FATCA Form 8938 Hidden Dangers – Increased Risk of IRS Investigations
- 0.1 What is Form 8938?
- 0.2 Quiet Disclosure or Incomplete Disclosure
- 0.3 Form 8938 – Did you Open the Account “This Year”
- 0.4 Form 8938 Asks you for “Income Generated by the Assets”
- 0.5 Form 8938 Asks you if you Filed a Form 5471
- 0.6 Form 8938 Asks you if you Filed a Form 8621
- 0.7 Ready to Get Into Compliance – IRS Voluntary Disclosure
- 1 IRS Voluntary Disclosure of Offshore Accounts
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.
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.
Call Now; We Can Help.
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. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.
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