Foreign Accounts and Financial Assets with Form 8938: The Facts on Complying With FATCA

So all those Bond villains with Swiss bank accounts still pay taxes? With this form, yes.

What is Form 8938?

Form 8938 is a requirement for US taxpayers to report their foreign financial assets. This is a part of their income tax return filing, which serves as a disclosure of any foreign accounts, assets, and entities that exceed specified thresholds. The goal of this form is to detect and deter those who evade taxes by hiding their assets abroad, as well as comply with the Foreign Account Tax Compliance Act (FATCA).

Failure to comply with the reporting requirements can result in harsh criminal and civil penalties, making it crucial to understand the significance of Form 8938 for taxpayers.

Who Is Form 8938 Actually for?

Form 8938 is a tax form that US taxpayers may be required to file if they have a certain level of foreign financial assets. US citizens, resident aliens, nonresident aliens who elect to file a joint income tax return, and nonresident aliens who are bona fide residents of American Samoa or Puerto Rico are considered specified persons and must file Form 8938 if they meet the following criteria:

• The total value of their specified foreign financial assets is more than the reporting threshold at the end of the taxable year.
• The value of their specified foreign financial assets exceeds $75,000 at any time in the taxable year.
• The value of their specified foreign financial assets exceeds $50,000 on the last day of the taxable year.
• They hold the specified foreign financial assets for any part of the tax year.

It is important to note that some domestic entities and trusts with foreign assets may also be required to file Form 8938 in certain circumstances.

Failing to file Form 8938 or understating the value of foreign financial assets can result in substantial monetary penalties. The maximum penalty for failing to file Form 8938 is $60,000, and an additional substantial underpayment penalty of 40% may apply for taxpayers who do not report income related to non-disclosed foreign financial assets.

When Do You Need to File Form 8938?

If you are a US person living in the US, you may need to file Form 8938 if the total value of your foreign financial assets exceeds the reporting thresholds. For individuals filing a single income tax return, you must file if your total foreign financial assets are valued at $50,000 or more on the last day of the taxable year or if they exceed $75,000 at any time during the taxable year. If you are married and filing separately, the above-mentioned thresholds apply.

For married individuals who file a joint income tax return, the thresholds are higher. You must file Form 8938 if the total value of your foreign financial assets exceeds $100,000 on the last day of the taxable year or if they exceed $150,000 at any time during the taxable year.

If you are a US person living abroad, you also need to file Form 8938 if your foreign financial assets exceed certain reporting thresholds. For individuals filing a single income tax return, you must file if your total foreign financial assets are valued at $200,000 or more on the last day of the taxable year or if they exceed $300,000 at any time during the taxable year. If you are married and filing separately, the reporting thresholds remain the same.

For married individuals who file a joint income tax return and live abroad, the thresholds increase to $400,000 on the last day of the taxable year or if they exceed $600,000 at any time during the taxable year.

It is important to note that filing requirements may apply even if the foreign assets are held through domestic entities. Failure to file Form 8938 or understating the value of foreign financial assets can result in substantial penalties. As discussed earlier, the maximum penalty for failing to file Form 8938 is $60,000, and an additional substantial underpayment penalty of 40% may apply for taxpayers who do not report income related to non-disclosed foreign financial assets.

Therefore, US persons with foreign assets need to be aware of the residency and filing status thresholds for Form 8938 and must file accordingly to avoid severe penalties.

Penalties for Not Filing Form 8938

Taxpayers who fail to file Form 8938 or underreport the value of foreign financial assets may be subject to hefty penalties. The penalties for nonfiling or understatement of foreign financial assets are in addition to any penalties related to a taxpayer’s tax return.

The standard penalty for failing to file Form 8938 is $10,000, which can increase to a maximum of $60,000 for continued noncompliance after IRS notification. Taxpayers who do not file the form within 90 days of receiving notice of their failure to comply may face penalties of $10,000 per month, up to a maximum of $60,000.

In addition to the standard penalty, taxpayers who fail to report income related to non-disclosed foreign financial assets may be subject to an additional substantial underpayment penalty of up to 40%. This penalty is assessed when the understated tax liability related to the non-disclosed foreign financial assets exceeds $5,000.

The maximum penalty that taxpayers may be subject to for failing to file Form 8938 is $60,000. However, in some rare cases, criminal penalties, including imprisonment, may be imposed for failing to report foreign financial assets.

Financial Assets Covered by Form 8938

Form 8938 serves as an important tool for the Internal Revenue Service (IRS) to identify and track foreign financial assets held by U.S. taxpayers. It requires taxpayers to report their financial assets held outside the United States, including foreign bank accounts, foreign entities, and other specified foreign financial assets, which meet certain reporting thresholds.

Mutual Funds

When held in a foreign financial institution, mutual funds are considered a specified foreign financial asset and are thus subject to reporting if their value exceeds the applicable reporting threshold.

It is worth noting that this reporting requirement applies to all types of mutual funds, including equity, bond, and money market funds. It also includes mutual funds issued by U.S. persons if they are held in foreign financial accounts.

The reporting threshold varies depending on whether the taxpayer resides in the U.S. or outside of the U.S. For individuals living in the U.S., the threshold is $50,000 on the last day of the tax year or $75,000 at any time during the tax year. For those living outside of the U.S., the reporting threshold is higher, set at $200,000 on the last day of the tax year or $300,000 at any time during the tax year.

Private Equity Funds

Typically, private equity funds are structured as partnerships or limited liability companies, which can make the reporting obligations for these entities quite complex. To determine if you have a reporting obligation for a private equity fund, you will need to review the fund’s governing documents and CUSIP/ISIN codes to identify if it meets certain criteria established by the IRS.

Some of the relevant factors to consider include whether the partnership interests are publicly traded, where the partnership is located, and the types of investments made by the fund. If the fund meets the criteria, then it must be reported on Form 8938 and included as part of the taxpayer’s annual income tax return.

Foreign Hedge Funds

If you have a financial interest in any foreign hedge funds, you must report it on Form 8938, as mandated by the IRS. To determine if you need to report your foreign hedge fund investments, you should be aware of the reporting threshold relevant to you.

The reporting threshold for specified foreign financial assets, which includes foreign hedge funds, varies based on whether you are a U.S resident or not. If you are a resident alien in the U.S. for the tax year, you must report specified foreign financial assets, including foreign hedge funds, if their total value exceeds $50,000 on the last day of the tax year, or $75,000 at any time during the tax year. If you are not a resident alien in the U.S. for the tax year, you must report specified foreign financial assets, including foreign hedge funds, if their total value exceeds $200,000 on the last day of the tax year, or $300,000 at any time during the tax year.

To report foreign hedge funds, you need to complete Part II of Form 8938, which is referred to as “Accounts and Other Assets Held in Financial Accounts.” This section requires you to provide detailed information about the hedge funds, including the fund’s name, address, and the maximum value of the investment in the fund during the tax year.

Life Insurance Policies With Cash Value

If you have a life insurance policy with a cash value, it is essential to know that it is considered a specified foreign financial asset and must be reported on Form 8938 if it exceeds the applicable reporting threshold. The reporting threshold varies depending on your residency status and filing status during the taxable year.

To report a life insurance policy with cash value on Form 8938, you must report the maximum value of the policy during the taxable year. It includes the total amount of cash value and the total death benefit of the policy. Therefore, it is crucial to track the values of your policies throughout the year to ensure accurate reporting.

If you have multiple life insurance policies with cash value, you can aggregate the values to determine if you meet the reporting threshold. For instance, if you have two policies with cash values of $25,000 each, the total value of your specified foreign financial assets is $50,000. If you are a resident alien and married filing a joint return, you must report it on Form 8938 since it exceeds the reporting threshold of $50,000 on the last day of the tax year.

Foreign Non-Account Investment Assets (stocks, bonds, etc.)

Foreign non-account investment assets refer to assets held for investment purposes that are not in a foreign financial account, such as stocks, securities, bonds, debentures, notes, and derivative instruments with foreign counterparts. These assets, along with other foreign non-account investment assets, must be reported on Form 8938 if their value exceeds the applicable reporting threshold for the taxpayer.

Other foreign non-account investment assets that may need to be reported on Form 8938 include partnership interests in foreign partnerships, interests in foreign retirement plans or deferred compensation plans, foreign-issued insurance contracts or annuities with a cash surrender value, and interests in foreign estates.

It is important to note that this list is not exhaustive, and taxpayers must report any foreign non-account investment asset held for investment if its value exceeds the reporting threshold. 

For taxpayers residing outside of the United States, the reporting threshold is higher. For example, for unmarried taxpayers residing outside of the US, the threshold is $200,000 on the last day of the year or $300,000 at any time during the year. For married taxpayers filing a joint income tax return and residing outside of the US, the threshold is $400,000 on the last day of the year or $600,000 at any time during the year.

Financial Accounts Subject to Form 8938 Reporting Requirements

The IRS requires taxpayers to disclose their ownership interest in foreign financial accounts, including bank accounts, brokerage accounts, and certain other types of financial accounts, if the total value of these accounts exceeds a certain threshold. This article discusses the types of financial accounts that are subject to Form 8938 reporting requirements and the applicable reporting threshold for US taxpayers.

Bank Accounts in a Foreign Country

If you have bank accounts located in a foreign country, it is important to know how to report them on Form 8938. This form is used to report specified foreign financial assets, including financial accounts held at a foreign financial institution. Bank accounts held in foreign countries are reportable on the form.

When filling out Form 8938, individuals must report any financial accounts held at a foreign financial institution, including bank accounts in foreign countries. If the value of these specified foreign financial assets is greater than the reporting threshold that applies to the individual, they must be reported on the form.

It is essential to note that failure to report these assets can result in significant penalties. The penalties for non-reporting of foreign financial assets can include substantial civil penalty assessments and even criminal penalties.

Financial Accounts in the U.S. Held by a Foreign Entity

When it comes to reporting under Form 8938, individuals must disclose any financial accounts held outside of the United States. However, what happens in the case where a foreign entity is holding financial accounts within the United States?

In such a case, the financial accounts held in the U.S. by a foreign entity would be considered a specified foreign financial asset and thus, would be subject to reporting requirements under Form 8938. Specifically, if the value of the financial accounts held in the U.S. by a foreign entity exceeds the applicable reporting threshold, it must be reported on Form 8938 along with other specified foreign financial assets.

It is important to note that Form 8938 has an inclusive list of foreign entities that may require reporting. Examples of foreign entities include foreign corporations, foreign partnerships or foreign trusts, among others. It also includes a detailed list of the types of information that must be included in the form.

Financial Accounts of a Domestic Entity Held at a Foreign Institution

If your domestic entity has a financial account at a foreign institution, it may be subject to reporting requirements under Form 8938. Financial accounts can include deposit and custodial accounts, foreign stock or securities held in a financial account at a foreign financial institution, foreign mutual funds, and more.

To determine if your financial accounts are required to be reported, you must determine the applicable reporting threshold. This threshold varies depending on several factors, including your filing status and the value of your assets.

Other Types of Assets Covered by Form 8938

In addition to financial accounts, Form 8938 also covers other types of assets, including personal property such as art, antiques, jewelry, cars, and other collectibles. Also, precious metals held directly, non-disclosed foreign financial assets, real estate, and foreign currency held directly are also covered by Form 8938.

It is important to note that domestic mutual funds investing in foreign stocks and securities are excluded from this list. However, if you have a non-US mutual fund that invests in foreign stocks, it may be considered a foreign financial asset and may need to be reported on Form 8938.

If you own any of the above-mentioned assets, it is important to determine if you need to report them on Form 8938. Non-disclosed foreign financial assets may also include foreign pension plans, which may need to be reported if they meet the reporting threshold.

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