201711.09
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Form 8938 – Instructions for Filing an 8938, IRS Step-by-Step Guide

Form 8938 - Instructions for Filing an 8938, IRS Step-by-Step Guide (Golding & Golding)

Form 8938 – Instructions for Filing an 8938, IRS Step-by-Step Guide (Golding & Golding)

Form 8938 – Instructions for Filing an 8938, IRS Step-by-Step Guide

You just learned that the IRS considers some of your foreign assets to be “specified foreign financial assets” and you may be required to file a form 8938. What now?

Form 8938 (FATCA)

The form can seem somewhat intimidating. Just looking at it, it seems like the IRS put as much as they possible could on the updated form. The form is relatively new, and only came into existence back in 2011 after the development of FATCA.

Even though the form may seem very intense, the reality is that it is not that bad…depending on the facts and circumstances of your situation.

For example, if you only have one unreported account and you decided to go on this trek alone, it shouldn’t be that bad (of course, unless the IRS contacts you later).

Alternatively, if you have 27 assets in seven different countries generating all different types of passive income, the form is going to be much more time intensive and laborious.

To that end, here is a basic 10 step process to preparing the form. This is by no means a comprehensive summary and is not intended as a guide for you or other tax professionals to complete the form.

**If you have specific questions, you may consider visiting our other page – Form 8938 FAQ.

The reality is, some people are adamant about doing things themselves (we understand). The IRS Form 8938 can be sleep inducing, and therefore we have tried to provide you a shorter summary, to at least get the ball rolling.

First Determine if You Have to File

Not everybody with specified foreign financial assets will have to file the form. There are four different threshold requirements:

– Single or married filing separately in the United States: Aggregate total of all specified foreign assets of $50,000 on the last day of the year. Or, if you have less than $50,000 on the last day of the year but more than $75,000 on any other day of the year, you still have to file.

– Single or married filing separately Foreign Resident: Aggregate total of all specified foreign assets of $200,000 on the last day of the year. Or, if you have less than $200,000 on the last day of the year but more than $300,000 on any other day of the year, you still have to file.

– Married filing jointly in the United States: Aggregate total of all specified foreign assets of $100,000 on the last day of the year. Or, if you have less than $100,000 on the last day of the year but more than $150,000 on any other day of the year, you still have to file.

– Married filing jointly Foreign Resident: Aggregate total of all specified foreign assets of $400,000 on the last day of the year. Or, if you have less than $100,000 on the last day of the year but more than $600,000 on any other day of the year, you still have to file.

Make a List of your Foreign Assets

We recommend going through your foreign assets for the year and determine which assets you owned during the year. Assets is a very broad category and may include the following:

  • Foreign Accounts
  • Foreign Investments
  • Foreign Entity Ownership
  • Foreign Pension
  • Foreign Life Insurance

That is not a comprehensive list, but just a list of the five most common types of assets.

Determine the Value of the Foreign Assets

In order to determine whether you even have to file the form, you will need to determine the value of the assets. Therefore, it is important to use the current year exchange rate and then calculate the value of each asset.

A few key tips:

  • While there is no specific exchange rate you have to use, it has to be reasonable.
  • Both the IRS and Department of Treasury publish their own individual rates; you should keep it consistent for each asset.

Exclude Assets That Are Not Included in the Analysis

Not all assets are subject to reporting. This is a very complex area that goes beyond this introduction, but two important exclusions are the following:

Foreign Real Estate: it only needs to be included if it is part of assets owned by a foreign entity. For example, if you own real estate that you rent, that is not included, but if you own 10% of a foreign entity that owns real estate, the proportionate value of the entity assigned to you would include the value of that real estate.

Financial Account Held at a Foreign Branch of a U.S. Financial Institution: This is a bit tricky. If the foreign institution is considered a wholly-owned subsidiary and not a branch, you may find yourself in some trouble – it is typically better to just report in this type of situation, but you should speak with an experienced offshore disclosure lawyer first.

Determine the Income Generated from the Assets

Unlike the FBAR in which a person only has to report the value of their accounts, the form 8938 is different. Not only is it filed directly with your tax return, but you have to identify “a summary of tax items attributable to specified foreign financial assets.”

In other words, the IRS wants to know the type of income and the source that generated the income.

Therefore, it is important to determine the total amount of income generated from the foreign assets.

We recommend creating different columns or categories such as interest, dividends, royalties, and gains, and then determining how much was earned under each category of income.

Determine Whether your Assets are Deposit or Custodial

This is nowhere near as easy as it should be. The IRS does not make it very clear, especially for individuals who do not have a background in tax.

With that said, typically an account is going to be a deposit account unless it is being held for the benefit of another person. Depending on your specific scenario, sometimes foreign life insurance policies and retirement/pension funds may be considered custodial.

This should not be a sticking point. The idea is that the IRS wants you to disclose and they want to know the different types of assets that you have. Just because you mis-categorized an asset due to the ambiguous instructions provided by the IRS would not lead you to a penalty situation. Just give it your best shot.

Be Sure to Identify Question 3 of Part 5

This is where individuals may get into trouble. Question three of part five requests specific information regarding the account. Namely, whether the account was opened or closed this year, whether the account was jointly owned, and whether any tax items were reported from the asset.

This is important information that the IRS wants from you. It is so the IRS can determine how much income you are generating from the different accounts and whether it is an income-generating account or not.

Some returns may be rejected if this portion is not completed (but not always). The last thing you want is for the form to be rejected, because then you are asking the IRS to essentially take a second look at your specified foreign financial assets. Understanding, that for many individuals the risk of audit is relatively low and therefore, even a few mistakes should not be a big deal.

Late Filing 8938 is a Different Story

If you have not filed a form 8938 in prior years, but you had specified foreign financial assets that should have been reported, you should be careful to just start reporting.

As you can see from question three part five, the IRS will know whether the account was opened in the current year or not, and whether there are tax items that should have been reported or not.

If you file the 8938 in the current year for the first time but had a reporting requirement in prior years in which your assets are generating income, it may beg the question as to why it was not reported previously.

Avoid Quiet Disclosure

A Quiet Disclosure is when you report the prior year offshore assets without following the proper means. Yes, some individuals will make it through no problem, but other individuals will be audited and if the IRS finds the person committed a quiet disclosure, they could be in some serious trouble.

It may amount to tax fraud and the IRS may pursue the criminal investigation. Again, realize that risk of audit is usually low and most people are not audited based on these foreign issues. With that said, there are some people who are in a higher tax bracket and owns businesses/itemizes deductions and the IRS tends to audit people for these various business deductions, charitable contributions, etc. The audit then expands and the auditor starts asking questions about these foreign accounts if they are filed improperly.

We Specialize in Safely Disclosing Foreign Money

To avoid the IRS obtaining your information from one of these countries/institutions before you have the chance to disclose, you may want to consider getting into compliance with IRS Offshore/Voluntary Disclosure.

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist

Our Managing Partner, Sean M. Golding, JD, LLM, EA  holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

*Recent cases we had to fix after taking over from less experienced counsel that flubbed the case can be found by Clicking Here (Case 1) and Clicking Here (Case 2).

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

Less than 1% of Tax Attorneys Nationwide

Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.

The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

Contact Us Today; Let us Help You.