In the past, some individuals and businesses bought foreign assets to lower their United States tax bill. This didn’t go over well with the Internal Revenue Service (IRS) and the federal government. In the last couple of decades, the laws have become stricter for individuals, corporations, partnerships, and trusts that keep foreign assets that exceed a certain dollar amount. The IRS Form 8938 is one of the measures to crack down on unreported form assets. Here’s everything you need to know about this form:
Define IRS Form 8938
On March 18, 2010, President Obama signed the Foreign Account Tax Compliance Act (FATCA) into law, and Form 8938 was one of the new forms created. The overall goal of FATCA was to place stricter requirements for taxpayers to report their foreign assets and pay the appropriate tax burden. It also was meant to force non-compliant taxpayers to reveal their foreign assets and get local foreign banks to reveal that information to ensure the United States government received the correct amount of taxes from its citizens.
One thing you and your company need to remember is that some foreign investments are made through investment accounts based in the United States, and these foreign investments aren’t subject to FATCA requirements and don’t require you to file a Form 8938.
Do I Need to Use Form 8938?
Each and every American taxpayer is bound by the requirements of FATCA. However, there are very specific circumstances in which FATCA applies to your foreign investments, and it’s essential that you understand these.
In the instructions for Form 8938, you may notice that they use the terms “specified individuals” and “specified domestic entities.” It goes on to when these people and businesses must use the form to report domestic assets.
You are a specified individual if:
- You’re a citizen of the United States
- You are considered a resident alien in the United States
- If you’re a nonresident alien, and you opt for tax purposes to be treated as a resident alien.
- If you live in American Samoa or Puerto Rico, and your status is a non-resident alien.
The IRS defines specified domestic entities as corporations or partnerships that meet the three items in this criteria:
- On the last day of the tax year, a single person holds more than 80 percent of the company’s shares, capital, or voting power.
- Passive income makes up 50 percent of the corporations or partnerships’ gross income.
- The partnership or corporation keeps 50 percent of its assets in order to create passive income.
When you have a domestic trust and at least one specific beneficiary, you need to fill out Form 8938.
If you’re one of the people who doesn’t need to file tax returns each year because you make less than the standard deduction for a non-dependent taxpayer, then you don’t need to file Form 8938.
What Are the Reporting Thresholds for Form 8938?
Once you determine that you’re an individual, business, or trust holder who might need to file Form 8938, you need to determine if you meet the financial threshold for filing it. Here are those thresholds:
Single Person Who Lives in the United States
In this situation, you only need to file a Form 8938 when on the last day of the current tax year the fair market value of their asset exceeds $50,000, or the value exceeded $75,000 at some time during the tax year.
Married Individuals Living in the United States and Filing a Joint Return
These married couples file Form 8938 when the fair market value of their asset exceeds $100,000 on the last day of the current tax year, or the value exceeded $150,000 during the tax year.
Married Individuals Who Live in the United States and Aren’t Filing a Joint Return
This is essentially seen as the same situation as a single person with foreign assets by the IRS. You use the same figures as a single person and must file the form when the fair market value of their asset exceeds $50,000 on the last day of the current tax year, or the value exceeded $75,000 at any point during the tax year.
Single People Who Live Outside the United States
You must first pass either the physical presence test or the bona fide resident test. Then you must have foreign assets with a fair market value of $200,000 on the last day of the current tax year, or the value exceeded $300,000 at any point during the tax year.
Married People Living Outside the United States and Filing a Joint Return
To be required to file Form 8938, you must first pass the physical presence test or the bona fide resident test. The fair market value of your foreign assets must exceed $400,000 on the last day of the current tax year, or the value exceeded $600,000 at some time during the previous 12 months.
Married Individuals Who Live Outside the United States and File Separate Returns
For the IRS, this situation is almost identical to that of an individual living in a foreign country. You need to pass either the physical presence test or the bona fide resident test. Then your foreign assets must have a fair market value of $200,000 or higher on the last day of the current tax year, or the value must have exceeded $300,000 during the tax year.
Partnerships, Trusts, and Corporations
Your group must file Form 8938 when the fair market value of their asset exceeds $50,000 on the last day of the current tax year, or the value exceeded $75,000 at any point during the tax year.
What Does the IRS Consider a Foreign Asset?
To be considered a foreign asset under FATCA and need to file Form 8938 if its value meets the threshold for your filing status, it must be:
- Homes and rental properties that are part of a foreign estate, corporation, trust, or partnership.
- Financial accounts held at foreign financial companies, including bank accounts, mutual funds, and retirement accounts.
- A financial contract that was issued by a foreign insurer or counter party.
- Security, bonds, and stocks issued by a foreign party and not held by an American investment company.
- Bonds or notes offered by an individual of a foreign country.
- Any interest received on a foreign entity, including partnerships, trusts, or corporations.
What are the Filing Requirements for Those With Foreign Assets
For U.S. taxpayers with foreign assets, the filing requirements depend on several factors, including the type and value of the assets. Here is a list of some of the key filing requirements:
- Foreign Bank Accounts: U.S. taxpayers with foreign bank accounts with an aggregate value of $10,000 or more must file a Report of Foreign Bank and Financial Accounts (FBAR) each year with the Financial Crimes Enforcement Network (FinCEN) by April 15th.
- Foreign Income: U.S. taxpayers who earn income from foreign sources must generally report such income on their tax return annually.
- Foreign Assets: U.S. taxpayers with foreign assets exceeding certain thresholds must report them on their tax return each year. This includes Form 8938 for specified foreign financial assets and Form 3520 for certain types of foreign trusts.
- Foreign Corporations and Partnerships: U.S. taxpayers who own or have an interest in foreign corporations or partnerships may also have additional reporting requirements, such as Form 5471 or Form 8865.
It’s important to note that these requirements can be complex and may vary based on individual circumstances, so it’s always best to consult with a tax professional or attorney if you have questions or concerns about foreign asset reporting requirements.
According to the IRS, what is Reasonable Cause Exception to Late Filing and How Does it Work?
The IRS allows taxpayers to request a reasonable cause exception for failing to file Form 8938 by the due date. In order for the reasonable cause exception to be granted, taxpayers must provide evidence that they exercised ordinary business care and prudence in attempting to comply with their reporting requirements, but were unable to do so despite taking reasonable actions.
Examples of actions which may qualify for this exception include:
- relying on inaccurate advice from a professional advisor
- an unavoidable delay in obtaining necessary documents
- extraordinary circumstances such as natural disasters or extreme illness
If a taxpayer is able to show reasonable cause for their failure to timely file Form 8938, they may be eligible to have any penalties waived. However, this waiver only applies if the taxpayer files their form within 60 days of the penalty notice or no later than one year after the original due date of the return.
Get Help From a Professional
You want to pay your taxes correctly and file all the necessary forms. The tax professionals at Silver Tax Group can assist with all of your tax needs and have expertise in dealing with tax issues relating to offshore assets.
Form 8938 FAQs
What is Form 8938?
Form 8938 is a tax form used by U.S. taxpayers to report specified foreign financial assets and income.
Who needs to file Form 8938?
Individuals who have specified foreign financial assets that exceed certain thresholds must file Form 8938 with their annual tax return. This includes U.S. citizens and residents as well as certain non-residents.
What are specified foreign financial assets?
Specified foreign financial assets can include things like foreign bank accounts, investments in foreign stocks or securities, and interests in foreign entities such as partnerships or trusts.
What are the filing thresholds for Form 8938?
The filing thresholds for Form 8938 depend on the taxpayer’s filing status and whether they live in the U.S. or abroad. For example, if a married couple filing jointly lives in the U.S., they must file Form 8938 if the total value of their specified foreign financial assets exceeds $100,000 at any point during the year.
What happens if I don’t file Form 8938?
If you are required to file Form 8938 but fail to do so, you may be subject to penalties and interest on any tax owed. The penalties can be quite steep, so it’s important to file the form if required.
What are the Late Filing Form 8938 Penalties?
The penalty for failing to file Form 8938 is $10,000, and an additional penalty of up to $50,000 or 5 percent of the total balance may be imposed. Furthermore, if the failure to timely file continues after IRS notification of a delinquency, an additional penalty may be imposed equal to the greater of $135 per day or 10 percent of the aggregate balance owed. Failing to report foreign assets on Form 8938 may also result in criminal penalties.
