Reporting Foreign Financial Assets on Form 8938
Form 8938 Instructions
U.S. taxpayers have been required to report financial assets they hold outside the United States to the Internal Revenue Service since March 18, 2010. 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), and it requires filing IRS Form 8938.
FATCA consists of two parts: a withholding regime designed to encourage global financial institutions to submit reports to the IRS regarding the international finances of U.S. citizens, and a reporting mechanism by which U.S. taxpayers must self-report financial assets held outside the U.S. This reporting is accomplished using IRS Form 8938.
What Counts As a Foreign Financial Asset?
Foreign financial assets—or "specified foreign financial assets," as the IRS calls them—include:
- Financial accounts maintained at institutions outside the U.S., such as bank accounts, investment accounts, retirement accounts, deferred compensation plans, and mutual funds
- Stocks, bonds, or other securities issued by a non-U.S. person and not held through an investment account
- Notes or bonds issued by a foreign person
- Any interest in a foreign entity, such as a foreign corporation, foreign partnership, or foreign estate or trust
- Any financial instrument or contract that has an issuer or counterparty that isn't a U.S. person
Foreign investments held through U.S.-based investment accounts are not reported on Form 8938 and they're not subject to FATCA rules.
Personal residences and rental properties don't have to be reported if they're not held by a foreign partnership, corporation, trust, or estate.
Who Is Required to File Form 8938?
Technically, all U.S. taxpayers are subject to FATCA, but only under certain circumstances. The IRS's Form 8938 instructions refer to "specified individuals" and explain when reporting is required.
Specified individuals include U.S. citizens, resident aliens, non-resident aliens who elect to be treated as resident aliens for tax purposes, and non-resident aliens who reside in American Samoa or Puerto Rico.
Taxpayers who aren't required to file tax returns because they earn less than the income filing requirements—the same as the standard deduction for most non-dependents as of 2020—do not have to file Form 8938.
Tracking Measures for Form 8938
Taxpayers must track two measures of the market value of their foreign financial assets when completing Form 8938:
- 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 the year-end values. These totals are used to determine if the value of the assets exceeds the FATCA reporting thresholds. If so, taxpayers must report all their foreign financial assets to the IRS.
Taxpayers are not required to file Form 8938 if the reporting thresholds aren't met.
Form 8938 Reporting Thresholds
The IRS has set different thresholds for different types of taxpayers:
- Unmarried individuals 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.
- 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 the year or greater than $150,000 at any time during the year.
- Married individuals filing separate returns 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 individuals 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 the year or greater than $300,000 at any time during the year.
- Married individuals filing jointly 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 $400,000 on last day of the 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 the year or greater than $300,000 at any time during the year.
These thresholds are applicable as of Dec. 20, 2019.
The Structure of Form 8938
Form 8938 spells out all the information that must be reported to the IRS. It consists of five 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.
- 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.
- Part V asks for more detailed, specific information on assets included in Part I.
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 have to know the highest fair market value for that asset at any time during the year, as well as the fair market value on the last day of the year.
These market values are then converted to U.S. dollars using the currency exchange rate on as of the last day of the year. Taxpayers should use the currency exchanges rates posted by the Bureau of the Fiscal Service or those on the IRS website, which lists the applicable rates per country from 2014 through 2019.
Taxpayers must specify the foreign currency, the exchange rate used, and the source of the exchange rate information, particularly if it's something other than the Bureau of the Fiscal Service.
Form 8938 vs. the Foreign Bank Account Report (FBAR)
Form 8938 closely resembles older versions of the Foreign Bank Account Report (FBAR), but Form 8938 calls for greater detail and it serves a different purpose than the FBAR.
Form 8938 facilitates compliance with an internal revenue law (FATCA) and it's part of the tax return. It's considered to be confidential tax return information. The purpose of the FBAR is to ensure compliance with the Bank Secrecy Act. It's not part of the tax return, and is therefore not considered to be confidential tax return information.
FBARs can be and are shared among various governmental agencies. They're 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 IRS to international tax evasion. The form also requests information about various foreign assets, including foreign accounts that hold assets, while the FBAR requests information only about foreign accounts.
An FBAR is required if any United States person, corporation, or other entity has at least $10,000 held in foreign accounts at any time during the year. The types of financial accounts reported on the FBAR differ slightly from the types of accounts reported on the Form 8938.
Taxpayers who have a requirement to file Form 8938 usually have an obligation to report substantially the same information on the FBAR as well, which is filed separately with the Treasury Department.
The IRS provides 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.
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 remains unfiled within 90 days of a formal notice by the IRS. The maximum penalty is $50,000.
The IRS presumes that a foreign financial asset has sufficient value to meet the reporting thresholds if a Form 8938 isn't filed, and if the IRS determines that a taxpayer owns one or more foreign financial assets that are required to be reported. Penalties can be waived if the taxpayer can show reasonable cause for not reporting an asset on Form 8938.
Tax laws change periodically and the above information may not reflect the most recent changes. Please consult with a tax professional for the most up-to-date advice and specific questions if you hold foreign financial assets. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.
IRS. "Basic Questions and Answers on Form 8938." Accessed Jan. 25, 2020.
IRS. "Summary of FATCA Reporting for U.S. Taxpayers." Accessed Jan. 23, 2020.
IRS. "2019 Instructions for Form 8938," Pages 10-11. Accessed Jan. 23, 2020.
IRS. "Comparison of Form 8938 and FBAR Requirements." Access Jan. 24, 2020.
IRS. "Information for U.S. Taxpayers on the Requirements of Form 8938, Statement of Specified Foreign Financial Assets." Accessed Jan. 23, 2020.