Form 8938: What Is It and Why You Need to File
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One of the many IRS forms that many U.S. citizens and Green Card holders need to file is Form 8938. Tax filers must declare certain types of financial assets they hold outside of the United States on their federal tax return. Foreign assets are reported on the Statement of Specified Foreign Financial Assets (Form 8938). Understanding what information should be included on the form will make the process run more smoothly.
This blog post will introduce you to Form 8938 and what information should be included on the form. You’ll also find useful tips for completing this form correctly and on time so you don’t miss any important deadlines!
Who is required to file Form 8938 and what is its purpose?
Form 8938, Statement of Specified Foreign Financial Assets, is used to report any foreign financial assets in which you have an interest that are greater than the appropriate threshold. This form is required if you are a specified person or U.S. taxpayer living outside the U.S. and have a total foreign asset value of more than $300,000 at any time during the year (or $200,000 by the end of the year). If you are filing a combined return, the thresholds are $600,000 at any time during the year or $400,000 on the last day of the year.
Tax return is not required if you do not owe any income tax for the year, even if the value of your specified foreign financial assets exceeds the appropriate reporting threshold.
A specified person is either a specified individual or a specified domestic entity.
The following are considered as specified individual:
- You must be a citizen of the United States
- A nonresident alien who votes to be classified as a resident alien for the purposes of filing a joint income tax return
- A nonresident alien who votes to be classified as a resident alien for the purposes of filing a joint income tax return
- A legitimate resident of American Samoa or Puerto Rico who is a nonresident alien
What is considered a foreign financial asset?
Foreign financial assets, or specified foreign financial assets, as the IRS refers to them, include the following:
- Bank accounts, investment accounts, retirement accounts, deferred compensation plans, and mutual funds held at institutions outside the United States
- Investing in stocks, bonds, or other securities issued by a person residing outside the United States and without access to an investment account
- Bonds or notes issued by a foreign entity
- Any stake in a foreign company, partnership, estate, or trust.
- Any instrument or contract that does not have a U.S. counterparty or issuer
- Foreign partnerships, corporations, trusts, and estates can hold real estate as their own, but only if they’re held by personal residences or rental properties
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What are the required thresholds for filing?
Two different market values must be considered by foreign financial owners. End-of-year asset value and the asset’s maximum value during the year. To determine the total value of all foreign financial assets at the end of the year, you will need to calculate each asset’s total value separately, adding the maximum values of the assets throughout the year. Based on your status as well as whether you are a U.S. citizen, the filing thresholds for Form 8938 vary.
This applies to taxpayers residing in the United States:
- Those married filing jointly who had foreign financial assets of $100,000 or more on December 31 must file Form 8938 or if their highest point during the year was over $150,000.
- Those who file separately and have foreign financial assets greater than $50,000 on December 31 must fill out Form 8938. This also applies if you have foreign financial assets above $75,000 throughout the year.
- Form 8938 must be filed by unmarried individuals whose foreign financial assets exceeded $50,000 on December 31. This equates to more than $75,000 at their highest point during the year.
And this is for taxpayers who resides outside the United States:
- Those married filing jointly who had foreign financial assets worth more than $400,000 on December 31 must file Form 8938 or over $600,000 at the end of the year.
- Married individuals filing separately must file Form 8938 when foreign financial assets exceed $200,000 at the end of the year. Alternatively, more than $300,000 at their highest point.
- The amount of foreign assets you own on December 31 must be more than $200,000 for unmarried individuals or $300,000 at their highest point.
Domestic entities are required to file Form 8938 if at any time during the tax year, they have foreign financial assets worth $50,000 or more. Keep in mind that in order to qualify for these higher filing levels, you must meet either the physical presence test or the bona fide resident test.
What if you fail to file Form 8938?
Failure to file Form 8938 before the due date of the tax return, including extensions, or filing an incomplete or erroneous Form 8938, can result in a $10,000 penalty imposed by the IRS. Furthermore, the IRS can levy a $10,000 penalty for each 30-day period or portion of a 30-day period if the Form 8938 remains unfiled within 90 days of receiving a formal notice from the IRS. The maximum punishment is $50,000. Additionally, the IRS states that “tax underpayments owing to undisclosed foreign financial assets will be subject to an extra substantial underpayment penalty of 40%.
If a Form 8938 is not filed and the IRS determines that a taxpayer owns one or more foreign financial assets that must be reported, the IRS presumes that the asset has sufficient value to fulfill the reporting criteria. Penalties may be avoided if the taxpayer demonstrates probable cause for failing to report an asset on Form 8938.
If you have any foreign assets and are unsure if you need to file Form 8938, contact us at Expat US Tax to have an initial free 15-minute consultation.
