The FORM 8938: Here is what you need to know if you are filing it

Feb 24, 2020

requirement, FATCA, foreign-held assets, interests, partnerships, bank accounts, mutual funds, stockholdings, FBAR, US treasury, form 8938, the IRS. 

Regarding the FORM 8938, there have been so many intricacies with respect to  income tax return filing and compliance with federal tax laws.

Recently, there have been a number of administrative requirements for disclosing local and foreign financial assets.

One such requirement is filing of FATCA-form 8938. You need to file form 8938 for disclosing foreign-held assets, interests, partnerships, bank accounts, mutual funds/stockholdings, etc. It is very similar to the FBAR, but you record FBAR with the US treasury. On the other hand, the IRS records form 8938. 

Who are the persons that come under the radar of FATCA compliance? 

You need to file form 8938 if you are a specified person or a specified domestic entity with rights/interests in a specified foreign financial asset. Now, every citizen of the USA who is earning more than $10,000 per annum, or holds a specific amount of foreign financial assets comes under the definition of specified persons for the purpose of FBAR reporting/filing form 8938.

What is FBAR?

FBAR is the report of foreign bank and financial accounts. It is separate from your tax return and is not filed with your tax return. FBAR is electronically filed directly with the Treasury. There is also no tax based on the FBAR. Instead, it is simply an informational reporting form, through which you are just providing information for the Treasury.

What is Form 8938?

Form 8938 is filed as part of your tax return. You do not need to file form 8938 separately, like the FBAR. You need to attach form 8938 to your form 1040 and file it along with it. Foreign Account Tax Compliance Act requires Form 8938. It became law on March 18th, 2010. The function of form 8938 is to report foreign financial assets.

Threshold requirements for Form 8938 

Thresholds for filing of Form 8938 is a bit different from that of the FBAR. Additionally, they vary depending on whether or not you are married, filing joint or single, or married filing single; or if you are a US resident or a foreign resident. 

In case you are a US resident, single or married but filing separate returns, you will be required to file form 8938 if your foreign financial assets are $50,000 at year-end or $75,000 or more at any time during that fiscal year.

Thresholds increase for persons that are married and filing jointly. In this case, the threshold is $100,000 a year-end and $150,0000/more at any time during the year.

If you are a foreign resident, the thresholds are even higher. It is because the IRS figured out that, being a foreign resident, you are more likely to have foreign financial assets. Thus, if you are foreign resident, single or married filing separately, you would be required to file. This will happen if, at year-end your foreign financial assets are at $200,0000/more, or if they were $300,000/more at any time during the year.

Alternatively, if you are a taxpayer, married and filing jointly, then the thresholds increase to $400,000 at year-end or $600,000 or more at any time during the year.

What are Foreign financial assets?

Foreign financial assets include foreign financial accounts. Form 8938 encompasses the same things as the FBAR. Additionally, it includes foreign stock/securities, ownership in any form/type of foreign entity, a financial instrument/contract with a foreign issuer counterpart (like a foreign annuity or insurance policy).

What are foreign financial accounts?

A very common misconception is that a foreign financial account is simply a bank account or a brokerage account.  Bank accounts or brokerage accounts are definitely foreign financial accounts. However, the term is very broad and encompasses a lot of different types of accounts. For example: foreign mutual funds, security deposits on rented real estate, foreign annuities, life insurance policies with a cash value etc. 

Difference between FBAR and form 8938

On the surface, FBAR and form 8938 look the same because both of them report almost similar information. However, there are few marked differences between the two.

  1. Specified persons for FBAR reporting are those that earn more than $10,000 per annum.While in case of form 8938, the specified persons are:
  • Any unmarried individual holding foreign assets worth more than $50,000 at the end of the fiscal year or had ownership of foreign assets worth $75,000 or more, throughout the fiscal year.  
  • All married persons that had $150,000 worth of foreign assets in a fiscal year or that still hold foreign assets worth $100,000 at the end of the fiscal year.
  1. Secondly, another difference between FBAR and form 8938 is the reporting requirements. In FBAR, requires specified persons to declare only foreign financial accounts. While the form 8938 requires them to file foreign financial assets.
  2. One files FBAR separately from the individual tax return. You need to file form 8938 along with annual tax return.
Penalties for non-compliance

The penalty of non-filing of form 8938 is $10,000. It can go up to $50,000 if the failure continues after receiving formal notification from the IRS. However, one of the scariest penalties is the unlimited statute of limitations. Basically, what this means is, traditionally the IRS has always had three years to audit a tax return. Therefore, if you made it past three years the IRS could not go back and audit it, unless in very exceptional circumstances.

Now that has been changed. If you didn’t file any of these foreign information returns, the IRS can go back and audit the entire tax return whenever they want. Hence, if you have failed to file form 8938 in 2011., the IRS could still go back to audit the entire tax return. Simply, because you failed to file one of these informational forms.

Another monetary component to this penalty is the application of 40% surcharge. This addition relates to the underpayment of taxes and unreported foreign financial assets and criminal charges. If you intentionally did not file form 8938, or you’ve been filing it incorrectly, the IRS can prosecute you against criminal offense.

Concluding remarks

In conclusion, a disclaimer: this blog post is for informational or educational purposes only. It is neither a legal or tax advice nor is it to be construed as such. Each individual circumstance is different. You should seek legal and/or tax advice to address any specific questions you may have.

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