Form 8938 Reporting Requirements

Form 8938

Today’s globalized world makes it easier than ever to have business and personal relationships that go far beyond American borders. When you own foreign assets, you may find that your taxes are considerably more complicated than expected. Depending on the value of your assets and your filing status, you may have to file Form 8938, the Statement of Specified Foreign Financial Assets.

As a U.S. taxpayer, you may be legally obligated to report your foreign assets to the IRS. But the rules are complicated. Read on to learn more about your tax obligations, or for immediate help, contact us to schedule a consultation.

What is Form 8938?

Form 8938, or Statement of Specified Foreign Financial Assets, is part of the Foreign Account Tax Compliance Act (FACTA). It’s part of the federal government’s growing battle to prevent taxpayers from stashing assets in offshore accounts to avoid paying taxes on them.

The form requires you to provide your personal information, disclose your deposit accounts and their maximum value, disclose your custodial accounts and their maximum value, and any closed foreign accounts. It also includes a section on other specified foreign assets. In addition to providing a summary of your foreign accounts, you must also list each account in detail on Form 8938. For those required to file it, Form 8938 is due at the same time as your tax return.

Who Must File

Whether or not you are required to file is dependent on your resident status and your filing status. If you are filing a joint tax return with your spouse and you are a U.S. resident, you must file Form 8938 if your assets were worth more than $100,000 at the end of the year or more than $150,000 at any point of the year. Couples who are not U.S. residents and file their taxes together must file if their foreign assets were worth more than $400,000 at the end of the year or more than $600,000 at any point during the year.

Single U.S. residents or married people filing separately must file Form 8938 if the value of their foreign assets exceeded $50,000 at the end of the year or was higher than $75,000 at any point during the year. Non-U.S. residents who are filing as single or separate are required to file if their foreign assets were worth more than $200,000 at the end of the year or $300,000 at any time during the year.

While most Form 8938 filers are individuals, there are also U.S. domestic partnerships, corporations, and trusts that must file this form. A corporation or partnership that meets two specific criteria must file. First, a specified individual (U.S. citizen, U.S. resident, etc.) must have 50% or more of the total value or control of the entity. This amounts to 50% of the voting power of a corporation or 80% of the capital in a partnership. The second requirement is that the entity must get at least half of its total earnings from passive income or hold half of its assets for the purpose of generating passive income.

Assets That Have to Be Reported

There are many foreign assets that must be reported on Form 8938. They include:

  • Bank accounts
  • Investment accounts
  • Savings accounts
  • Securities accounts
  • Mutual funds
  • Trusts
  • Retirement plans
  • Business and corporate accounts
  • Life insurance policies

As with any tax form or issue, there are exceptions and limitations. Working with a tax professional when you have foreign assets can help you avoid forgotten forms, missed deadlines, and expensive tax penalties.

Reporting Threshold

The reporting threshold varies based on your resident or non-resident status and your filing status. As discussed above, the threshold for reporting is:

  • Single or married filing separately, resident: Assets worth $50,000 at the end of the year or $75,000 at any point during the year
  • Single or married filing separately, non-resident: Assets worth $200,000 at the end of the year or $300,000 at the end of the year
  • Married filing jointly, resident: Assets worth more than $100,000 at the end of the year or $150,000 at any point during the year
  • Married filing jointly, non-resident: Assets worth more than $400,000 at the end of the year or $600,000 at any point during the year

Assuming that your foreign accounts are in the currency of the country they’re located in, how you calculate the value of your accounts is important. All values should be calculated based on the currency exchange rate on the last day of the year. The IRS requires that you use the U.S. Treasury Bureau of the Fiscal Service foreign currency exchange rate.

If that exchange rate is unavailable, you should use another publicly accessible exchange rate. Note that you will need to provide the source of your exchange rate on Form 8938.

Form 8938 vs. FBAR: What Are the Differences?

The FBAR, or Report of Foreign Bank and Financial Accounts, is similar to Form 8938 in several ways. Both forms report your foreign assets and their value. While these forms overlap in many ways, there are also significant differences. Depending on the value of your accounts, you may have to file one form, both forms, or neither. We’ll explore the differences here:

  • Who must file? Form 8938 may be required for U.S. individuals, trusts, partnerships, and corporations; the FBAR is generally required of U.S. persons with foreign assets.
  • Where does the form go? Form 8938 goes to the IRS, and the FBAR goes to FinCEN.
  • What about reporting thresholds? FBAR has a standard reporting threshold of $10,000. If the total value of your foreign accounts was higher than $10,000 at any point during the calendar year, you must file. Form 8938’s filing thresholds are more complicated and based on filing status and residential status.
  • Which types of assets are reported? Your Form 8938 should disclose your foreign financial accounts and certain investment assets. The FBAR generally requires information on your foreign financial accounts.
  • When is it due? Form 8938 is due with your annual tax return. The FBAR is due April 15, but filers are granted an automatic extension to October 15 if they miss the initial deadline.
  • What are the penalties for failing to file? Penalties for failure to file the FBAR depend on whether the violation is determined to be willful or non-willful. Additionally, penalties are adjusted every year for inflation. The penalty for failing to file Form 8938 is set at $10,000 initially, and it increases if you do not file after the IRS notifies you of your obligation to file.

Do I Have to File an FBAR and Form 8938?

This is a crucial question to ask your international tax professional when you file each year. The penalties for missing either Form 8938 or the FBAR are steep, and you definitely don’t want to be on the hook for tens of thousands of dollars. While the types of assets requiring disclosure vary between the FBAR and Form 8938, there is substantial overlap.

If you are required to file Form 8938, which has much higher financial thresholds than the FBAR, the odds are good that you are also required to file an FBAR. If you meet the filing requirements for the FBAR but fall short of the Form 8938 requirements, you likely only have to file the FBAR.

It’s important to note that filing one of these forms does not fulfill your requirements for the other. Although the information contained in each form is similar, they go to different places and have different purposes. Filing one could still leave you on the hook for penalties if you do not file the other.

How to File Form 8938

Form 8938 has clear instructions on how to fill out the form properly and accurately. Most people will fill it out as a specified individual, but there is also space to mark that you are filing for a partnership, corporation, or trust.

You first fill out the Foreign Deposit and Custodial Accounts Summary, which includes the number of accounts you have, the maximum total value of all of them, and any closed accounts. If you have non-account assets to report, you do so in Part II. In Part III, you list the interest, dividends, royalties, other income, gains, deductions, and credits earned for your deposit accounts and other foreign assets. Certain assets do not need to be included on Form 8938 if they are included on tax forms, which you detail in Part IV.

From there, you move into the time-consuming part of this form. You must first fill out detailed information for each deposit and custodial account, which is included in your earlier summary. For each account, be prepared to list the type of account, account number, when the account was opened, the maximum value during the year, how you calculated the value in U.S. dollars, and the name and address of the bank holding the account. You will likely need to include additional paperwork if you have more than one account to report. You then list the same information for each foreign asset disclosed.

When you have finished Form 8938 and verified its accuracy, it is submitted to the IRS with your tax return.

Penalties for Failing to File Form 8938

There are many reasons an individual may not file Form 8938. They may not realize that they are required to do so—the United States is one of just a few countries that requires residents and citizens to report foreign assets. Others may choose not to file Form 8938 because they do not want to be taxed on any income gained from their foreign assets, so they don’t want the IRS to know about the assets.

Regardless of one’s reason for not filing Form 8938, the penalties can be stiff. There is an initial $10,000 failure to file penalty. If the IRS notifies you that you have not filed and are required to do so, they may charge you an additional $10,000 after 90 days. They can continue to do so for each 30 days that you remain non-compliant, up to a total penalty of $50,000 for continued non-compliance. If the IRS charges you a penalty, you will receive Notice CP15.

People generally underestimate how far the U.S. government will go to ensure that foreign assets are accurately reported.  It is relatively easy for the United States to find out if someone has not reported a reportable foreign asset. There are 113 countries that have FATCA model agreements, allowing the United States to receive information on taxpayers with foreign accounts.

Penalties for Income Not Reported Due to Non-Disclosed Foreign Assets

If you have unreported income related to assets that you did not correctly disclose by filing Form 8938, the IRS can assess a 40% underpayment penalty in addition to the non-filing penalty.

For example, say that you earned interest on one of your foreign accounts. You didn’t report the account on Form 8938, and you didn’t report the interest on your tax return. Now, let’s say the tax on the interest would have been $10,000. In this case, the understatement penalty is $4,000.

Form 8938 does not calculate the tax that you owe. It’s just a report of your specified foreign assets. However, when you complete section III of this form, you note any income generated by your foreign assets, and you will also note where you reported that income on your tax return.

What to Do If You Forgot to File

If you either failed to file Form 8938 for the most recent tax year or you have failed to file for multiple years, it is time to take your concerns to a tax professional. Luckily, if you have not been contacted by the IRS regarding your failure to file, you may be able to limit your financial losses with a variety of solutions.

Reasonable Cause

Depending on your circumstances, you may be able to avoid penalties if you can show that your failure to file was due to reasonable cause and not willful neglect. This is a subjective assessment, so two IRS agents could look at your circumstances and come to different conclusions about whether or not you were negligent. This is one situation where it’s crucial to work with a tax professional—when tens of thousands of dollars are on the line, it is essential to put forward the most convincing case possible.

Streamlined Filing Compliance Procedures

This process involves gathering the necessary information for all of your foreign assets, including records from every year that you forgot to file Form 8938. You can then move forward with filing your amended tax returns, making sure to attach Form 8938 to each tax return. Your attorney may also include a statement to explain why you did not previously file the form. Once you have accounted for all of your assets on Form 8938, go ahead and pay any taxes and penalties associated with your newly disclosed assets. This is only available to those who are not the target of an IRS civil examination or audit.

What About Quiet or Silent Disclosure?

The idea of paying penalties is unappealing at best, and some taxpayers attempt to evade them by simply filing an amended or late Form 8938, hoping that the IRS doesn’t assess a penalty. This is known as a quiet disclosure or silent disclosure. This should not be considered a viable option. The IRS is very good at collecting the money it’s owed, and taxpayers shouldn’t be surprised to have penalties assessed if they go this route. It’s much safer to work with a tax attorney who can help you craft a strong case for reasonable cause.

When It’s Time to Talk to an Attorney

If you’ve submitted an inaccurate Form 8938 or you haven’t filed Form 8938 in spite of meeting the filing requirements, talking to an attorney is the single best thing you can do to protect your financial security and your standing with the IRS. The penalties for failing to file Form 8938 are steep, and the sooner you bring in a tax professional, the stronger your chances of getting a favorable outcome.

Concerned about your undisclosed foreign assets or income? The team at Wiggam Law can explain your options and help you find the best option for your situation. Schedule a consultation now by calling us at 404-609-1300 or using our online scheduler. Tax problems can be stressful and overwhelming—don’t let them take over your life. Choose Wiggam Law for the answers and peace of mind you deserve.

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