Originally published by Houston Tax Attorney.
The “FATCA” (Foreign Account Tax Compliance Act) provisions require specified individuals to report ownership of specified foreign financial assets if the total value exceeds the applicable reporting threshold. The IRS created Form 8938, Statement of Specified Foreign Financial Assets, for this purpose. Form 8938 must be included with the individual’s tax return. Failure to include the Form 8938, if required, could lead to significant penalties. Note that the Form 8938 is also referred to as “FATCA” which can cause confusion since that term also refers to the regulations themselves.
Who is a Specified Individual?
Specified individuals who own specified foreign financial assets, the value of which exceed the applicable reporting threshold, are required to complete Form 8938 as part of their income tax returns. Specified individuals include U.S. citizens, U.S. resident aliens for any part of the year, nonresident aliens who make an election to be treated as residents for joint filing purposes, and nonresident aliens who are bona fide residents of American Samoa or Puerto Rico. Individuals who qualify as U.S. resident aliens but elect to be treated as nonresidents pursuant to the residency tie-breaker provisions of a treaty are not subject to the foreign financial asset reporting requirements for the non-residency period provided a return is timely filed with a Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).
What is the Form 8938 Threshold?
The applicable reporting threshold is determined based on the taxpayer’s filing status and where he or she lives.
The reporting thresholds are:
| Filing status | Living in: | Meets reporting threshold if value of specified foreign financial assets is greater than … |
|---|---|---|
| Unmarried/ Married Filing Separately | United States | $50,000 on last day of tax year; or $75,000 at any time during tax year |
| Married Filing Jointly | United States | $100,000 on last day of tax year; or $150,000 at any time during tax year |
| Unmarried / Married Filing Separately | Foreign Country | $200,000 on last day of tax year; or $300,000 at any time during tax year |
| Married Filing Jointly | Foreign Country | $400,000 on last day of tax year; or $600,000 at any time during tax year |
What is a Specified Foreign Financial Asset?
The term “specified foreign financial asset” includes any depository, custodial, or other financial account maintained by a foreign financial institution as well as, (a) any stock or security issued by foreign persons, (b) any financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (c) any interest in a foreign entity. U.S. persons holding an equity interest in a foreign investment vehicle, such as a foreign mutual fund, foreign hedge fund, or foreign private equity fund must report such foreign financial assets on Form 8938. However, reporting is also required with respect to foreign trusts, foreign deferred compensation plans, and foreign pension plans.
What are the Form 8938 Penalties for Not Filing?
Non-compliance with the reporting requirements can result in substantial penalties. Failure to properly report foreign financial assets can result in a penalty of $10,000 with additional penalties of up to $50,000 for continued failure to disclose after receiving a request from the IRS. Additional penalties can be assessed if there is unpaid tax on unreported income. A six-year statute of limitations could apply to assess unpaid tax and applicable penalties if more than $5,000 of income is omitted from the taxpayer’s return and such income is attributable to assets reportable on Form 8938 (without regard to the dollar thresholds for reporting).
FBAR vs Form 8938
Form 8938 does not replace filing the FinCEN Form 114, Report of Foreign Bank and Financial Accounts. If an individual meets the filing requirements for both forms, each must be filed, even though some information may be duplicate.
| Form 8938, Statement of Specified Foreign Financial Assets | FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) | |
|---|---|---|
| Who Must File? | Specified individuals and specified domestic entities that have an interest in specified foreign financial assets and meet the reporting threshold Specified individuals include U.S citizens, resident aliens, and certain non-resident aliens Specified domestic entities include certain domestic corporations, partnerships, and trusts |
U.S. persons, which include U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold |
| Does the United States include U.S. territories? | No | Yes, resident aliens of U.S territories and U.S. territory entities are subject to FBAR reporting |
| Reporting Threshold (Total Value of Assets) | Specified individuals living in the US: Unmarried individual (or married filing separately): Total value of assets was more than $50,000 on the last day of the tax year, or more than $75,000 at any time during the year. Married individual filing jointly: Total value of assets was more than $100,000 on the last day of the tax year, or more than $150,000 at any time during the year. Specified individuals living outside the US: |
Aggregate value of financial accounts exceeds $10,000 at any time during the calendar year. This is a cumulative balance, meaning if you have 2 accounts with a combined account balance greater than $10,000 at any one time, both accounts would have to be reported. |
| 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. See instructions for further details. |
| 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 Due? | Form is attached to your annual return and due on the date of that return, including any applicable extensions | Received by April 15 (6-month automatic extension to Oct 15) |
| Where to File? | 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 |
Sources:
IRS.gov, Comparison of Form 8938 and FBAR Requirements, link.
IRS.gov, Do I need to file Form 8938, “Statement of Specified Foreign Financial Assets?”, link.
IRS.gov Instructions for Form 8938 (2016), link.
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