Form 8938: Reporting Requirements and Penalties for Not Filing
IRS Form 8938 is short and easy to overlook. Many people aren't aware of it, or even if they're aware of the rule, they may not understand it. Do you need to file it? Worried that you should have filed it but didn't?
This guide explains who needs to file this form. Then, it outlines what to do if you haven't filed and how to get help if you're facing penalties.
What Is Form 8938?
This is the form you use to report specified foreign assets to the IRS. This form is just informational. Reporting your foreign assets doesn't create a tax bill, but failing to file this form can lead to significant penalties.
Penalty for Not Filing Form 8938
The penalty for not filing Form 8938 on time is $10,000. If the IRS contacts you and you don't file within 90 days, you will incur another $10,000 penalty for every month you don't file. The maximum penalty for not filing Form 8938 is $50,000.
If you have reasonable cause for filing the form late, you can get the penalties waived. Reasonable cause typically includes very serious situations such as deaths, illnesses, and natural disasters. Simply forgetting or not understanding the rules is generally not considered to be reasonable cause. The IRS assesses penalty waivers on a case-by-case basis.
However, you may be able to avoid penalties by using the IRS's streamlined compliance procedures. This program is for taxpayers who want to get caught up on their filing requirements and have yet to be contacted by the agency. If you qualify, the IRS will waive the penalties even if you just forgot to file or didn't understand the rules.
There is a 40% penalty if you underpay tax due to unreported income related to an undisclosed specified foreign asset.
Here's an example. Say that you own shares in a foreign corporation and you receive taxable distributions from that corporation. You don't report the distributions as income, and you also don't report the specified foreign asset on Form 8938. If you had reported the distributions, your tax bill would have been $10,000 higher.
In this case, the accuracy-related penalty is $4,000. That's 40% of the unreported tax. This goes on top of any penalties you incur for not filing Form 8938.
Here's another example. Say that you had shares in a foreign corporation, and you sold them for a gain during the tax year. However, you didn't report the gain on your tax return, and you also failed to file Form 8938. You will also incur an accuracy-related penalty for the underpaid tax in this situation.
If fraud is involved, the penalty jumps up to 75% of the unreported tax. To continue with the example above, say that the IRS determines that your unreported $10,000 tax was due to fraud. Then, the penalty would be $7,500 instead of $4,000. There can also be criminal penalties in extreme situations.
What to Do If You Didn't File Form 8938
If you didn't file, you may be able to catch up using the IRS's streamlined compliance procedures. This program lets you file delinquent Form 8938 reports, and as long as you can prove that you didn't fail to file due to willful conduct, you should usually be able to avoid penalties. Non-willful conduct refers to negligence or mistakes resulting from a good-faith misunderstanding of the law.
You can only participate in this program if the IRS hasn't contacted you for an audit. Even if the audit isn't directly related to this issue, it still prevents you from using the streamlined procedures.
Don't amend old returns and add Form 8938. If you do this, the IRS will likely assess the penalties for delinquent filing. Depending on the situation, there may also be accuracy-related penalties.
If you've already reported some delinquent Form 8938 reports by amending old returns, you are still eligible to use the streamlined procedures. However, you will still incur penalties on the forms submitted with your amended returns.
What If Willful Conduct Was Involved?
The streamlined procedures are only for taxpayers who didn't file due to non-willful conduct. If you willfully didn't file, you may need to consider the IRS's Criminal Investigation Voluntary Disclosure Practice.
If you qualify, this program allows you to avoid criminal liability and reduce monetary penalties in exchange for your disclosure. However, this is a very serious issue. Before taking this route, you should contact a tax attorney with experience in criminal tax issues.
Who Needs to File?
You must file this form if you're a specified person with specified foreign assets. So, what does that mean? Here's a definition of each of those concepts.
Specified persons include the following.
- US citizens.
- Resident aliens.
- Non-resident aliens who elect to be treated as resident aliens for tax purposes.
- Non-resident aliens who are residents of American Samoa or Puerto Rico
- Closely held domestic corporations or partnerships with at least 50% of their gross income from passive income.
- Closely held domestic corporations or partnerships with at least 50% of assets held for the production of passive income.
- Domestic trusts with one or more specified persons as current beneficiaries.
Specified foreign financial assets include the following:
- Financial accounts maintained by foreign financial institutions.
- Stocks issued by someone who is not a US person, held for investment and not in an account maintained by a financial institution.
- Interests in foreign entities for investment but not held in a financial institution.
- Any financial instruments or contracts from issuers or with counterparties that are not US persons, held for investment but not in an account at a financial institution.
You don't have to report foreign accounts that are maintained by domestic financial institutions or other U.S. payers. For instance, if you have an IRA in a foreign branch of a US financial institution, that is not considered to be a specified foreign asset. You also don't have to report assets that are not held in financial accounts if they are subject to the market-to-market accounting rulers for dealers of securities and commodities.
Examples of Specified Foreign Assets
Here are some real-world examples of specified foreign assets:
- Bank accounts at foreign financial institutions. This does not include financial accounts at foreign branches of US banks or at US branches of foreign banks.
- Foreign stock held in foreign brokerage accounts.
- Foreign stock held outside a foreign brokerage account.
- Foreign partnership interests.
- Foreign mutual funds. This does not include foreign stock investments in domestic mutual funds.
- Foreign accounts held by foreign grantor trusts when you are the grantor.
- Foreign accounts held by domestic grantor trusts when you are the grantor.
- Foreign-issued life insurance or annuities with cash value.
- Foreign hedge funds.
- Foreign private equity funds.
You only have to report your specified foreign assets if they are over a certain threshold. The threshold varies based on your filing status and whether you live in the United States or abroad.
As of 2023, you must file Form 8938 if you have over the following thresholds in specified foreign assets:
- Unmarried or married filing separate taxpayers living in the United States — More than $50,000 on the last day of the tax year, or more than $75,000 on any day during the year.
- Unmarried or married filing separate taxpayers living outside the United States — More than $200,000 on the last day of the tax year, or more than $300,000 on any day during the year.
- Married taxpayers living in the United States and filing a joint tax return — More than $100,000 on the last day of the tax year or more than $150,000 on any day during the tax year.
- Married taxpayers living outside the country and filing a joint income tax return — Over $400,000 on the last day of the tax year or more than $600,000 on any day during the tax year.
Exchange Rate to Value Assets
Use the exchange rate on the last day of the tax year to determine the value of your specified foreign assets. You can also use this rate to determine the value of your assets throughout the year. Even if you sold your asset during the year, you should still use the exchange rate on the last day of the year to assess its value.
Determining the Value of Assets During the Year
You don't have to know the value of your asset on every single day of the year. The IRS says that you can use your periodic account statements to determine value. The only exception is if you know that the statements don't accurately reflect the highest values of your assets.
Statute of Limitations on Form 8938
If you don't file Form 8938, the IRS has three years to review your return. If you fail to include over $5,000 in income related to specified foreign assets, the statute of limitations extends to six years. There is no statute of limitations if you haven't filed a tax return at all. You must file a return for the statute of limitations to start.
Form 8938 Instructions
Figuring out if you need to file the form is the tricky part. Filling out the form is pretty straightforward. Here are the instructions.
The top of the form requests basic details such as the taxpayer's name, the type of entity (specified individual, partnership, corporation, trust, etc.), In parts one and two, you provide an overview of your foreign assets. This includes the number and value of your foresign assets broken out into deposit accounts, custodial accounts, and other foreign assets.
Then, in section three, you note any taxable items related to your foreign assets. For instance, if you received interest, dividends, or other taxable income or credits from these assets, you should list the amount reported and where it was reported on your tax return.
If you filed any other forms that reported specified foreign assets, you must note which forms and the number of forms in section four of this form. The options include Forms 3520, 8621, 3520-A, 8865, and 5471.
Finally, in parts five and six, you detail all of the foreign assets. The form requests details such as the type of account, the type of currency, the exchange rate used for valuation, the name of the financial institution, and Global Intermediary Identification Number.
FAQs About Form 8938
The reporting requirements for Form 8938 can be tricky. Even just figuring out if your asset qualifies as a specified asset can be difficult. To help you out, here are answers to frequently asked questions.
Do you have to report foreign social security?
No, if you have a right to receive foreign social security or similar types of payments, you don't have to report those funds. However, if you have an interest in a foreign pension, you may need to report that depending on its value.
What if you reported specified assets on another form?
You don't have to report specified assets on Form 8938 if you already reported the assets on one of the following forms:
- Form 3520 (Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts)
- Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations)
- Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company)
- Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships)
However, you must note on Form 8938 which forms you filed.
What if you sold your specified foreign asset during the tax year?
To figure out if you need to file, see if the asset's value exceeded the reporting threshold at the time of sale or at any other time during the year.
What if you own specified foreign assets jointly?
Suppose you own the asset with your spouse, who is also a specified person, and you file jointly. In that case, you should compare the total value of the asset to your reporting threshold, but if you file separately, you should only consider your half of the asset.
For instance, say that you live in the United States and your jointly owned specified foreign asset is worth $120,000 on the last day of the tax year. If you file jointly, you take this whole amount into account, and you must file Form 8938 because your asset is worth more than $100,000 on the last day of the year.
If you file separately, you only take $60,000 (half of the asset's value into account). However, as the reporting threshold for married filing separately is $50,000 on the last day of the year, you also need to file Form 8938.
If you share the asset with a spouse who is not a specified individual or someone who is not a spouse, you need to compare the total value of the asset to the reporting threshold for your filing situation.
To illustrate, say that you and your spouse own a specified asset worth $60,000 on the last day of the tax year, but your spouse is not a specified person. In this case, if you live in the United States, you don't have to file if you file married filing jointly, but you do if you file married filing separately. The $60,000 asset is over the $50,000 threshold for a married filing separately filer, but it's under the $100,000 threshold for a married filing jointly filer.
What if you own multiple specified foreign assets?
You should add up the total of your assets on the last day of the year and you should also consider their highest combined value throughout the year. When calculating the total value of your assets, use the above tips for jointly held assets.
What if you and your spouse own specified foreign assets individually?
If filing jointly, you should add your individually owned foreign assets to your spouse's individually owned foreign assets. Then, you should add the total value of your jointly owned assets and see if the total puts you over the filing threshold.
If you file separately, you should each add up your individually owned foreign assets separately. Then, you should each add half of the value of your jointly held assets. If the total puts you over the reporting threshold for a married filing separately filer, you must file Form 8938.
What if your spouse is not a specified person?
If your spouse is not a specified person, you should include 100% of the value of any specified assets you own jointly with your spouse. Then, you should consider the specified foreign assets you own individually. If the total puts you over the threshold, you must file the form. You don't have to include any assets that your spouse owns individually.
Do you have to report foreign real estate on your tax return?
You generally don't have to report foreign real estate on Form 8938, but if you own a foreign entity that owns foreign real estate, you may need to report the foreign entity. A tax attorney can help you figure out your requirements.
Do you have to report foreign currency that you hold directly?
No, you don't have to report foreign currency that you hold directly. In contrast, you must report foreign currency if it is in a bank account in a foreign financial institution.
What is the difference between Form 8938 and FBAR?
Both Form 8938 and the FBAR are informational reports about foreign financial accounts and assets, but they have very different requirements. The filing threshold for the FBAR is only $10,000. In contrast, it's between $50,000 and $600,000 for Form 8938.
The rules about who must file and the types of accounts that need to be reported also vary. Finally, you file the FBAR with the Financial Crimes Enforcement Network (FinCEN), while you file Form 8938 with the IRS.
Do you need to file an FBAR if you filed Form 8938?
You may need to file an FBAR even if you filed Form 8938. If any of the specified financial assets reported on Form 8938 are financial accounts maintained by financial institutions located in a foreign country, you must also file an FBAR.
Get Help With Form 8938 Penalties, Disclosures, and More
To get caught up with Form 8938 or to get help dealing with penalties, reach out to a tax professional today. Unfortunately, this reporting requirement is relatively rare, which means that many accountants don't understand the requirements or the disclosure processes.
To protect yourself, use TaxCure to search for a tax pro with experience with Form 8938 and other foreign asset disclosure forms. If needed, you can also narrow your search to find a tax attorney with criminal tax experience.
Don't call a big tax resolution firm where you'll just be a number. Instead, find a local professional with the expertise you need.