by Jim Curtis, JD

In this largely shrinking global neighborhood that we live in, as the world gets smaller, many of us may have (or know someone who has) assets such as real estate or bank accounts in other countries. Some of us may have also set up foreign entities or domestic (California) entities to hold foreign assets to create some distance with ourselves personally. If you have foreign accounts or other “specified foreign financial assets”, you may be subject to IRS Form 8938 filing requirements and not even realize it.

What is Form 8938?
Form 8938, “Statement of Specified Foreign Financial Assets”, first became required for the 2011 tax year when the Foreign Account Tax Compliance Act (FATCA) was passed in March 2010.  It is used not only to report financial accounts maintained by foreign financial institutions, but also to report other “specified” foreign assets which are outlined below.  Form 8938 must be filed annually with your federal income tax return and extensions to your tax return will also apply to Form 8938.

Do I need to file Form 8938?
Generally, Form 8938 must be filed by individuals who are U.S. tax residents filing an annual federal income tax return AND if one of the following reporting thresholds below are met:

  • For Unmarried / Married Filing Separate Taxpayers Living Within the U.S. – If the total value of specified foreign assets is more than $50,000 on the last day of the tax year, or more than $75,000 at any time during the tax year.
  • Married Taxpayers Living Within the U.S. – If the total value of specified foreign assets is more than $100,000 on the last day of the tax year, or more than $150,000 at any time during the tax year.
  • For Unmarried / Married Filing Separate Taxpayers Living Outside of the U.S. – If the total value of specified foreign assets is more than $200,000 on the last day of the tax year, or more than $300,000 at any time during the tax year.
  • Married Taxpayers Living Outside the U.S. – If the total value of specified foreign assets is more than $400,000 on the last day of the tax year, or more than $600,000 at any time during the tax year.

U.S. tax residents who have either been, 1) a resident of a foreign country or countries for an uninterrupted period that includes an entire tax year OR 2) present in a foreign country or countries for at least 330 days during any period of 12 months ending the tax year being reported, are considered taxpayers living outside of the U.S. for purposes of Form 8938 reporting.

Does Form 8938 only apply to individuals?
Not any longer, Treasury regulations issued in 2016 require U.S. corporations, partnerships and trusts who are considered “specified domestic entities” to file Form 8938.  A “specified domestic entity” is any of the following:

  • A closely held domestic corporation that has at least 50% of its gross income from passive income OR at least 50% of its assets produce / are held for the production of passive income.
  • A closely held domestic partnership that has at least 50% of its gross income from passive income OR at least 50% of its assets produce / are held for the production of passive income.
  • A domestic trust that has one or more specified persons (i.e., specified individual or specified domestic entity) as a current beneficiary.

The instructions to Form 8938 provide more detailed information on the filing requirements for a “specified domestic entity” and what is considered “passive income” or “passive assets” for purposes of Form 8938 reporting.

Which foreign assets must be reported on Form 8938?
Unlike FBARs (Foreign Bank Account Reports), reporting of specified foreign assets under FATCA can have a broader scope.  Like FBARs, Form 8938 requires reporting of foreign financial accounts held in foreign banks, securities or pension accounts and annuities or life insurance contracts with cash value.  However, Form 8938 also requires reporting of other types of foreign assets or investments, such as:

  • Stocks issued by a foreign corporation
  • A capital or profits interest in a foreign partnership
  • A notes, bond, debenture or form of indebtedness issued by a foreign person
  • An interest in a foreign trust or foreign estate
  • An interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap or similar agreements with a foreign counterparty
  • An option or other derivative instrument with respect to any of the above examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer.

If you have specified foreign assets held in a foreign branch or subsidiary of a U.S. financial institution or in a U.S. branch of a foreign financial institution, they do not have to be reported on Form 8938.

This chart from the IRS illustrates the differences between the FBAR and Form 8938: https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements

Is there a penalty for failure to file Form 8938?
Remember that filing FBARs and other U.S. international tax information returns does not excuse you from filing Form 8938 with your federal income tax return if it is required.  Per the instructions to Form 8938:

If you are required to file Form 8938, but do not file a complete and correct Form 8938 by the due date (including extensions), you may be subject to a penalty of $10,000. … If you do not file a correct and complete Form 8938 within 90 days after the IRS mails you a notice of the failure to file, you may be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000.

For more information, visit the IRS instructions to Form 8938 here and contact Jim Curtis at jimc@hallcpas.com or 949-910-4255 ext. 257.

Jim has over fifteen years of experience in public accounting and is an international tax specialist. He specializes in providing a wide variety of inbound and outbound U.S. international tax compliance and consulting services.

Jim’s areas of concentration include U.S. international tax compliance, planning and structuring, including the following: withholding tax issues for business and individuals, information return filings for U.S. persons, foreign tax credit issues, Subpart F inclusion analysis, IC-DISC export tax incentives, and tax compliance requirements for IRS OVDP and Streamlined case submissions. Jim also supports the federal tax practice with tax compliance for closely-held businesses and consolidated corporations, as well as other consulting projects related to domestic production activities deduction (DPAD), uniform capitalization rules (UNICAP), R&D tax credit and other state tax incentives.

In his spare time, Jim enjoys playing golf and the guitar as hobbies, and has a passion for barbeque.

Receive Our Newsletter