Reporting Foreign Financial Assets on Form 8938
Beginning with tax years starting after March 18, 2010, United States taxpayers are required to report to the Internal Revenue Service about financial assets held outside the United States. This reporting requirement is part of the Foreign Account Tax Compliance Act (FATCA), which was part of the larger Hiring Incentives to Restore Employment Act (HIRE). FATCA consists of two parts: a new withholding regime designed to encourage global financial institutions to submit reports to the IRS regarding the international finances of US citizens, and a new reporting mechanism by which US taxpayers self-report to the IRS financial assets held outside the United States.
This article discusses the self-reporting requirements of US taxpayers under FATCA.
What Counts as a Foreign Financial Asset
Foreign financial assets, or "specified foreign financial assets" as the IRS calls them, consist of:
- Financial accounts maintained at financial institutions outside the United States, such as bank accounts, investment accounts and mutual funds;
- Stocks, bonds or other securities issued by a non-U.S. person and not held through an investment account;
- Any interest in a foreign entity, such as a foreign corporation, foreign partnership, or foreign trust;
- Any financial instrument or contract that has an issuer or counterparty that is not a U.S. person.
Foreign investments held through U.S.-based investment accounts are not reported on Form 8938.
Who Is Required To File Form 8938
Technically all U.S. taxpayers are impacted by FATCA. But for now, the IRS is requiring only individual taxpayers to report their foreign financial assets. The IRS's instructions for Form 8938 refer to "specified individuals" and delineate when reporting is required. The following "specified individuals" may be required to file Form 8938: U.S. citizens, resident aliens, non-resident aliens who elect to be treated as if they were resident aliens, and non-resident aliens who reside in American Samoa or Puerto Rico.
(For more details, see Do I Need to File Form 8938, "Statement of Specified Foreign Financial Assets"? on the IRS.gov Web site.)
Reporting Thresholds for Form 8938
Taxpayers will need to track two measures of the market value of their foreign financial assets: the maximum value of the asset at any time during the year and the value of the asset at the end of the tax year. Taxpayers will then take the sum of all the maximum values and the sum of all the year-end values. These totals are then used to determine if the value of the assets exceed the reporting thresholds. If so, taxpayers will need to report all their foreign financial assets to the IRS. If the thresholds are not met, then taxpayers are not required to file Form 8938.
The IRS has set forth different thresholds for different types of taxpayers, as follows:
- Unmarried individual residing in the United States are required to file Form 8938 if the market value of their foreign financial assets is greater than $50,000 on last day of year or greater than $75,000 at any time during the year.
- Married individuals filing jointly and residing in the United States are required to file Form 8938 if the market value of their foreign financial assets is greater than $100,000 on last day of year or greater than $150,000 at any time during the year.
- Married individuals filing separately and residing in the United States are required to file Form 8938 if the market value of their foreign financial assets is greater than $50,000 on last day of the year or greater than $75,000 at any time during the year.
- Unmarried individual residing outside the United States and satisfying either the bona fide resident or physical presence tests are required to file Form 8938 if the market value of their foreign financial assets is greater than $200,000 on last day of year or greater than $300,000 at any time during the year.
- Married individuals filing jointly residing outside the United States and satisfying either the bona fide resident or physical presence tests are required to file Form 8938 if the market value of their foreign financial assets is greater than $400,000 on last day of year or greater than $600,000 at any time during the year.
- Married individuals filing separately and residing outside the United States and satisfying either the bona fide resident or physical presence tests are required to file Form 8938 if the market value of their foreign financial assets is greater than $200,000 on last day of year or greater than $300,000 at any time during the year.
How to Value Foreign Assets
Foreign financial assets are measured using their fair market value in the currency in which the asset is denominated. Taxpayers will need to know both the highest fair market value for that asset at any time during the year and the fair market value on the last day of the year. These market values are then converted into U.S. dollars using the currency exchange rate on the last day of the year. Taxpayers should use currency exchanges rates posted by the Treasury Department's Financial Management Service.
If that Web page does not list the currency needed, taxpayers can use other publicly available currency exchange databases. Taxpayers will need to specify the foreign currency, the exchange rate used, and the source of the exchange rate information if other than those posted at the Financial Management Service.
When to File Form 8938
Form 8938 is filed with the Form 1040 tax return. Filing an extension also extends the time to file Form 8938.
The Structure of Form 8938
Form 8938 spells out all information that needs to be reported to the IRS. Form 8938 consists of four parts:
Part I is for financial accounts, such as a deposit or custodial account with a financial institution.
Part II is for other types of financial assets, such as stocks, bonds and other financial instruments.
Form 8938 has room for just one asset in Part I and one asset in Part II. Taxpayers may use as many Forms 8938 as needed to report their foreign financial assets.
Part III is a summary showing where income from the foreign financial assets is reported elsewhere on the tax return.
Part IV is a summary for certain types of financial assets excepted from reporting on Form 8938 because that information is reported elsewhere on the tax return.
How Form 8938 Relates to the Foreign Bank Account Report
Form 8938 closely resembles older versions of the Foreign Bank Account Report (FBAR). But Form 8938 requests greater detail and serves a different purpose than the FBAR. The purpose of Form 8938 is to facilitate compliance with an internal revenue law (FATCA) and is part of the tax return, and is considered confidential tax return information. The purpose of the FBAR is compliance with the Bank Secrecy Act, is not part of the tax return, and is not considered confidential tax return information.
FBARs can be and are shared among governmental agencies and are used primarily by the Treasury Department's Financial Crimes Enforcement Network to track and combat international money laundering. Form 8938 is designed to be used by the Internal Revenue Service for combating international tax evasion.
Also, Form 8938 requests information about foreign assets, which includes foreign accounts that hold assets, while the FBAR requests information only about foreign accounts.
Taxpayers who have a requirement to file Form 8938 probably also have an obligation to report substantially the same information on the FBAR, which is filed separately with the Treasury Department. An FBAR is required if any United States person (including corporations and other entities) have at least $10,000 held in foreign accounts at any time during the year. However, the types of financial accounts reported on the FBAR differ slightly from the types of accounts reported on the Form 8938.
The IRS also has a chart with a detailed Comparison of Form 8938 and FBAR Requirements.
Penalties Relating to Form 8938
The IRS can impose a $10,000 penalty for failing to file Form 8938 by the due date of the tax return (including extensions), or for filing an incomplete or inaccurate Form 8938. If the Form 8938 has not been filed within 90 days of a formal notice by the IRS, then the IRS can assess additional penalties of $10,000 for each 30-day period (or part of a 30-day period) that the Form 8938 continues to be not-filed, up to a maximum penalty of $50,000.
If no Form 8938 is filed and the IRS determines that a taxpayer owns one or more foreign financial assets required to be reported, the IRS is allowed to presume that the foreign financial asset has sufficient value to meet the reporting thresholds. Penalties can be waived if the taxpayer can show reasonable cause for not reporting an asset on Form 8938.
- Internal Revenue Code sections 6038D (reporting requirements), 6662 (penalties), and 6501 (statute of limitations).
- Form 8938, Statement of Specified Foreign Financial Assets
- Instructions for Form 8938
- Comparison of Form 8938 and the Foreign Bank Account Report Requirements
- Summary of Key FATCA Provisions
- Explanation of Section 6038D Temporary and Proposed Regulations
- TD 9567, Temporary and Proposed Regulations for Reporting of Specified Foreign Financial Assets (which are summarized by the IRS in the link above)
- Joint Committee on Taxation's Technical Explanation (JCX-4-10)
- Offshore Accounts: Insider’s Summary of FATCA and its Potential Future, an insightful paper by J. Richard Harvey, who helped write FATCA when he worked at the IRS.