Declare Your Assets on Form 8938: What Are Specified Foreign Financial Assets and How They’re Taxed

Form 8938 is how IRS agents stop Bond villains: “Sir, you have an undisclosed villa. With a shark pool. What’s the fair market value of that laser?”

Are you a US taxpayer with investment assets in foreign countries or with foreign entities? If so, it’s essential to understand how to properly declare these offshore assets to the Internal Revenue Service (IRS). Form 8938, Statement of Specified Foreign Financial Assets, is the form you need to report these assets.

The reporting threshold for Form 8938 varies depending on your filing status and whether you live in the United States or abroad. For unmarried individuals living in the US, the threshold is $50,000 on the last day of the tax year or $75,000 at any time during the tax year. Married individuals filing a joint income tax return have a threshold of $100,000 on the last day of the tax year. That threshold goes up to $150,000 at any time during the tax year. Married individuals filing separate income tax returns have a threshold of more than $50,000 on the last day and more than $75,000 on any day during the tax year. For individuals living abroad, whether they’re married or unmarried taxpayers, the thresholds are higher.

You must report various types of assets to the IRS using this form. (It’s as if extra paperwork is part of expat taxes.) This includes not only financial accounts held in foreign banks but also foreign stock, interests in foreign partnerships, foreign mutual funds, and foreign hedge funds. Real estate, certain foreign retirement plans, and even life insurance policies can also be considered specified foreign financial assets.

Why is it important to report these types of assets on Form 8938? The purpose is to provide the IRS with information about your foreign assets to ensure compliance with tax laws. Failure to disclose them can result in significant penalties, including criminal penalties and substantial underpayment penalties.

Don’t risk the consequences of non-disclosure. Take the necessary steps to declare your assets by accurately completing Form 8938 and including it with your annual tax return. Stay compliant and avoid potential issues with the IRS by following the instructions to Form 8938.

Definition of a Specified Foreign Financial Asset

When it comes to reporting your foreign assets on Form 8938, it’s important to understand what qualifies as a specified foreign financial asset. These assets encompass a wide range of financial holdings and investments held outside of the United States. While the most obvious examples include foreign bank accounts and financial accounts in foreign institutions, it’s essential to note that the reporting requirement extends beyond just these accounts. Common examples of these assets include foreign stocks, interests in foreign partnerships, foreign mutual funds, and foreign hedge funds yielding passive income. (By no means is this a comprehensive list.) Additionally, real estate owned outside of the United States, certain foreign retirement pension funds, and even life insurance policies held with foreign companies can be considered specified foreign financial assets. It’s crucial to accurately identify and report all relevant assets to ensure compliance with tax laws and avoid potential penalties. Non-disclosed foreign financial assets, such as passive income from rentals or foreign income from your company’s stocks, can lead to significant issues. Declare them. 

Who Qualifies as a Specified Individual?

If you’re a U.S. citizen, resident alien, or a nonresident alien filing a joint income tax return with a U.S. citizen or resident alien spouse, you may be considered a specified individual for reporting purposes on Form 8938. It’s important to understand the IRS definition of a specified individual and determine whether you meet the criteria to report your foreign financial assets.

The IRS considers U.S. citizens, resident aliens, and nonresident aliens filing joint tax returns as specified individuals for Form 8938 reporting. Additionally, nonresident aliens who are bona fide residents of American Samoa or Puerto Rico may also qualify as specified individuals.

Each category of specified individuals has specific requirements that need to be met in order to meet the reporting thresholds. It’s important to seek professional guidance to ensure you have the most up-to-date information and understand your reporting obligations as a specified individual.

How Many Foreign Financial Institutions Participate in Voluntary Disclosures via FATCA?

When it comes to reporting foreign financial assets, it’s important to understand how many foreign financial institutions are obligated to report to the IRS. The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report certain information about U.S. account holders to the IRS. As of now, there are more than 400,000 foreign financial institutions that are actively reporting to the IRS. This includes banks, investment companies, insurance companies, and other types of financial institutions from countries all around the world. The purpose of this reporting requirement is to enhance tax compliance and reduce offshore tax evasion. By requiring foreign financial institutions to report, it allows the IRS to have better visibility into the offshore holdings of U.S. taxpayers and ensures that they are properly reporting their foreign financial assets. So, if you have foreign financial accounts, it’s likely that the institution holding your account is reporting this information to the IRS. It’s crucial to understand the implications of this reporting requirement and fulfill your obligations as a taxpayer.

Do Most Foreign Countries Have a FATCA?

If you have foreign financial assets, it is important to understand the reporting requirements under the Foreign Account Tax Compliance Act (FATCA) Agreement. FATCA is a law that requires individuals to report certain foreign financial assets to the Internal Revenue Service (IRS) if they meet the filing thresholds.

While FATCA is a US law, not all foreign countries have signed a FATCA Agreement with the United States. As of now, more than 100 countries have signed the agreement, which means that financial institutions in those countries are required to report information on US account holders to the IRS.

The number of Foreign Financial Institutions (FFIs) reporting to the IRS is continually increasing. This is a positive development as it helps the IRS in detecting and preventing tax evasion by American taxpayers holding assets in foreign financial institutions.

However, it is important to note that not all countries have signed a FATCA Agreement yet. There are still some countries that have not entered into this agreement with the US. As of now, there are approximately 40 countries and thousands of financial institutions that have not signed the agreement.

If, for example, you have a private equity fund from a country that has not signed a FATCA Agreement, it does not relieve you from your reporting obligations. You may still be required to report assets in question on your federal income tax return. It is crucial to consult a tax professional or refer to the instructions for Form 8938 to ensure compliance with the reporting requirements based on your specific situation.

Form 8938 Thresholds, Requirements and Penalties

When it comes to reporting your foreign financial assets, it is crucial to understand the thresholds for filing Form 8938, as well as any reporting requirements. This Internal Revenue Service form is used to disclose your specified foreign financial assets to the IRS and is separate from the Report of Foreign Bank and Financial Accounts (FBAR). It’s an informational tax form, meaning there might not be any impact to your annual return, but you’re helping foreign trusts and the U.S. government combat fraud and underpayments of taxes. 

The filing requirements for Form 8938 depend on various factors such as your U.S. residency, filing status, and the total value of your specified offshore assets. For unmarried individuals living in the United States, the filing threshold starts at $50,000 on the last day of the tax year, or $75,000 at any time during the year. For married taxpayers filing a joint income tax return, these thresholds are doubled.

It’s important to note that the filing thresholds differ for individuals living abroad and those married filing jointly with nonresident aliens. Additionally, different thresholds apply to domestic entities and specified foreign financial assets held jointly by spouses.

Not filing Form 8938 can lead to severe penalties. The IRS can assess a $10,000 penalty for failure to disclose, with an additional $10,000 for each 30-day period of noncompliance after receiving an IRS notice. The penalty for forms of intentional noncompliance can reach up to $50,000. Criminal penalties may also apply, including fines of up to $250,000 or 50% of the value of the unreported assets, along with potential imprisonment.

To avoid these severe penalties, it is essential to accurately determine if you meet the threshold requirements and complete Form 8938 accordingly. Consulting a tax professional or referring to the instructions for Form 8938 can provide valuable guidance to ensure compliance with reporting obligations based on your specific circumstances.

What’s the Point of Reporting Assets on Form 8938?

This complicated tax form ensures that you comply with the foreign asset reporting requirements when filing taxes and helps the IRS identify cases of offshore tax evasion.

Reporting your assets on Form 8938 serves as a crucial tool for the IRS to gain insight into your global financial footprint. By disclosing your specified foreign financial assets, such as foreign bank accounts, stocks, and real estate, you provide transparency regarding your offshore holdings. This information assists the IRS in assessing your tax liability accurately and detecting any potential tax evasion schemes or orchestrated underpayments of taxes. 

Undisclosed assets can lead to significant penalties. The IRS can impose a $10,000 penalty for noncompliance, along with an additional $10,000 for every 30-day period of noncompliance after receiving notice from the IRS. In cases of intentional noncompliance, the penalty can reach up to $50,000. Moreover, criminal penalties, such as hefty fines of up to $250,000 or 50% of the value of the unreported assets, along with potential imprisonment, may be imposed.

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