Taxpayers have long been required by the Bank Secrecy Act to report certain foreign accounts. The IRS also requires certain taxpayers to report their specified foreign financial assets on Form 8938, Statement of Specified Foreign Financial Assets, which is attached to their annual income tax return. This annual foreign-asset disclosure to the IRS is in addition to any reporting requirement under the Bank Secrecy Act using the so-called “FBAR” form. This letter highlights some of the key elements of the reporting requirement for specified foreign assets.
Who must file Form 8938?
Form 8938 must be filed by “specified individuals” and “specified domestic entities” with “specified foreign financial assets.” A specified individual is a U.S. citizen; a resident alien of the U.S. for any part of the tax year; a nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return; or a nonresident alien who is a bona fide resident of American Samoa or Puerto Rico.
Specified domestic entities include certain domestic corporations, partnerships, and trusts that are formed for the purpose of holding, directly or indirectly, specified foreign financial assets.
Specified foreign financial assets
The IRS has described what constitutes a specified foreign financial asset in the Instructions to Form 8938 and in guidance. Specified foreign financial assets include foreign financial accounts, and foreign non-account assets held for investment (as opposed to held for use in a trade or business), such as foreign stock and securities, foreign financial instruments, contracts with non-US persons, and interests in foreign entities.
Along with knowing what assets meet the definition of a specified foreign financial asset, it is important to know what assets are excluded from the definition of a specified foreign financial asset and do not require Form 8938 reporting. This includes, for example, foreign real estate held directly. Additionally, certain specified foreign financial assets reported elsewhere do not need to be reported on Form 8938.
Exceptions are also made for certain trusts and assets held by bona fide residents of U.S. possessions. One important exception applies to an interest in a social security, social insurance, or other similar program of a foreign government. If you have any questions about the types of assets that are excluded from the definition of specified foreign financial asset, please contact our office.
Thresholds
The IRS has developed monetary thresholds for reporting. The thresholds vary depending on the taxpayer’s status.
- Unmarried taxpayers living in the U.S.: The total value of the taxpayer’s specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
- Married taxpayers filing a joint income tax return and living in the U.S.: The total value of the couple’s specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
- Married taxpayers filing separate income tax returns and living in the U.S.: The total value of the taxpayer’s specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
- Taxpayers living abroad. An individual is a taxpayer living abroad if (1) the individual is a U.S. citizen whose tax home is in a foreign country and the individual is either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year; or the individual is a U.S. citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries for at least 330 days.
- Domestic entities. The total value of the domestic entity’s specified foreign assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
Taxpayers will need to determine the value of their specified foreign financial assets. Generally, taxpayers may rely on periodic account statements for the tax year to report a financial account’s maximum value unless the taxpayer knows or has reason to know that the statements do not reflect a reasonable estimate of the maximum account value during the tax year. The IRS has provided guidance on valuing other types of specified foreign financial assets.
Form 8938 is filed with the taxpayer’s federal income tax return. A taxpayer does not need to file Form 8938 if an income tax return for the tax year is not required..
Penalties
Penalties for noncompliance can be substantial. There is a failure to file (Form 8938) penalty of $10,000 and an additional penalty of up to $50,000 for continued failure to file after notification by the IRS. However, a taxpayer may avoid a penalty if failure is due to reasonable cause and not willful neglect. In addition, penalties for underpayment and fraud may apply as well as criminal penalties.
FBAR filing
The Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation, if there is one, under the Bank Secrecy Act to file Form 114, Report of Foreign Bank and Financial Accounts (FBAR).
Taxpayers generally must file an FBAR if they have a financial interest in, signature authority or other authority over one or more accounts in a foreign country, and the value of the account exceeds $10,000 at any time during the calendar year. The FBAR must be received by the IRS on or before April 15 of the year following the calendar year being reported. The FBAR is not filed with the taxpayer’s federal income tax return. Instead, it must be filed electronically through FinCEN’s BSA E-Filing System.
If you have any questions about FATCA’s reporting requirements or Form 8938, please contact our team.
