Important Facts About IRS Form 8938
While there are many different types of international information reporting forms that a U.S. Taxpayer may have to file each year with the IRS, Form 8938 (a relative newcomer to the world of international tax) is one of the most common types of foreign reporting forms that should be on a U.S. Taxpayer’s radar. Form 8938 is used by U.S. persons who are required to report foreign assets and accounts as required by FATCA (Foreign Account Tax Compliance Act) and in conjunction with Internal Revenue Code Section 6038D. It is important to note that while Form 8938 is similar to another international reporting form called the FBAR (Foreign Bank and Financial Account Reporting), it is a separate form with its own set of filing requirements (and headaches).
*Golding & Golding previously published the 5 Facts About IRS Form 8938 You Should Know article back in 2021 and has since updated and expanded the list.
When Is Form 8938 Required?
Form 8938 is part of the tax return. So, unlike several of the other standalone international information reporting forms such as the FBAR and Form 3520, Form 8938 is only required by Taxpayers if they are required to file a tax return in the same year they meet the threshold requirements. In other words, even if a Taxpayer exceeds the threshold requirements for filing Form 8938, if they are not required to file a tax return that year, then they are also not required to file Form 8938 that year.
Taxpayers Living Abroad Must Still File Form 8938
Taxpayers who live overseas and are still being taxed as U.S. Persons are still required to file Form 8938 even though they live overseas, but the threshold requirements for foreign residents are much higher than for U.S. residents. Also, a successful treaty election may eliminate (or modify) the filing requirements.
How to Extend the Form 8938 Filing Due Date
If a Taxpayer files an extension to file their tax return in October instead of April (or October instead of June for taxpayers abroad), Form 8938 goes on extension as well so that taxpayers are not required to file a separate extension for Form 8938 as they would have to do for Form 3520-A, which requires filing IRS extension Form 7004.
Form 8938 Is Included With Commercial Software Packages
Unfortunately, many Taxpayers fail to file certain international information reporting forms such as Form 3520 or Form 8621 because those forms are usually not part of most commercial tax software packages such as H&R Block and TurboTax. However, Form 8938 is typically part of the most common tax software packages.
You Must Have a Financial Interest in the Asset/Account
Unlike other tax forms such as the FBAR (in which Taxpayers must file whether or not they have an actual interest in the foreign account), Form 8938 is only required when a Taxpayer has a ‘financial interest’ in the underlying account or asset. Thus, if the filer does not have a financial interest in the account or asset, Form 8938 may not be required.
Are Both the FBAR and Form 8938 Required?
Depending on the type of foreign assets that the Taxpayer owns, they may be required to file multiple forms for the same asset in the same year. For example, Taxpayers with certain foreign bank accounts may have to file both the FBAR and Form 8938 if they meet both thresholds (noting there are different thresholds to consider).
Different Thresholds for Single vs Married/U.S. Residency
Unlike the FBAR which has the same $10,000+ threshold depending on whether the Taxpayer lives in the United States or lives abroad, Form 8938 has different threshold requirements depending on whether the Taxpayer is filing Married vs. Single/Married Filing Separately (and whether the Taxpayer resides in the United States or is considered a foreign resident).
Penalties Are Per Form, Not Per Asset
Taxpayers who are assessed Form 8938 penalties for non-compliance should note that it is not based on each account or asset identified in Form 8938 but rather on the non-filing or the late filing of the form itself. Typically, penalties start at $10,000 per year, although there are potential continuing failure-to-file penalties. As provided by the IRS:
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“Continuing Failure To File: If you do not file a correct and complete Form 8938 within 90 days after the IRS mails you a notice of the failure to file, you may be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000.”
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Penalties May be Avoided, Waived, or Abated
For Taxpayers who have been (or might be) penalized for late or incomplete filing of Form 8938, the IRS offers several options to minimize, avoid, or abate penalties. Many Taxpayers will qualify for either the Streamlined Procedures or Delinquency Procedures, which are taxpayer-friendly offshore amnesty tax programs (see below).
Joint and Several Liability
Penalties involving Form 8938 are assessed against the joint tax return, not just the individual taxpayer with the foreign accounts/assets. In other words, even if assets belong to only one person, both parties to the tax return may be penalized. As provided by the IRS:
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“Married Taxpayers Filing a Joint Income Tax Return: If you are married and you and your spouse file a joint income tax return, the failure-to-file penalties apply as if you and your spouse were a single person. Your and your spouse’s liability for all penalties is joint and several.”
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Examples of Foreign Asset Disclosures
*For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice. **This article was originally written by Golding & Golding in 10/2024 and has been recently updated and expanded.
Foreign Bank Accounts
Foreign bank accounts are the most common foreign assets that many U.S. Taxpayers have. Whether it is because the Taxpayer lived in a foreign country, worked in a foreign country, or invested in a foreign country, having a foreign bank account is relatively common. When a Taxpayer has a foreign bank account, they may have to report that foreign bank account on multiple international information reporting forms.
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Example 1: Michelle lives in a foreign country and has five different bank accounts. Some of the bank accounts are above $10,000 and some of the bank accounts are below $5,000. Since the aggregate annual total of the foreign accounts exceeds $10,000, all 5 bank accounts are reportable on the FBAR. Since Michelle files as “Single” on her tax return and the maximum value of her accounts combined in the year was $170,000, she does not have to file the Form 8938 (since it is under the threshold reporting for 8938).
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Example 2: Janine lives overseas and has three bank accounts with a total maximum value of $340,000. Janine also files as “Single” on her tax return, but because the maximum value of her foreign accounts exceeded $300,000 during the year, she will file both the FBAR and Form 8938.
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Example 3: David lives overseas and has one bank account with $700,000 and no income from any sources. David will file the FBAR, but since David is not required to file a tax return, he does not need to file Form 8938 even though the maximum value of his account exceeds the filing threshold for Form 8938.
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Foreign Stock Accounts and Individually Held Stock
Foreign stock is reportable, but depending on whether the foreign stock is in an account or whether it is held directly will impact what type of reporting may be required:
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Example 1: Brenda lives in the United States and has $90,000 in a foreign stock account. Since Brenda files “Single,” she will have to file both the FBAR and Form 8938.
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Example 2: Brian lives in a foreign country and has a single bank account with $7,000 in it and directly held stock worth $750,000. Since Brian has a significant amount of income, he is required to file the tax return and is also required to file Form 8938 to report the directly held stock. But, since the total value of Brian’s financial accounts is less than $10,000, he is not required to file the FBAR.
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Example 3: The same facts as Example 2 except Brian has a stock account with $750,000 in it and does not directly own stock. In this example, Brian would now be required to file both the FBAR and Form 8938.
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Foreign Mutual Funds and ETFs
Unfortunately, in most situations, foreign mutual funds and foreign ETFs will qualify as PFIC — Passive Foreign Investment Companies. As a result, the Taxpayer may be required to file multiple forms each year depending on how the pooled funds are held and whether they are held directly or in a foreign account with other non-PFIC.
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Example 1: Scott owns $170,000 in foreign mutual funds (directly) and ETFs. Therefore, Scott will have to file the FBAR along with a separate Form 8621 for each PFIC.
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Example 2: David has an investment account worth $900,000 with 9 mutual funds within that investment account with a value of $600,000. In this type of situation, David will have to file the FBAR to report the foreign account, along with Form 8938 to report the foreign account — as well as individual Form 8621s for each PFIC. That is because even though there are mutual funds in the investment account, there are also non PFICs which will mandate the filing of both Form 8938 and 8621.
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Example 3: Peter has an RRSP that contains multiple foreign mutual funds in it with a value of $400,000. Peter will have to file the FBAR and Form 8938 but may be able to avoid filing Form 8621 for the mutual funds by relying on the treaty exception.
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The Tip of the Iceberg
The goal of this article is to help clarify some of the basics of international information reporting. Reporting foreign assets to the U.S. tax authorities can be very complicated, especially when it involves additional items such as foreign life insurance policies, foreign corporations, foreign partnerships, and transactions between U.S. persons and foreign companies. Taxpayers should try to stay in compliance if they are already in compliance or should consider getting into compliance if they have not properly filed the necessary reporting forms if for no other reason than the fact that the IRS has made offshore compliance a key enforcement priority and has been issuing fines and penalties for non-compliance.
Late Filing Penalties May be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Current Year vs. Prior Year Non-Compliance
Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. *This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.
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