FATCA Form 8938 Hidden Dangers – Increased Risk of IRS Investigations
- 1 What is Form 8938?
- 2 Quiet Disclosure or Incomplete Disclosure
- 3 Form 8938 – Did you Open the Account “This Year”
- 4 Form 8938 Asks you for “Income Generated by the Assets”
- 5 Form 8938 Asks you if you Filed a Form 5471
- 6 Form 8938 Asks you if you Filed a Form 8621
- 7 Ready to Get Into Compliance – IRS Voluntary Disclosure
- 8 Golding & Golding, A PLC
Form 8938 is a relatively new form that is required to be filed in accordance with your tax return (if you meet the threshold requirements for filing the form).
Most commonly, Form 8938 is required to be filed by any individual who has foreign/offshore accounts or other Specified Foreign Assets worth at least $50,000 on the last date of the year.
Even if the individual (U.S. Resident) has less than $50,000 in Specified Foreign Assets on the last day of the year, if he or she had more than $75,000 at any time during the year, they must still file the form (the threshold requirements are higher if you are Married Filing Jointly and/or Reside in a Foreign Country).
What is Form 8938?
The purpose of Form 8938 is to update the IRS as to your various Offshore and Foreign Specified Assets (Read: keeping tabs on your assets). The form was created in accordance with FATCA (Foreign Account Tax Compliance Act). Under FATCA, more than 100 countries and tens of thousands of Foreign Financial Institutions have agreed to report U.S. Account Holders to the U.S.
It is important to note that if you complete this form (and you should if you are required to do so) that you do it properly and you submit to full compliance. Otherwise, the IRS will have the opportunity to penalize you extensively.
Quiet Disclosure or Incomplete Disclosure
Many individuals who contact us have only recently learned about the Form 8938 filing requirements. In learning about the FATCA Form 8938, they realized that they missed the time to file the Form 8938, as well as the FBAR (Report of Foreign Bank and Financial Account) in current/prior years as well.
Instead of properly submitting to either the IRS Voluntary Disclosure Program or making a Reasonable Cause Submission – they go ahead and file the current year form 8938 properly — without prior year forms. This is a bad strategy because there are hidden dangers in form 8938. Moreover, by knowingly failing to report prior accounts, they have turned a non-willful situation into a Willful/Tax-Fraud scenario, which could land them in serious danger with the IRS, DOT, or DOJ.
Here are some of the hidden dangers to be careful about:
Form 8938 – Did you Open the Account “This Year”
In completing form 8938, the form requests that you mark the box if the account was opened in the current year. Let’s say the account was not opened in the current year, and therefore you do not mark the box. If you are audited in the future and did not meet the threshold for filing in prior years, then IRS inquiry would be no big deal on this issue.
BUT, if even though this is the first year you are reporting the account, you met the threshold requirement for reporting the account in prior years, then the IRS may further question you as to why you did not report the account in prior years on either a FATCA Form 8938 or FBAR (or submit to Voluntary Disclosure).
If the IRS believes you were willful or reckless in failing to do so (and/or failed to get into compliance), then in a multi-year audit situation you may be subject to 100% penalty on the value of the accounts for willfully or recklessly failing to comply.
Form 8938 Asks you for “Income Generated by the Assets”
Form 8938 also asks you to complete how much Interest, Dividend, Capital Gain or Royalties you earned from these foreign accounts/assets. Most importantly is the Capital Gain issue. Specifically, if you had Capital Gain income in the current year, chances are you did not also purchase or acquire the asset in the current year.
If you did not purchase the asset in the current year, and you are audited, the IRS may inquire further…which can lead to questions as to why you did not report the asset in prior years and/or get into compliance properly. The same goes for Interest, Dividend, or Royalties; again, if you owned the asset(s) or account in prior years and therefore did not mark off that the accounts were opened or asset was acquired in the current year, it could lead to an IRS presumption that you were are also earning the same type of income in prior years only you did not report it — and subject you to extensive fines and penalties.
Form 8938 Asks you if you Filed a Form 5471
Four 5471 is a reporting form used for individuals who have a certain interest or ownership in a foreign corporation. In any year in which you are required to file a form 5471, you are not required to file a form 8938 as well.
But, if you mark off in the current year that you are filing a form 5471, it may lead the IRS to look at the 5471 (which requires you to identify when you obtained your interest in the Foreign Corporation). If the IRS audits or examines you and learns that you have had the ownership in years prior, the penalties can be severe and start a $10,000 per year, per required 5471 form.
Form 8938 Asks you if you Filed a Form 8621
Form 8621 is used to report any interest you may have (even fractional interest) in a Passive Foreign Investment Company. Like the 5471, you are not required to file and 8938 for any asset in which the current year you are filing form 8621. The analysis of taxes and interest due under IRC 1291 et seq. and reported on Form 8621 are intense and beyond the scope of this article, but if you are curious or bored, you can find a complete analysis we prepared here.
Here’s where it gets tricky and VERY DANGEROUS: While there is no specific financial penalty for failing to file a form 8621 (although monetary penalties may be enforced through the language of 8938), by failing to file the form your tax return is not considered complete and the statute of limitations does not begin to run. Therefore, your prior tax return will remain open indefinitely if it turns out that the IRS realizes you should have been filing 8621 information returns in prior years.
Ready to Get Into Compliance – IRS Voluntary Disclosure
The safest and most effective method of getting into compliance is by submitting to one of the IRS offshore voluntary disclosure programs or a Reasonable Cause submission.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.