Form 8938, Statement of Specified Foreign Financial Assets, is a newly established form by the IRS since tax year 2012, in accordance with FATCA (Foreign Account Tax Compliance Act).
Similar to FBAR, the purpose of Form 8938 is to disclose financial assets located outside of the U.S. However, one of the major differences is that Form 8938 consists as a part of the income tax return and needs to be filed to the IRS along with Form 1040. Another difference is that, unlike FBAR, Form 8938 requires foreign assets of each spouse to be disclosed together on the same form if the tax return is filed on a married-filing-joint basis. This is due to Form 8938 being part of an income tax return. FBAR filing to FinCEN does not relieve filing of Form 8938 to the IRS, and vice versa, as the filing requirements differ between both forms.
Who needs to file Form 8938?
Similar to FBAR, U.S. citizens, U.S. Greencard holders, U.S. resident aliens, or non-U.S. resident aliens who elect to be treated as U.S. residents per IRC 6013(G) or (H) or IRC.7701(b)(4) are subject to Form 8938 filing requirement. Also included are individuals who are U.S. residents per Substantial Presence Test under U.S. domestic law but are instead treated as non-U.S. residents per “Tie-Breaker” rule under U.S. income tax treaty.
F-1/J-1 holders who file Form 8843 are exempt from filing Form 8938 if certain conditions are met. Also excluded, if certain conditions are met, are individuals who elect to be treated as non-U.S. residents by filing Form 8840 per “Closer Connection” rule.
Form 8938 Filing Threshold
|Taxpayer living in the US||Max. Balance at any time during the year||$75,000||$150,000||$75,000|
|Taxpayer living abroad||Max. Balance at any time during the year||$300,000||$600,000||$300,000|
If a taxpayer’s assets balance exceeds either max balance OR year-end balance threshold, then she/he is required to disclose ALL of her/his foreign assets.
Unlike FBAR, an individual who has signature authority over a foreign asset but does not own a legal title is NOT required to disclose such an asset on Form 8938.
What are Reportable Foreign Assets for Form 8938 and What are Not?
The following are subject to disclosure on Form 8938:
- Bank accounts, including savings, checking, demand, CDs, and time deposits
- Stocks and Securities accounts, including any investments, brokerages, and mutual fund accounts as well as similar pooled funds
- Foreign stocks or securities not held in financial accounts (*)
- Foreign partnership interests (*)
- Any other investment accounts, including commodity futures and option accounts
- Defined Benefit Plans
- Defined Contribution Plans
- Any foreign accounts maintained by U.S. Person’s employer, including but not limited to, company savings accounts, severance pays, stock share plans, ESPP, etc.
- Pensions and Annuities
- Insurance plans with cash surrender value, such as whole life insurance plans
- Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor
The following are not subject to disclosure:
- Indirect interests in foreign financial assets through an entity (*)
- Financial accounts held at foreign branches of a U.S. financial institution (*)
- Foreign Social Security
- Domestic mutual funds investing in foreign stocks and securities
- Foreign real estates held directly
- Foreign real estates held through a foreign entity
- Foreign currencies held directly
- Precious metals held directly
- Personal properties held directly, such as arts, antiques, jewelries, cars and other collectibles
(*) Definitions of reportable assets/accounts are similar to that of FBAR but not the same. Underlined items are the differences in disclosures between FBAR and Form 8938.
Form 8938 Penalty
Failure-to-file penalty is $10,000, and an additional $10,000 for each 30-day period, up to $50,000, may be imposed for continuing failure. Also, a taxpayer may be subject to a separately-assessed penalty for unreported income, such as accuracy-related penalty at 40% of underpaid tax. If the failure is deemed fraudulent, 75% of underpaid tax may be assessed. Criminal charges may also apply. Statute of limitations is 3 years but will be extended to 6 years if unreported income exceeds $5,000.