Are you a U.S. citizen or resident with foreign financial assets? If so, you might be familiar with the IRS’s efforts to ensure compliance with reporting obligations for these assets. One key piece of that puzzle is IRS Form 8938, Statement of Specified Foreign Financial Assets. While often confused with FBAR (FinCEN Form 114), Form 8938 has its own distinct requirements and implications. Let’s break down what you need to know.
What is Form 8938 and Who Needs to File It?
Form 8938 is an information return used to report your interest in “specified foreign financial assets” if the aggregate value of those assets exceeds certain thresholds. It’s designed to provide the IRS with a clearer picture of your offshore holdings and combat tax evasion.
Generally, you’ll need to file Form 8938 if you are a U.S. citizen, resident alien, or certain non-resident aliens, and you have an interest in specified foreign financial assets exceeding:
- For individuals living in the U.S.:
- $50,000 on the last day of the tax year, or
- $75,000 at any time during the tax year.
- For individuals living outside the U.S. (bona fide residents of a foreign country):
- $200,000 on the last day of the tax year, or
- $300,000 at any time during the tax year.
- For married filed jointly living in the U.S.:
- $100,000 on the last day of the tax tear, or
- $150,000 at any time during the tax year.
These thresholds are doubled for married individuals filing a joint return.
What are “Specified Foreign Financial Assets”?
This is a crucial definition! It generally includes:
- Financial accounts held at foreign financial institutions (e.g., bank accounts, brokerage accounts).
- Certain foreign non-account investment assets held for investment that are not held in a financial account (e.g., foreign stock or securities not held in a financial account, interests in foreign partnerships, foreign mutual funds, foreign real estate held through a foreign entity, foreign-issued life insurance or annuity contracts with a cash surrender value).
Form 8938 vs. FBAR (FinCEN Form 114): What’s the Difference?
This is where many people get confused. While both forms deal with foreign financial assets, they are distinct and have different reporting requirements:
- FBAR (FinCEN Form 114): Reports a financial interest in or signature authority over foreign financial accounts. It’s filed with the Financial Crimes Enforcement Network (FinCEN), not the IRS. The reporting threshold is generally an aggregate value of more than $10,000 at any point during the calendar year.
- Form 8938 (IRS Form 8938): Reports specified foreign financial assets (which can include foreign financial accounts, but also other types of assets). It’s filed directly with your income tax return (Form 1040) with the IRS. The thresholds are significantly higher and depend on your filing status and residency.
Crucially, you may need to file BOTH an FBAR and Form 8938! Meeting the threshold for one does not exempt you from the other if you meet its respective criteria.
Why is Form 8938 Important?
The IRS uses Form 8938 to gain greater transparency into U.S. taxpayers’ foreign financial holdings. This information helps them:
- Identify unreported income: Foreign assets can generate income that might not be reported on a U.S. tax return.
- Combat tax evasion: By having a clearer picture of assets, the IRS can better detect instances of taxpayers hiding money offshore to avoid U.S. taxes.
- Comply with international agreements: The U.S. has agreements with other countries (like FATCA – Foreign Account Tax Compliance Act) to exchange financial information, and Form 8938 plays a role in this.
What Happens if You Don’t File or File Incorrectly?
The penalties for failing to file Form 8938 or for filing an incomplete or inaccurate form can be substantial. These can include:
- Failure to File Penalty: A $10,000 penalty for failing to file Form 8938 when required.
- Continued Failure to File Penalty: An additional $10,000 for each 30 days (or part thereof) during which the failure continues after the IRS mails you a notice of failure to file, up to a maximum of $50,000.
- Accuracy-Related Penalties: Penalties of 20% or even 40% on underpayments of tax attributable to the undisclosed foreign financial assets.
- Criminal Penalties: In some cases, severe criminal penalties, including imprisonment, may apply.
Key Takeaways and Next Steps:
- Don’t assume: If you have any foreign financial assets, don’t assume you’re exempt from reporting.
- Understand the thresholds: Carefully review the filing thresholds for both Form 8938 and FBAR.
- Identify “specified foreign financial assets”: Be clear on what types of assets need to be reported on Form 8938.
- Consult a tax professional: Foreign asset reporting can be complex. If you have significant foreign assets or are unsure about your obligations, it’s highly recommended to consult with a qualified tax professional experienced in international tax matters. They can help you determine your filing requirements, gather the necessary information, and ensure accurate and timely reporting to avoid costly penalties.
Staying compliant with your U.S. tax obligations, especially regarding foreign assets, is crucial. By understanding Form 8938 and its requirements, you can navigate the complexities of international tax reporting with greater confidence.
