Kevin Brekke, International Man
June brings privacy gloom for US tax filers. June 30 is the filing deadlinefor Treasury Form TD F 90-22.1 (the FBAR), wherein US persons get to stand financially naked by reporting their foreign held financial assets or accounts. The pat down was turned into a strip search with the introduction of the new IRS Form 8938 that greatly expanded the types of foreign assets now required to be reported to the US tax authorities.
Over the past 18 months, a series of changes to the reporting requirements for foreign assets held by US tax filers were introduced, including the release of the new form 8938 mentioned above. With each change came questions, as the instructions were not always clear and left tax filers hanging about how they should be interpreted - an unsettling situation, as the penalties for failure to file are absurdly extreme. However ...
There is some good news to report
For most assets, the question of whether or not it is reportable is fairly black and white. Today, I will cover both the good news and the "gray" news on two of the more commonly held assets.
Let's begin with the good news: real estate. Last year, following the release of the new IRS Form 8938, real estate got caught in the drift net of foreign asset reporting. And lacking a clear definition, the question surfaced as to whether a personal residence and rental property are reportable.
That question was answered with the recent release of IRS guidance. The IRS uses the "failure to indicate yes means no" approach; that is, foreign real estate held directly is not reportable. "Held directly" means that the property is not held through an entity such as a trust, LLC, real estate fund, partnership, etc. So, foreign real estate such as a personal residence or rental property is not reportable if it is owned outside an entity (although any rental income from property held directly must be reported).
Also note that foreign assets such as collectibles, artwork, cars, and boats are not reportable.
Foreign ownership of bullion
One reporting area remains gray: foreign-held bullion. Some readers will recall that last year, following amendments to the FBAR released in February, a new term was introduced under "Types of reportable accounts": accounts with a financial agency.
The definition of "financial agency" added little clarity, as it included the phrase "transactions in gold" as part of the services that a financial agency might provide. This opened to speculation whether the word "gold" was meant as a placeholder to indicate all precious metals ... or meant literally, and that silver, platinum, and palladium were all exempt.
That mystery was solved as recent IRS guidance states that all precious metals held outside the US are reportable except precious metals held directly. Well, that's just peachy, but what the heck does "held directly" mean? Unlike for real
estate, where "held directly" is defined, what it means for bullion remains unclear.
From the legal opinions we have reviewed, "held directly" is being interpreted to mean that the owner has unencumbered access to the precious metal. But there is far from 100% consensus on that interpretation. The storage method that draws mixed opinions is the use of a bank safe box - is that "held directly"?
Private vaulting facilities, warehouse receipts, mint certificates, and companies that buy and store bullion through an account all would be reportable. But it looks like we must wait for an answer to the bank safe box question. In the meantime, we always advise that when in doubt, report it.
But here, too, there is some good news. There is a way to hold bullion outside the US and legally avoid US reporting requirements for US persons. And we'll cover this story in a future edition of World Money Analyst.
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