Form 8938 Instructions – Important Steps to Reporting Foreign Assets
- 1 Form 8938 Basics
- 1.1 First Determine if You Have to File
- 1.2 Make a List of your Foreign Assets
- 1.3 Determine the Value of the Foreign Assets
- 1.4 Exclude Assets That Are Not Included in the Analysis
- 1.5 Determine the Income Generated from the Assets
- 1.6 Determine Whether your Assets are Deposit or Custodial
- 1.7 Be Sure to Identify Question 3 of Part 5
- 1.8 Late Filing 8938 is a Different Story
- 1.9 Avoid Quiet Disclosure
- 1.10 Offshore Disclosure & Fixing Quiet Disclosures
Form 8938 Instructions: For one reason or another, you have come to realize that you have what the IRS considers to be “specified foreign financial assets” and you may be required to file a form 8938. What now?
Form 8938 Basics
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 it’s 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’re trying to provide 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.
Offshore Disclosure & Fixing Quiet Disclosures
If you have unreported prior year foreign financial assets and/or you already submitted the via quiet disclosure but have not yet been contacted by the IRS, you can still get into compliance and avoid future problems and headaches.
The term is called IRS offshore voluntary disclosure. At Golding & Golding, we limit our entire practice to offshore voluntary disclosure.
If you want to learn more about the process, you can click here for a summary of the different IRS offshore voluntary disclosure alternatives.