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Form 8938 Penalties – Reducing or Avoiding FATCA Penalties for Individuals

Form 8938 Penalties - Reducing or Avoiding FATCA Penalties for Individuals

Form 8938 Penalties – Reducing or Avoiding FATCA Penalties for Individuals

This article “Form 8938 Penalties – Reducing or Avoiding FATCA Penalties for Individuals,” is prepared by the experienced International Tax Lawyers at Golding & Golding.

Form 8938 (Statement of Specified Foreign Financial Assets) is an IRS Form associated with FATCA (Foreign Account Tax Compliance Act). The failure to file the Form 8938 can lead to extensive Fines and Penalties.

This article should not be construed as Form 8938 Instructions, but rather a Summary Review Guide — to provide you a basic understanding of reporting requirements.

An IRS Form 8938 can be much more difficult and complex than first meets the eye (but not always), so we recommend working with an experienced International Tax Attorney to get into Tax Compliance.

Form 8938

Form 8938 can become a very complex form depending on the facts and circumstances of your situation. For some people, they may have a variety of different types of accounts such as deposit accounts, custodial accounts, and/or specified foreign financial assets that can make compliance very burdensome.

For other people, they may simply have bank accounts which they have already reported on their FBAR, and therefore the reporting requirements for the Form 8938 are relatively the same. Moreover, if they do not have any interest in the foreign accounts, they may have no Form 8938 reporting requirement at all.

But I Already Filed an FBAR ?

Please keep in mind that the Form 8938 and FBAR are not the same. Thus, while some individuals may have an FBAR reporting requirement simply because they have signature authority or another relationship to a foreign account, if they have no interest in the money — they may not even need to file a form 8938.

What is the Purpose of Form 8938?

Form 8938 is a relatively new form. It is a form that was created in accordance with FATCA (Foreign Account Tax Compliance Act), and Taxpayers were not even required to begin filing Form 8938 until 2011.  The purpose of the form is to extract certain information from taxpayers, so that the U.S. government can stay abreast of certain financial information regarding taxpayer accounts and specified foreign assets (such as shares of stock, securities, etc.)

Is it the Same as an FBAR?

No. And while we will go into more detail regarding distinctions further into this article, it is important to note that they are not the same. The FBAR has been around since the 1970s, with the sole requirement being the reporting of the Maximum Account Balance during the year. In other words, the purpose of the FBAR for individuals is that if, on any day during the year, they had an annual aggregate total of more than $10,000 in their foreign accounts, they have to report the accounts on an FBAR (FinCEN 114).

While the tax geeks at Golding & Golding can surely bore you with the logistics of who created the form, who gets to enforce the penalties, etc. — we have decided to take mercy on you. All you need to know is that if you own, jointly owned, or have signature authority over foreign accounts, which on any day of the year in total exceeded $10,000 – you should probably file the form.

*We say probably, because this is a summary. We do not represent you, and therefore we have not reviewed and evaluated your facts and circumstances to assess the possibility that you may be exempt from filing.

How is Form 8938 Different From an FBAR?

Form 8938 is just…different. First, unlike the FBAR which is submitted separately, electronically, to the Department of Treasury – Form 8938 is filed directly alongside your tax return (if you meet the threshold requirement) to the IRS.

Unlike the FBAR, form 8938 requires much more in the way of reporting. Namely, if your foreign financial accounts or assets are generating income, then unlike the FBAR, a Form 8938 requires that you disclose the income (line-by-line) on the form.  Form 8938 has evolved since its introduction back in 2011, but the reporting requirement remains the same.

Moreover, unlike the FBAR, on the Form 8938 you have to break down the income by category/type. For example, if you earned interest income from a custodial account, you have to identify that on one portion of the 8938. If you earned dividend income from a deposit account, you would also have to identify it separately on its own line. (Noting, custodial and deposit account income is not distinguished on the form as of current)

In addition, if you received royalties from a specified foreign asset, then this would also go on a separate part the form for income generated from assets, as opposed to accounts.

But I already Reported my Foreign Income on Schedule B?

It does not matter. Just because you reported your foreign income on schedule B does not exempt you from the burdensome dual reporting of also including in on the Form 8938.  

If I File an FBAR, do I also have to File an 8938?

It depends on the type of accounts you have. While the forms are similar, they are not exact. Oftentimes, much of the same information that is reported on the FBAR will be duplicated on form 8938, but not always. Conversely, you may be required to include information on a Form 8938 (such as direct ownership of stock) that you would not have to report on an FBAR (since the FBAR is used to report accounts and not direct ownership of assets)

In addition, there are different threshold requirements for having to file a Form 8938, depending on whether you are Married, Single, or Married Filing Separately – as well as whether you are considered a US resident with foreign resident for tax purposes.

Please see below for more in-depth discussion regarding the different threshold requirements for filing form 8938.

It Looks like I have more Money than I Do?

This is a much more common situation than you may think

Example: Andrea has $1 million in foreign accounts. During this particular tax year, Andrea moved more than $800,000 of her retirement fund into a new retirement fund. Moreover, Andrea had a few fixed deposits that matured, and therefore she closed those accounts, withdrew the money, and opened new fixed deposits.

Since all of the accounts at some point were ‘open’ during the current tax year that Andrea is filing a Form 8938, she will have to report each account. As a result, it may appear as if Andrea has more than twice the money she has, when in reality it is the same money being transferred to different accounts.

Not to worry, the IRS already thought of this. If you inspect Form 8938, you will find that each account entry has certain boxes you can mark-off depending on the facts and circumstances of your case, including:

  • Was the account opened this year?
  • Was the account closed this year?

This should help alleviate some of that stress we know you’re feeling when you have to submit paperwork to the IRS making it appear that you are more wealthy than you are.

Who Must File FATCA Form 8938?

If you are a US Citizen, Legal Permanent Resident or Foreign National otherwise subject to US tax, then you may already be aware of FATCA (Foreign Account Tax Compliance), OVDP (Offshore Voluntary Disclosure Program), IRS Streamlined Offshore Disclosure Program, and various other requirements necessary to get into IRS compliance with your overseas and foreign tax income and assets.

                                           

What is IRS FATCA Form 8938?

The IRS FATCA Form 8938  is a form that is required to be filed when a taxpayer or taxpayers submit their tax return to the Internal Revenue Service.

Not all taxpayers are required to file IRS form 8938. Rather, FATCA Form 8938 is reserved for individuals who maintain accounts or “Specified Foreign Assets” overseas and meet the threshold requirements for filing the form.

*Even if you reside overseas, if you are a U.S. Citizen, Legal Permanent Resident, or even sometimes a former Legal Permanent Resident you are still required to file an 8938, although the threshold requirements for filing are higher.

                                           

Why Report Overseas Foreign Income and Assets?

Although it may seem unfair, the United States taxes US taxpayers on their worldwide income. That means is that if you reside in a foreign country and earned income (employment, self-employment, interest, capital gains) you are required to file a US tax return and disclose all your domestic and foreign income on your US tax return (Even if the income is tax-free in the foreign country).

Chances are that if you have already paid tax on the earnings in a foreign country, you will receive a foreign tax credit so that you do not pay the same tax twice. If on the other hand, you are earning money in a country that does not require taxation of that specific type of income such as capital gains, dividends, or interest income – you are still required to pay US taxes on that money.

                                           

Threshold Requirements for Filing an IRS form 8938?

Whether or not the taxpayer has to file a FATCA Form 8938 will depend on the amount of money they have overseas, country of residence and marital status.

For Taxpayers residing in the United States:

Single Taxpayers or Married Filing Separate (MFS)

If a taxpayer is single, or files married filing separate then they will have to file IRS form 8938 if they have more than $50,000 in aggregate total in Specified Foreign Assets on the last day of the year. Alternatively, if they have less than $50,000 on the last day of the year but at any time during the year they had $75,000 or more in Specified Foreign Assets, then they are also required to file IRS form 8938.

Married Filing Jointly Taxpayers (MFJ)

When taxpayers file married filing jointly, the threshold requirements are doubled. In other words, when a couple files the US tax return as married filing jointly, they will only have to file IRS form 8938 when you have a combined annual aggregate total of $100,000 on the last day of the year or if it anytime during the year they had $150,000 or more in overseas accounts.

If a person does not meet these threshold requirements then generally they will not have to file IRS form 8938.

*Taxpayers should be sure they understand that even if they are not required to file IRS form 8938, they may still be required to file an FBAR with the Department of the Treasury, since the threshold requirements for overseas accounts and FBARs are significantly less ($10,000). 

**Unlike the FBAR, a person only has to file an IRS form 8938 when the money is theirs; with an FBAR, a person has to file the FBAR even if the money is not theirs, but they have signatory authority over the accounts.

***The Threshold Requirements for Taxpayers residing overseas to have to file a FATCA Form 8938 are significantly higher.

Single Taxpayers or Married Filing Separate (MFS) – Foreign Residents

If a taxpayer is single, or files married filing separate then they will have to file IRS form 8938 if they have more than $200,000 in aggregate total in Specified Foreign Assets on the last day of the year. Alternatively, if they have less than $200,000 on the last day of the year but at any time during the year they had $300,000 or more in Specified Foreign Assets, then they are also required to file IRS form 8938.

Married Filing Jointly Taxpayers (MFJ) – Foreign Residents

When taxpayers file married filing jointly, the threshold requirements are doubled. In other words, when a couple files the US tax return as married filing jointly, they will only have to file IRS form 8938 when you have a combined annual aggregate total of $400,000 on the last day of the year or if it anytime during the year they had $600,000 or more in overseas accounts.

If a person does not meet these threshold requirements then generally they will not have to file IRS form 8938.

                                           

What Information is Included on an IRS form 8938?

An IRS form 8938 basically details the overseas accounts of the taxpayers. Let’s assume that taxpayer has $175,000 overseas in four (4) foreign accounts. When completing the tax return, the taxpayer will have to detail the information for each account. Generally, IRS form 8938 will require the following information:

  • The maximum value of the account for the tax year
  • The account number
  • The bank name
  • The bank address
  • Acknowledgment by the Taxpayer as to whether the account earned any interest.

There is some additional information that may be required but for the most part these are the five most important pieces of information that will be included on the IRS form 8938.

What if I do not Not Actually Own the Money or Asset?

Form 8938 differs from the FBAR. That is because when you file an FBAR, it is one you either have ownership of the foreign account, joint ownership of the, or signature authority over the foreign account. IRS Form 8938 is different. Technically, you only have the file the form if you have an interest in the. Therefore, whether or not you have any interest in the money is a higher threshold than simply having your name or signature authority on the account.

As provided by the IRS: “Unless an exception applies, you must file Form 8938 if you are a specified person (either a specified individual or a specified domestic entity) that has an interest in specified foreign financial assets and the value of those assets is more than the applicable reporting threshold.

Do I File a Form 8938 If I Receive a Foreign Gift?

Generally, the answer is no. Rather, you would file a form 3520. It is important to note that on the form 8938 it asks you whether you have to file any other forms, and one of the forms it identifies is form 3520. Therefore, while you do not need to file a form 3520 and form 8938 for the same asset or account, you do need to identify on form 8938 that you have filed a form 3520. Click Here to learn more about Form 3520 and the penalties involved.

Do I File a Form 8938 If I own a Foreign Business?

This is a bit of a trickier answer. Technically, if you have interest in a foreign business and that interest is at least 10%, then you will file a form 5471 (presuming it is not a PFIC). And, if you file a form 5471 then you are not required to file a form 8938 for that same interest.

Conversely, if you have an interest in a foreign business or own foreign business stock and it does not meet the 10% threshold, then you would have to file a form 8938 presuming that you met the threshold requirements for having to file a form 8938.

In other words, while you may not have to file a form 5471 because your ownership is less than 10%, if the value is higher than the threshold required for a form 8938, you would still have to file a form 8938Click Here to learn more about Form 5471 and the penalties involved.

Do I File a Form 8938 If I own a PFIC?

No. Just like form 3520 and form 5471, the IRS is not required that you file a form 8938 along with a form 8621 for the same asset. It is important to note, that you do have to identify whether you filed any form 8621’s directly on a form 8938.

In addition, it is important to keep in mind that the threshold requirements for filing a form 8621 (to report even fractional ownership interest of a PFIC) is very low. Even if you do not meet the requirements for having to file a Form 8938 or 5471, you may still need to file a form 8621 if it meets the definition of a PFIC. Click Here to learn more about Form 5471 and the penalties involved.

What are the Penalties for an Un-Filed 8938?

If you are required to file Form 8938 but do not file a complete and correct Form 8938 by the due date (including extensions), you may be subject to a penalty of $10,000 per year.

– 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, for a total of $60,000 in maximum penalties.

Are Married Taxpayers Both Liable for 8938 Penalties?

Maybe.

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. In other words, the spouses are “joint and severally” liable for the penalties.

Married Taxpayers filing a SEPARATE income tax return

 If you are married and you and your spouse file a separate income tax return, than only the person who is one the account or asset (presuming only one of the spouses would have been required to file a Form 8938) is required to pay the penalty.

Presumption of Maximum Value

If the IRS determines that you have an interest in one or more specified foreign financial assets and asks you for information about the value of any asset, but you do not provide enough information for the IRS to determine the value of the asset, you are presumed to own specified foreign financial assets with a value to be determined by the IRS. Moreover, you are subject to the failure-to-file penalties if you do not file Form 8938.

Reasonable Cause Exception

No penalty will be imposed if you fail to file Form 8938 or to disclose one or more specified foreign financial assets on Form 8938 and the failure is due to reasonable cause and not to willful neglect. You must affirmatively show the facts that support a reasonable cause claim.

                                           

If you are out of compliance for Filing Form 8938, you may consider one of the IRS Offshore Voluntary Disclosure options listed below:

IRS Voluntary Disclosure of Offshore Accounts

Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.

When Do I Need to Use Voluntary Disclosure?

Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.

If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure.

Golding & Golding – Offshore Disclosure

At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.

In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.” It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.

The Devil is in the Details…

If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.

It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.

Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.

What if You Never Report the Money?

If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported —  then you are in a bit of a predicament, which you will need to resolve before it is too late.

As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.

Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).

Getting into Compliance

There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.

We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlikes the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.

After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.

If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.

Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.

At Golding & Golding, we are Tax Attorneys (with Masters of Tax Law) and Enrolled Agents credentialed by the IRS (Highest Credential awarded by the IRS), so we can handle your entire submission (Taxes, Legal, and Audit Defense) in-house, for a flat-fee.

Call Today, Let us Help.