Foreign Bank Account Compliance Form 8938
In an effort to increase tax revenues and crack down on tax evasion, the IRS requires certain taxpayers to report foreign asset ownership. Taxpayers may have heard of the FBAR filing requirement to report foreign bank account and other financial accounts, but may still be unaware of the potential additional requirement to report other foreign financial assets. For taxpayers required to file an FBAR related to foreign bank account reporting, an additional tax compliance consideration should include Form 8938 related to reporting Foreign Financial Assets. Taxpayers may be required to file both an FBAR and Form 8938. Failure to file Form 8938 could result in penalties and impact the taxpayer's statute of limitations related to income tax assessments and penalties.
Penalties for Failing to Timely Report Foreign Financial Assets
Where a Form 8938 is required to be filed, the IRS may assess penalties of $10,000 for failure to file the form. Accuracy related penalties of up to 40% of the unreported tax related to unreported assets that should have been included in Form 8938 may also apply. In addition to those penalties, civil fraud and criminal penalties may apply where the taxpayer evades reporting obligations.
What Does Form 8938 Report?
Unlike an income tax return, the purpose of the form is to report the amount of the foreign assets and the type of ownership interest in the assets. The form does not report taxable income or calculate tax. The list of foreign reportable financial assets includes financial accounts maintained by a foreign financial institution. Reportable foreign financial assets also include certain assets held for investment and not held in a financial institution account, including stocks and securities, ownership interests in a foreign entity, and a financial contract with a foreign counter-party.
A financial institution is "foreign" if it is not organized under U.S. law and generally operates like a U.S. bank, accepting deposits, holding financial assets for customers and engaging in investment or securities services for customers. A foreign financial institution may also hold mutual funds or operate as a hedge or private equity fund. The list of foreign assets is extensive and also includes stock issued by a foreign corporation, foreign partnership interests, debt issued by a foreign company or person, an interest in a foreign trust. Assets held in a foreign branch of a U.S. financial institution are not considered foreign for purposes of this form.
The underlying criteria must include an investment purpose and assets held for use in an active business are not reportable on Form 8938. Financial assets like cash or accounts receivable would not be reportable if they are used in a trade or business. Assets that are not used in a business, but relate to a business, include a foreign partnership interest or stock in a foreign corporation. Assets held by disregarded entities are treated as owned by the owner of that disregarded entity. Owners of joint property are considered to own the entire property. Taxpayers that have an interest in a foreign estate or trust
Taxpayers are considered to have an ownership interest in an asset if any income, gains, losses, deductions, credits, etc. from holding or disposing of the asset are or would be required to be reported or included in the taxpayers income tax return. The asset would be includible even if the tax attribute (e.g, income or loss) is not reportable in the current year.
Who Must File Form 8938?
Many types of taxpayers may be required to file Form 8938. Individuals include U.S. citizens, U.S. residents, and certain non-residents. Taxpayers other than individuals are also subject to the reporting rules and have additional asset and ownership tests that apply. These entities include certain domestic corporations, domestic partnerships and trusts. These entities are generally formed for investment purposes to produce passive income. Passive income generally includes dividends, interest, rents, royalties, and gains or losses from the sale of passive assets. If more than 50% of the assets of one of these entities produces passive income or more than 50% of the income of one of these entities during a year is passive income, the entity may be subject to the reporting rules if it is a closely held entity and exceeds the reporting threshold.
The entity is closely held if more than 80% of the entity is owned by one individual who is subject to the reporting rules. The rules apply a constructive ownership test to determine if the assets owned exceed the ownership thresholds on an aggregate basis.
An exception to reporting exists for assets that are reported on other forms. For example, if a domestic entity reports its ownership of foreign stock on Form 5471, then no Form 8938 is required to report foreign financial assets assuming they are already reported on Form 5471. Entities that may be subject to similar non-reporting rules include foreign partnerships and foreign grantor trusts.
For individuals filing single and entities, the filing threshold is total foreign financial asset value of $50,000 on the last day of the year or $75,000 during the year. For individual taxpayers filing married filing jointly, the threshold is $100,000 on the last day of the year or $150,000 during the year. No formal appraisal is required, and taxpayers should look to financial account statements for value if available.
When is Form 8938 Due?
Form 8938 must be filed with the taxpayer's income tax return (e.g., 1040, 1120, 1065, etc). These due dates are generally March 15th or April 15th for calendar year taxpayers and include the 6 month extension if requested and granted. Fiscal year taxpayers should file by their defined reporting date.
In addition to being subject to the penalties described above, failure to file Form 8938 prevents the statute of limitations from starting on the related income tax return. Normally the statute of limitations is three years from the date the return is filed, but if the Form 8938 is not filed with the taxpayer's income tax return, the statute of limitations will not begin to run until the Form 8938 is filed. This failure could result in additional income tax assessments and penalties unrelated to the foreign financial asset reporting rules.
If you have questions about foreign asset reporting or other U.S. international tax matters, contact tax attorney Andrew Steiger at Steiger Tax Law to discuss your tax questions. He can assist you in preparing your tax return and satisfying your IRS tax compliance obligations.