Form 8938 and Form 8621: Revealing 4 Key Differences You Need to Know to Avoid Mistakes in Filing

Living abroad is an exciting opportunity to discover new places and cultures. Maybe you’re practicing your profession in London or tending to your spa in Thailand and have made some wise investments along the way. Whatever your source of income is overseas, you still need to comply with your tax obligations in the U.S.

Filing taxes as an American living abroad can be confusing and challenging. Knowing the correct forms to use and how to fill them out correctly is as crucial as learning how to file your taxes. You need to understand two essential forms for expat taxes: Form 8938 and Form 8621.

While both forms require you to disclose your income overseas, they have distinct differences and guidelines. Making mistakes in completing these forms or failing to file them can cost you time and money. This article will walk you through everything you need to know about forms 8938 and 8621.

What is Form 8938?

Form 8938 is officially referred to as the Statement of Specified Foreign Financial Assets. Expats use this to report their overseas financial assets to the IRS, such as foreign company shares or foreign pension plans.

This form is under the Foreign Account Tax Compliance Act (FATCA), a law signed by President Barack Obama on March 18, 2010. The law aims to control government losses related to noncompliance with foreign asset taxation.

Individual taxpayers whose cumulative foreign asset value exceeds a relevant threshold must follow this tax reporting requirement. The taxpayer must report this information on Form 8938 and attach it to the annual income tax return.

What is Form 8621?

Expat taxpayers use Form 8621 to report income from Passive Foreign Investment Companies (PFICs) or foreign mutual funds. This form is officially referred to as Information Return by a Shareholder of a Passive Foreign Investment Company.

The U.S. Tax law dictates that mutual funds acquired overseas are considered or set up as corporations. Other entities considered as PFICs include investment trusts, ETFs, or any collective investment registered outside of the U.S.

It’s best to get the assistance of a reliable tax resolution services company in filing your Form 8621. Even if you can conveniently file online, completing the form can be a daunting task since it is too technical and detailed. The IRS guidelines require you to file a form for each PFIC stock investment. So, if your offshore portfolio has four funds, you will need to file four Form 8621s.

4 Key Differences Between Form 8938 and Form 8621

In some situations, forms 8938 and 8621 may go hand in hand, but they are not interchangeable. If you are required to submit a Form 8621 based on your source of income, you will need to accompany it with Form 8938. They share the same goal of reporting foreign assets, but they also have their differences.

1.    Purpose

Form 8938 is a requirement under the FATCA to inhibit global tax evasion. It requires disclosing information about assets held in foreign accounts and other offshore assets.

Meanwhile, Form 8621 falls under the IRS regulation that requires expat taxpayers to report investments in mutual funds and other pooled investments. It is a more specific report of a source of income compared to the general scope of Form 8938.

2.   Who Should File

Resident aliens, some nonresident aliens, and U.S. citizens whose foreign financial assets have a total value of more than $50,000 (for single individuals or married couples filing separately) need to file Form 8938.

Married people filing jointly and whose foreign financial assets are those stated below also need to accomplish and file Form 8938.

●   $100,000 on the last day of the tax year

●   Between $75,000 and $150,000 at any time during the tax year

Expats who are direct or indirect PFIC shareholders need to file tax Form 8621. You also need to accomplish this form if you meet the following criteria:

●   You met the appropriate filing threshold of more than $25,000

●   You gained a direct or indirect PFIC stock disposition

●   You are reporting a Qualified Electing Fund 

●   You received direct or indirect PFIC distributions

3.   Types of Assets to Declare

If you’re accomplishing Form 8938, you need to report all the offshore financial accounts’ associated income and maximum value. You must also declare partnership interests, private equity funds, private stocks, hedge funds, and other foreign private investment assets.

Accomplishing Form 8621 is more complicated since the required declarations depend on the various elections you reported on the form. The IRS has detailed instructions on how to fill up Form 8621.

4.   Penalties

If you’re required to file Form 8938 but fail to do so, you will face $10,000 penalties. If you continue to ignore filing after the IRS sends you a notification, you will need to shell out an additional fine of up to $50,000. There’s also a 40% penalty if you committed an understatement of tax on non-disclosed assets.

There’s no definite amount to pay if you fail to file Form 8621, but the IRS may subject you to an audit. The agency can suspend the statute of limitation on your tax return.

When is the Filing Due?

One similarity that these two forms share is that both are due on the date of your income tax return filing. 

Get Expert Help from a Tax Specialist 

Taxes, in general, are already complicated. Dealing with U.S. taxes while living in a foreign land can get even more frustrating. While it is possible to accomplish these forms on your own, getting the help of tax resolution partners can save you the headache of sorting through all the required information.

Tax Samaritan offers the best-in-class service for U.S. expats. They can help you avoid future problems while minimizing your tax liabilities. They can ensure smooth-sailing and hassle-free tax preparation services so you can focus on living your best life abroad.