Form 8938 is part of the Foreign Account Tax Compliance Act or FATCA. It is a form that discloses accounts and assets held in other countries outside of the United States. If you have a requirement to make a report of your foreign assets and/or accounts under FATCA, you will need to file the IRS Form 8938 with your federal income tax return each year to comply with IRS requirements. A common question is “Do I Need To File Form 8938”? Below is some information to help you understand these requirements and determine whether you need to file the FATCA form (commonly known as Form 8938).
What Is the Foreign Account Tax Compliance Act (FATCA)?
FATCA was passed in 2010 as a part of the HIRE Act.
As a result, FATCA requires all United States taxpayers to report any accounts or other assets they may own in another country. In the past, some taxpayers have tried to avoid paying their full U.S. tax liability by hiding their assets in foreign accounts.
The purpose of this law is to prevent and/or uncover this type of tax evasion. When there is tax evasion, taxpayers will face both financial and criminal penalties. FATCA applies for all tax years beginning with 2011.
FATCA impacts individual taxpayers, foreign governments, and foreign financial institutions that serve U.S. persons and entities. Most foreign governments and foreign financial institutions have entered agreements with the United States that require them to report certain information about accounts belonging to U.S. taxpayers to the Internal Revenue Service.
If the institution or government fails to report this required information, they will face penalties.
For individuals, FATCA has stringent reporting requirements. If you have any financial assets outside the United States, you must report those assets to the Internal Revenue Service. For more taxpayers, this means that Form 8938 filing requirement applies with your tax return.
About Form 8938
Form 8938, Statement of Specified Foreign Financial Assets, is a form used to meet the requirements of FATCA.
Who Must File?
Individuals who must file Form 8938 include U.S. citizens, resident aliens, and certain non-resident aliens who meet the reporting threshold and have an interest in certain types of foreign financial assets. Also, certain domestic entities that hold foreign assets will have a requirement to file this form.
Which Financial Assets?
According to the IRS, all financial assets are to be reported if the threshold is met. Examples of accounts subject to disclosure on Form 8938 include:
- A partnership interest in a foreign company.
- Interest in a foreign deferred compensation plan or retirement plan.
- Stocks or other securities from a foreign corporation.
- Checking, deposit, brokerage, or savings accounts held in foreign banks.
- Bonds or notes issued by foreign entities.
- Interest in foreign estates.
- Interest in foreign annuities or insurance contracts.
This is not a comprehensive list. If you own any foreign assets, you may need to file this form. So it is important to consult a tax professional for guidance.
If you own foreign financial assets, you must consider two different measures of their market value. The asset’s value at the end of the year and the asset’s maximum value during the year. If you own more than one foreign financial asset, you will need to calculate all assets’ total value at the end of the year. And the total of their maximum values during the year.
The filing thresholds for Form 8938 depend on your filing status as well as whether you live in the United States. For 2018, the filing thresholds are as follows:
Taxpayers living in the United States
- Married filing jointly – You must file Form 8938 if your foreign financial assets totaled more than $100,000 on December 31. Or more than $150,000 at their highest point during the year.
- Married filing separately – You must file Form 8938 if your foreign financial assets totaled more than $50,000 on December 31. Or more than $75,000 at their highest point during the year.
- Unmarried individuals – You must file Form 8938 if your foreign financial assets totaled more than $50,000 on December 31. Or more than $75,000 at their highest point during the year.
Form 8938 is a requirement for domestic entities for foreign financial assets that total $50,000 or more at any point during the tax year.
Taxpayers living outside the United States
- Married filing jointly – You must file Form 8938 if your foreign financial assets totaled more than $400,000 on December 31. Or more than $600,000 at their highest point during the year.
- Married filing separately – You must file Form 8938 if your foreign financial assets totaled more than $200,000 on December 31. Or more than $300,000 at their highest point during the year.
- Unmarried individuals – You must file Form 8938 if your foreign financial assets totaled more than $200,000 on December 31. Or more than $300,000 at their highest point during the year.
Remember that you must satisfy either the physical presence test or bona fide resident test to qualify for these higher filing thresholds.
Completing Form 8938
Form 8938 is two pages long. If you have many accounts, additional pages are known as “continuation statements” may be applicable. The first few lines of the form include all of your identifying information, such as your name, taxpayer identification number, and whether you are filing as an individual or an entity.
In Part I of the form, you will disclose information about your foreign deposit and custodial accounts. This includes the number of accounts you have, their aggregate value, and whether any of them were closed during the tax year. In Part II of the form, you will disclose information about your other foreign assets.
Part III of Form 8938 covers tax items that are attributable to your foreign assets. These items include interest, dividends, royalties, gains, deductions, and credits. Part IV of the form deals with any assets you may have already reported on other forms. If you have reported assets on other forms, you will use this section to designate which forms you already completed.
In Parts V and VI, you will provide detailed information about each of the deposit accounts, custodial accounts, and other foreign assets you included in Parts I and II of the form. For each account or asset, you will need to disclose the type of account or asset, its value, how its value was calculated in U.S. dollars, and the asset or account’s location.
Failing to File Form 8938
If you must file Form 8938 and fail to do so, you may be subject to penalties from the IRS. At this time, the penalty for failing to file this form is $10,000. If you continue to fail to file Form 8938 even after you have received a notification from the IRS, you will owe an additional penalty of up to $60,000.
This additional penalty is $10,000 for every 30 days that pass when the IRS notifies you of your failure to file and your actual filing. You may also owe further penalties for any underpayments of taxes that would have been applicable on the foreign assets you failed to disclose. The underpayment penalty as of 2019 is equal to 40 percent of the amount of the underpayment.
These penalties are substantial and can add up quickly, especially if you have significant foreign assets and/or failure to file this form for multiple tax years. For this reason, it is important to make sure that you are in full compliance with the requirements of FATCA.
If you believe you have already failed to file one or more required forms, you need to contact a tax professional for assistance to resolve the matter as soon as possible.
When you fail to file Form 8938, criminal penalties may also apply. Criminal penalties are most likely to apply if the IRS believes that you purposefully chose not to file the form to avoid paying your taxes. To reduce the risk of criminal penalties, submitting all unfiled tax forms and to make every effort to pay what you owe is essential.
Dealing with Failure to File
In some cases, taxpayers fail to file Form 8938 simply because they are unaware of the requirements or dealt with other extenuating circumstances that made it impossible for them to file it. If you can convince the IRS that you were not intentionally withholding information when you failed to file Form 8938, your penalties may be waived. However, the IRS will make this decision on a case-by-case basis based on the evidence you submit.
It is important to note that the Internal Revenue Service has established a statute of limitations for assessing taxes. This includes those assessed on foreign financial assets. For foreign financial assets that were not reported properly, the statute of limitations begins when the required information is submitted and lasts for three years.
The statute of limitations may be longer in certain circumstances, such as if you omitted from your tax return income that was taxable and attributable to a foreign financial asset.
Form 8938 versus FBAR
FBAR, or “Foreign Bank Account Reporting,” first began in 1970. Like FATCA, the FBAR discourages tax evasion. Many taxpayers have ignored these requirements, but the government has paid more attention to FBAR in recent years, causing problems for those taxpayers who did not comply.
If you are subject to FBAR reporting requirements, you will need to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts. Form 8938 shares some similarities with FinCEN Form 114, causing some confusion for taxpayers. However, there is a difference between these two forms.
- FinCEN Form 114 has a much lower and less complicated reporting threshold. Any taxpayer must file this form if they have foreign assets or accounts with a total value above $10,000 at any time during the year. Thus, if you have a Form 8938 filing requirement, you probably have a FinCEN Form 114 filing requirement as well.
- For FinCEN Form 114, you have a financial interest in an account if you own the account, the account owner is your representative, or you have a significant interest in the entity that owns the account. You must also report accounts for which you have signature authority. You must report qualifying accounts even if their activity would not affect your tax return.
- Form 8938 is due whenever your tax return is due and must be included with the return. FinCEN Form 114, on the other hand, is due April 15th with an automatic extension to October 15th.
- FinCEN Form 114 will not be submitted with your tax return. Instead, it must be submitted electronically using a specific procedure.
- FinCEN Form 114 carries its own penalties. Civil monetary penalties for failing to file this form are adjusted for inflation. Before August 2016, penalties for non-willful failure to file were capped at $10,000. If failure to file was willful, penalties were capped at the greater of $100,000. Or one-half of the account balances in question.
- As with Form 8938, failing to file FinCEN Form 114 when you are required to do so can lead to criminal penalties. This is in addition to any associated financial penalties.
FBAR and Form 8938 Differences
Below is a chart that breaks down the specific differences between these two forms. Information is obtained directly from the IRS.
|Form 8938||FinCEN Form 114|
|Taxpayers Required to File||Specified individuals (U.S citizens, resident aliens, and certain non-resident aliens) and specified domestic entities (certain domestic corporations, partnerships, and trusts) that have an interest in specified foreign financial assets and meet the reporting threshold||U.S. persons (U.S. citizens, resident aliens, trusts, estates, and domestic entities) who have an interest in foreign financial accounts and meet the reporting threshold|
|Are Resident Aliens and Entities in U.S. Territories Included?||No||Yes|
|Reporting Threshold||Specified individuals living in the US:
Specified individuals living abroad:
Specified domestic entities:
|Total value of financial accounts exceeding $10,000 at any time during the calendar year. All accounts included in the total must be reported, even if individual accounts total less than $10,000.|
|When do you have an interest in an account or asset?||If any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included, or otherwise reflected on your income tax return||Financial interest: you are the owner of record or holder of legal title; the owner of record or holder of legal title is your agent or representative; you have a sufficient interest in the entity that is the owner of record or holder of legal title.
Signature authority: you have authority to control the disposition of the assets in the account by direct communication with the financial institution maintaining the account.
|What is Reported?||Maximum value of specified foreign financial assets, which include financial accounts with foreign financial institutions and certain other foreign non-account investment assets||Maximum value of financial accounts maintained by a financial institution physically located in a foreign country|
|How are maximum account or asset values determined and reported?||Fair market value in U.S. dollars in accord with the Form 8938 instructions for each account and asset reported
Convert to U.S. dollars using the end of the taxable year exchange rate and report in U.S. dollars.
|Use periodic account statements to determine the maximum value in the currency of the account.
Convert to U.S. dollars using the end of the calendar year exchange rate and report in U.S. dollars.
|When is the form due?||Form is attached to your annual return and due on the date of that return, including any applicable extensions||Form must be received by April 15 (6-month automatic extension to Oct 15)|
|Where should the form be filed?||File with income tax return pursuant to instructions for filing the return.||File electronically through FinCENs BSA E-Filing System. The FBAR is not filed with a federal tax return.|
|Penalties||Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply||Civil monetary penalties are adjusted annually for inflation. For civil penalty assessment prior to Aug 1, 2016, if non-willful, up to $10,000; if willful, up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply|
Types of Foreign Assets and Whether They are Reportable
|Form 8938||FinCEN Form 114|
|Financial (deposit and custodial) accounts held at foreign financial institutions||Yes||Yes|
|Financial account held at a foreign branch of a U.S. financial institution||No||Yes|
|Financial account held at a U.S. branch of a foreign financial institution||No||No|
|Foreign financial account for which you have only signature authority and no other interest||No||Yes, with exceptions|
|Foreign stock or securities held in a financial account at a foreign financial institution||The account itself is subject to reporting, but the contents of the account do not have to be separately reported||The account itself is subject to reporting, but the contents of the account do not have to be separately reported|
|Foreign stock or securities not held in a financial account||Yes||No|
|Foreign partnership interests||Yes||No|
|Indirect interests in foreign financial assets through an entity||No||Yes, if sufficient ownership or beneficial interest (i.e., a greater than 50 percent interest) in the entity. See instructions for further detail.|
|Foreign mutual funds||Yes||Yes|
|Domestic mutual fund investing in foreign stocks and securities||No||No|
|Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor||Yes, as to both foreign accounts and foreign non-account investment assets||Yes, as to foreign accounts|
|Foreign-issued life insurance or annuity contract with a cash-value||Yes||Yes|
|Foreign hedge funds and foreign private equity funds||Yes||No|
|Foreign real estate held directly||No||No|
|Foreign real estate held through a foreign entity||No, but the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate||No|
|Foreign currency held directly||No||No|
|Precious Metals held directly||No||No|
|Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles||No||No|
|‘Social Security’- type program benefits provided by a foreign government||No||No|
Many taxpayers who need to file one of these forms will need to file the other as well. Failing to file either one can lead to penalties and criminal charges. Thus, every taxpayer needs to understand these requirements and talk to a qualified tax professional if necessary.
A knowledgeable and experienced professional can help you determine what forms you need to file so you can avoid problems with the IRS.
The filing requirements associated with Form 8938 can be confusing. However, if you fail to file this form when you have a requirement to do so, you may face severe penalties.
If the IRS determines that you have missed this form for several years, the penalties you will face could be exorbitant. For this reason, it is essential to make sure that you are always in compliance with every part of FATCA.
If you have any foreign assets or accounts, the best thing you can do to protect yourself from penalties is to contact an experienced tax professional who understands all of these requirements and can make sure you remain on good terms with the IRS.
If you think you may have already failed to file some required forms, contacting a professional is even more important. A tax professional will be able to review your situation. Determine whether you have failed to file important forms. And help you explore your options for resolving any issues you have with the IRS.
Help for Expats
Anyone who owns a foreign asset or account may be required to file Form 8938 and/or FBAR. However, these forms are most often required from ex-pats who live outside the United States but are still responsible for paying U.S. taxes.
If you are an expat, the threshold for Form 8938 will be much higher than it would be for someone living in the U.S., provided you meet certain requirements. These requirements can be confusing, and the wrong interpretation of your status in the IRS’s eyes can lead to expensive penalties and even legal problems.
Expats deal with many other unique tax requirements as well. While most countries tax only the income earned within their borders, the United States requires people living abroad to report and pay taxes on the money they earn outside the country.
Thus, most expats are still required to file a tax return even when they do not earn any money from or within the United States. Furthermore, some ex-pats may even be liable for paying state taxes. Failing to pay these taxes or file the appropriate forms can lead to serious problems in the future.
Consult An Expat Tax Firm
If you are an expat living abroad, you need to consult an expat tax firm for assistance. A firm with experience and expertise in this area will be able to review your situation. And explain all of your tax filing and payment requirements. The right professionals will also be able to help you complete all of the required paperwork promptly.
If you are already out of compliance with IRS requirements, an expat tax firm can help you understand your options and work toward an appropriate resolution that helps you get back on the IRS’s good side with as little time, expense, and inconvenience as possible.
Tax Samaritan specializes in providing tax solutions for U.S. taxpayers living outside of the United States. To learn more about our services or to discuss your specific situation, please contact us today.