IRS Form 8938: Reporting Requirements Overview

Apr 11, 2024

Living abroad brings its own set of adventures and challenges, especially when it comes to navigating U.S. tax obligations. If you’re an expat with a financial footprint across borders, you’ll need to familiarize yourself with IRS Form 8938, a key component of the Foreign Account Tax Compliance Act (FATCA).

What is Form 8938?

Form 8938, titled “Statement of Specified Foreign Financial Assets” is a tax form required by the U.S. Internal Revenue Service (IRS) for taxpayers to report their specified foreign financial assets if the total value of those such foreign bank assets exceeds certain thresholds. It was introduced as part of the Foreign Account Tax Compliance Act (FATCA) to combat tax evasion and ensure U.S. persons are reporting their foreign income.

The form is filed along with the taxpayer’s annual income tax return, and the reporting thresholds vary depending on the taxpayer’s filing status and whether they live in the U.S. or abroad.

Who Needs To File IRS Form 8938?

IRS Form 8938 must be filed by U.S. taxpayers (citizens, residents, and certain nonresidents) who have specified foreign financial assets exceeding certain thresholds. These thresholds depend on the taxpayer’s filing status and residency:

  • U.S. Residents:
    • Single or married filing separately: Assets over $50,000 on the last day of the tax year or over $75,000 at any time during the year.
    • Married filing jointly: Assets over $100,000 on the last day of the tax year or over $150,000 at any time during the year.
  • Non-U.S. Residents:
    • Single or married filing separately: Assets over $200,000 on the last day of the tax year or over $300,000 at any time during the year.
    • Married filing jointly: Assets over $400,000 on the last day of the tax year or over $600,000 at any time during the year.

    Even if the reporting thresholds are met, Form 8938 is only required if the taxpayer is required to file a U.S. tax return.

What Are Foreign Financial Assets?

Foreign accounts or financial assets refer to financial accounts and investments held outside the United States, often subject to reporting to the U.S. Internal Revenue Service (IRS) by U.S. taxpayers. These assets can include, but are not limited to:

  1. Financial accounts maintained at foreign financial institutions, such as:
    • Bank accounts (checking, savings, CDs, etc.)
    • Brokerage and securities accounts
    • Commodity futures or options accounts
    • Insurance policies with cash value
    • Annuity policies with cash value
    • Shares in a foreign mutual fund
  2. Other foreign financial assets not held in a financial account, such as:
    • Stocks or securities issued by a foreign person or entity
    • Interests in a foreign partnership
    • Interests in a foreign trust or estate
    • Financial instruments or contracts with a foreign issuer or counterparty
  3. The “foreign” aspect refers to the assets being physically located or issued outside of the United States.
  4. Foreign financial assets do not include foreign real estate, foreign currency, or financial accounts maintained at U.S. financial institutions, even if they hold foreign stocks/securities.
  5. The key criteria is that the financial asset is “foreign” in nature, meaning it is issued, held or maintained outside of the United States.

What is the difference between FBAR and Form 8938?

While FBAR and Form 8938 both involve the reporting of specified foreign financial asset information, they are distinct in their requirements, reporting thresholds, and the types of assets they cover.

Thresholds and Specified Persons:

  • FBAR (FinCEN Form 114): Requires U.S. persons with a total of more than $10,000 in foreign financial accounts at any point in the calendar year to report. “U.S. persons” include citizens, residents, corporations, partnerships, and trusts.
  • Form 8938: Targets a broader range of U.S. filers with higher reporting thresholds. Unmarried individuals must report if they have foreign assets worth more than $50,000 at the year’s end or $75,000 at any time during the year. Married individuals filing jointly have a threshold of $150,000 worth of foreign assets at the year’s end or $100,000 at any time during the year.

Reporting Requirements:

  • FBAR: Focuses exclusively on foreign financial accounts, including bank accounts, brokerage accounts, and mutual funds.
  • Form 8938: Requires reporting on a wider array of foreign financial assets, not just accounts. This includes foreign stocks not held in a financial account, interests in foreign entities, and foreign securities.

Filing Process:

  • FBAR: Filed separately from the individual’s tax return, directly to the Financial Crimes Enforcement Network (FinCEN) using the BSA E-Filing System.
  • Form 8938: Filed as part of an individual’s annual tax return to the IRS, making it directly tied to the tax filing process.

Understanding these differences is crucial for compliance with U.S. tax laws and avoiding potential penalties. Each form serves a specific purpose in the broader aim of preventing tax evasion and promoting financial transparency.

Related: FBAR vs Form 8938: A Side-by-Side Comparison

What Is The Penalty For Failure To File Form 8938?

The penalty for failing to file Form 8938, Statement of Specified Foreign Financial Assets, can be substantial. If you do not file a required Form 8938, the starting penalty is $10,000. Additionally, if the failure to file continues after IRS notification, an additional penalty of up to $50,000 may be applied for continued non-compliance.

Beyond monetary penalties, failing to timely file Form 8938 can also have implications for the statute of limitations on your income tax return itself. Normally, the IRS has three years to audit a tax return, but if you fail to file Form 8938, the statute of limitations may remain open indefinitely until the required Form 8938 is filed. This means the IRS can audit your income tax return at any time in the future without any time limit, potentially examining years beyond the standard audit window.

It’s also important to note that these penalties are separate from and in addition to any penalties associated with failing to file an FBAR (FinCEN Form 114), which has its own civil penalty assessment structure to apply civil monetary penalties for non-compliance.

How to File Form 8938?

Filing IRS Form 8938, Statement of Specified Foreign Financial Assets, involves several steps to a foreign financial asset to ensure compliance with the Foreign Account Tax Compliance Act (FATCA). Here’s how to go about it:

STEP 1: Determine if you are required to file Form 8938:

  • Are you a U.S. citizen, resident alien, or certain nonresident aliens?
  • Do you have “specified foreign financial assets” that exceed the reporting thresholds? The thresholds vary based on your filing status and whether you live abroad.

STEP 2: Gather information on your specified foreign financial assets:

  • This includes foreign bank accounts, investment accounts, pensions, insurance policies, and other foreign financial instruments.
  • Determine the total value of these assets as of the last day of the tax year, as well as the maximum value during the year.

Form 8938 Page 1

STEP 3: Complete Form 8938:

  • Fill out all the required sections of the form, including identifying information, details on your specified foreign financial assets, and any other foreign information returns you have filed.

STEP 4: Attach Form 8938 to your annual tax return:

  • Form 8938 must be filed with your Form 1040 (or other applicable annual return) by the due date of that return, including any extensions.

How Does the IRS Know If I Haven’t Filed Form 8938?

Since the enactment of the Foreign Account Tax Compliance Act (FATCA), international financial transparency has significantly increased. Under FATCA, foreign financial institutions (FFIs) are required to report information on financial accounts held by U.S. taxpayers directly to the IRS. This includes details on accounts holding cash, foreign stock, foreign mutual funds, foreign pensions and other specified foreign financial assets exceeding certain thresholds.

Many of our clients first become aware of their filing obligations when their bank or financial institution, located in a foreign country, reaches out to them regarding their obligation to report their foreign financial account information under FATCA. This automatic exchange of information has equipped the IRS with a robust mechanism to track compliance with Form 8938 filing requirements. If there’s a discrepancy between the information received from FFIs and your tax filings, or if the IRS receives information from a foreign financial institution about your foreign financial assets but you haven’t filed Form 8938, it could raise red flags, potentially leading to audits, penalties, or both.

How 1040 Abroad Can Help

Navigating the requirements of Form 8938 and understanding the broader implications of FATCA can be daunting, especially for U.S. expats living abroad. If you have any questions about your specific situation, or if you’re looking for tailored tax advice, don’t hesitate to reach out. We offer free tax advice via email to help you navigate your obligations with confidence. Contact us today to ensure your foreign financial assets are in full compliance with IRS requirements.

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