Should I Disclose Foreign Assets, Foreign Gifts and Foreign Bequests?

by Sanford Millar

The United States uses a global approach to income and estate tax. Many of the other G-20 countries use a territorial system. The result is that U.S. taxpayers are now faced with enhanced disclosure and enforcement issues.

Form 8938 is required for U.S. taxpayers as part of Form 1040 whose aggregate “specified foreign financial assets” exceed specified values depending on filing status. The value test is applied against the greater of the highest value in the year or the year-end value. Example: individuals who have aggregate value in excess of $75,000 at any point during the year or $50,000 at year-end must comply. Form 8938 is required under the HIRE Act as part of section 6038D. It is important to note that the disclosures required under section 6038D include foreign trusts which are treated as “grantor trusts” under section 6048. What does all this mean for taxpayers?

Form 8938 requires the disclosure of the following asset classes: (a) accounts maintained at foreign financial institutions; (b) stock or securities issues by someone other than a U.S. person; (c) any interest in a foreign entity; and (d) any financial instrument or contract that has an issuer or counterparty that is other than a U.S. person. The first provision, disclosure of accounts, is somewhat like the disclosure required under the Bank Secrecy Act (BSA) which except that the aggregate account disclosure level for an FBAR is only $10,000. There are important penalty and enforcement differences applicable to failure to file FBARs and failure to file Form 8938. FBAR enforcement is governed under the BSA and Form 8938 enforcement under the IRC. But the real issue with Form 8938 is what the disclosure is likely to reveal. The disclosure may have income tax and estate and gift tax consequences.

It would be a dubious proposition to state that Form 8938 is designed to interdict money launderers, drug dealers, or arms dealers, which are among the listed objectives of the BSA. But there is a consistent theme and that is tax evaders. Tax evasion may be discovered by auditing activity following the filing of Form 8938. How the specified foreign financial assets were acquired will likely be a primary inquiry. Were the assets acquired by gift or inheritance? If so, was a Form 3520 required? Was a distribution from a foreign trust involved? Was a Form 3520A required? Is the taxpayer the holder of an interest in a PFIV or CFC and if so were those returns required? These questions pose ethical issues for tax return preparers who are now obligated to ask about foreign holdings. The burden will fall particularly on taxpayers who are dual nationals or U.S. ex-patriots.

Return preparers may have to refer clients to tax counsel once the return preparer discovers the existence of unreported foreign holdings, in order to preserve attorney-client privileges. The absence of a specific voluntary disclosure programs, like the 2009 OVDP and 2011 and 2012 OVDI, mean that taxpayers may now have to apply to enter the general voluntary disclosure program or make a decision to file returns and make a reasonable cause argument for penalty abatement. The penalties assessable under the IRC and mitigation remedies are both complex and require careful reasoned approaches. The result is that some practitioners and taxpayers will be on the wrong side of enforcement actions. As we approach the effective date of FATCA 2014, more and more foreign financial institutions will require proof of U.S. income tax compliance, including the filing of FBARs and reporting of income. Once FATCA kicks in, those foreign financial institutions who enter into agreements with the IRS will provide account information on U.S. account holders.

The noose is tightening on U.S. taxpayers with undisclosed foreign assets. Going forward the cost benefit of non-disclosure will increase, but then again so will the need for careful asset planning. Among the points to consider is how future estate planning should be managed. Assets disclosed on Form 8938 may need to be included in estate tax and/or gift tax returns and result in the taxable estate exceeding the then-applicable estate and gift tax exemptions. Should U.S. taxpayers who expect to inherit foreign assets speak with counsel, and their relatives to plan? The result of not acting could be a taxable estate without sufficient liquidity to cover the tax.

Form 8938 is just the beginning of a whole new enforcement and compliance campaign which will mandate more diligence by return preparers and more expense by taxpayers.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Sanford Millar, Law Offices of Sanford I. Millar | Attorney Advertising

Written by:

Sanford Millar

Law Offices of Sanford I. Millar on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.