If you are a “specified person,” Form 8938 is required to be filed with your tax return to report your interest in “specified foreign financial accounts” if the total value of all of your specified foreign financial assets exceeds a threshold. Okay, if you’re really interested, here are the Instructions.
Specified foreign financial assets include cash amounts in foreign accounts, foreign securities, financial interests in foreign entities and retirement accounts. This form requires details about each individual foreign asset, beyond just the total account balance that is included in Treasury Form 114 (FBAR). This does not include foreign rental property or foreign financial assets (currency or securities) that are held in a US financial institution. Here is a Comparison Chart of FBAR and 8938 requirements.
The Foreign Account Tax Compliance Act (FATCA) requires certain U.S. taxpayers holding financial assets outside the United States to report those assets to the IRS using Form 8938, Statement of Specified Foreign Financial Assets.
The Form 8938 reporting obligation under FATCA does not, however, replace the independent obligation to report foreign financial accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).
The two forms are often confused. The table below provides a summary comparison of the key differences between each form:
In the USA, there have been so many intricacies involved with respect to your income tax return filing and compliance with the federal tax laws. Recently, there have been a number of administrative requirements for disclosing local and foreign financial assets. One such requirement is filing of FATCA-form 8938 for disclosing foreign-held assets, interests, partnerships, bank accounts, mutual funds or stockholdings, etc. It is very similar to the FBAR but the FBAR gets recorded with the US treasury and form 8938 goes to the IRS.
Who are the persons that come under the radar of FATCA compliance?
The law states that you need to file form 8938 if you are either a specified person or a specified domestic entity and you have rights or interests in a specified foreign financial asset. Now, every citizen of the USA who is earning more than $10,000 per annum or hold a specific amount of foreign financial assets come under the definition of specified persons for the purpose of FBAR reporting or filing form 8938.
What is FBAR?
FBAR is the report of foreign bank and financial accounts. It is separate from your tax return and is not filed with your tax return. It is filed directly with the Treasury. It has to be electronically filed. There is also no tax based on the FBAR, instead, it is simply an informational reporting form, through which you are essentially just conveying information to the Treasury.
A failure to file FBARs and Form 8938 can result in numerous civil tax penalties. Criminal penalties are also a possibility, which could result in jail time.
FBAR Civil Penalties
The FBAR civil penalties have two tiers, depending on whether your conduct was willful or non-willful:
- Willful penalties can result in a penalty of $100,000 or 50% of the aggregate foreign account balance
- Non-willful penalties can result in a penalty of up to $10,000 per violation
These penalties can be assessed for each account and for each year a FBAR should have been filed, but wasn’t. So a taxpayer with 5 foreign accounts and 5 years of unfiled FBARs could have 25 FBAR violations. In practice, examiners may recommend only one penalty per year and may even recommend a single penalty for multiple years of violations.