington v. C.I.R., 93 T.C. 297, 307–08 (1989)), aff'g T.C. Memo. 2019-87.
(4) We are naively assuming, at this point, that the Swiss account was the only specified foreign financial asset.
(5) Also, based on the facts, there is no apparent exception available, more generally, to the reporting requirements, under Treas. Reg. § 1.6038D-7 (e.g., relating to certain duplicative reporting of assets, specialized domestic trusts, and residents of U.S. possessions).
(6) For a given Form 8938 (individual or combined with a spouse), the rules only apportion the value of jointly owned assets for this purpose when two married specified individuals file separate returns. In this circumstance, if the married individuals jointly own a specified foreign financial asset, each individual accounts for half.
(7) See Treas. Reg. § 1.6038D-5(c). This assumes “last year” was 2022, but this limited hypothetical does not otherwise depend on specific dates. Also, the analysis does not rely on the permissive shortcut of using periodic statements, under paragraph (d) of the section. This expedient, which was originally designed for “maximum value” reporting on the Form 8938, does not bind the questioner.
(8) Even if, by virtue of Rev. Proc. 2020-17, you qualified for an exemption from foreign-trust reporting under Code section 6048 (you probably wouldn't be eligible), the requirements under Code section 6038D are unaffected. Indeed, the IRS felt it was appropriate to permit the revenue procedure's exemption because, among other reasons, “U.S. individuals with an interest in these trusts may be required under section 6038D to separately report information about their interests in accounts held by, or through, these trusts . . . .”
Content posted July 29, 2023.
