Form 8938 definition of financial interest

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zilla
Posts: 3
Joined: Tue Apr 01, 2014 5:21 pm

Form 8938 definition of financial interest

Post by zilla » Mon Apr 07, 2014 3:48 pm

Hi

I was almost ready to submit my first 1040 when I reread the instructions for form
8938.

With regards to defining financial interest it states "You have an interest in a
specified foreign financial asset if any income, gains, losses, deductions, credits,
gross proceeds, or distributions from holding or disposing of the asset are or would
be required to be reported,included, or otherwise reflected on your income tax
return."

I am joint owner of accounts in Canada but tax liability for them lies
entirely with the other joint owners as I have contributed nothing to the principal.
It is my new understanding that I do not have to report them on 8938, can anyone
give reason otherwise?

The FinCEN 114 definition of financial interest is much broader so these accounts would still be included on that one.

rohitkn@gmail.com
Posts: 30
Joined: Sun Mar 30, 2014 1:09 pm

Post by rohitkn@gmail.com » Mon Apr 07, 2014 4:04 pm

From my understanding and this isn't legal or tax filing advice, you just said you are

"joint owner"

The key here is owner. I would say it means that you have interest.
Even if you have contributed nothing to the principal, any income generated from the asset if you are the 'owner' would 'belong' to you. Hence reportable on your tax return, hence financial interest.

My understanding.

zilla
Posts: 3
Joined: Tue Apr 01, 2014 5:21 pm

Post by zilla » Tue Apr 08, 2014 12:07 am

According to the IRS the amount of tax liability of joint holders of an account is determined by local law. The accounts are in Canada and according to the CRA the tax liability of joint owners over interest from an account is proportional to the amount each owner contributed. In my case I contributed nothing and the primary joint owner pays tax for the entire interest income (in Canada). I have never paid tax on these in Canada.

The main reason for asking the question was to see if someone can see anything in the financial lingo of the instructions "gains, losses, deductions, credits, etc" that would be relevant to me. They are just deposit accounts so I am not sure how these would be applicable.

I thought about including them even though I interpret the instructions as indicating I don't have to, just to be safe, but I am concerned that including these accounts on the 8938 could be interpreted as admitting to tax liability that I don't have and result in fines for not reporting interest income. I am hoping that including the accounts on FinCEN 114 and reporting foreign interest income on other accounts I do have tax liability for will make it clear I am not trying to hide accounts/avoid taxes.

I saw in your post on another thread that you say you feel stupid for coming here and getting a job; I feel exactly the same way. Maybe I'm getting paranoid but I feel like the whole system is this complicated to ensure the IRS will be able to penalize well-intentioned people no matter what they do.

eeyore
Posts: 32
Joined: Tue Mar 19, 2013 6:45 pm

Post by eeyore » Sat Apr 12, 2014 10:23 am

Just wondering if anyone else has any input on this question. I have precisely the same concern as zilla.

I am a U.S. citizen living in Canada with my non-U.S.-person spouse. We have savings accounts in Canada that are joint solely for the purpose of estate planning. These joint accounts hold funds entirely based on who earned or received the income. That makes income reporting to CRA simple: although my name is on all the accounts, I report income from only the accounts that hold money I earned or received. My spouse does similarly for the joint accounts he contributed to. And that's the way CRA wants it.

Are the attribution rules in the U.S. the same as in Canada? (i.e., interest income must be reported by the person who earned/received the principal in the first place?)

If I applied the language of Form 8938 to my obligations to the CRA, then the answer regarding these joint accounts to which I did not contribute would be "No": i.e., No "income ... from holding or disposing of the asset are or would be required to be reported on [my] income tax return" to the CRA. But is that interpretation consistent with what the IRS requires re Form 8938?

This language on Form 8938 implies that recording an account on that form means that I should be reporting any income earned by that account on my annual tax return. Therein lies the concern.

Thanks for any advice you can give.

Dalthien
Posts: 50
Joined: Wed Apr 07, 2010 12:29 pm

Post by Dalthien » Mon Apr 14, 2014 1:08 am

zilla,

Based on strict adherence to the instructions provided, your interpretation is correct.

As you mentioned, the IRS treats tax responsibility for joint accounts based on local laws (from Pub. 17 " If two or more persons hold property (such as a savings account or bond) as joint tenants, tenants by the entirety, or tenants in common, each person's share of any interest from the property is determined by local law.")

As you also mentioned, 8938 is interested in accounts in which you have a taxable interest, "You have an interest in a specified foreign financial asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the asset are or would be required to be reported,included, or otherwise reflected on your income tax return." The instructions specifically mention only the parts of the accounts that are potentially taxable (income, gains, distributions, dispositions, etc.). So if you don't have any potential tax liability with respect to the account, then you don't have an interest in the account with respect to 8938.

The potential problem comes with stuff that goes beyond the written instructions. The Tax Court has occasionally broadened the joint interest in an account beyond local laws, to something called beneficial ownership. In one example, a man had deposited money into accounts for his 4 children. According to local laws, the children were the owners of the accounts, and the children were responsible for reporting any income from the accounts. The father later withdrew money from these accounts to help finance his business. He stated that this was a loan from his children that he would pay back at a future date, but the Tax Court ruled that he had a status of beneficial ownership in the account, and he was still liable for the taxes on the income in the US, even though he did not have that responsibility according to the local laws.

There's an interesting writeup on this subject here - http://www.woodllp.com/Publications/Art ... counts.pdf

Basically, if you exercise any control over the account (not signing authority, where you have the potential of exercising control - but actually going ahead and actually exercising that control), then you could be said to have beneficial ownership over the account. So, for example, if you withdraw funds from the account, then you could have beneficial ownership of the account, since you get a direct benefit from your joint status in the account.

Even in that case, though, that is going well beyond the instructions as spelled out, and 8938 will waive any penalties in the case of Reasonable Cause. And following the instructions as written (instead of relying on esoteric court cases) would certainly seem to quality as reasonable cause.

exPenn
Posts: 102
Joined: Tue Aug 20, 2013 3:06 pm
Location: GTA

Post by exPenn » Mon Apr 14, 2014 11:11 am

eeyore: My wife (dual citizen) and I are in exactly the same position as you. For the sake of simplicity,we list all the accounts on her 8938 that are listed on her FBAR. For the accounts where all the holdings are attributed to me, and all the interest is reported on my Canadian Taxes, we simply check the boxes "account jointly owned with spouse" and "no tax item reported in Part III with respect to this account". We have never had any questions from the IRS.

ipaddslogin
Posts: 1
Joined: Mon Jul 20, 2020 12:20 am

Re: Form 8938 definition of financial interest

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