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.
What is Form 8938?
Form 8938 like Schedule B is filed as part of your tax return, so this is not filed separately like the FBAR. This is a form that is attached to your form 1040 and filed along with it. Form 8938 is required by the Foreign Account Tax Compliance Act which became law on March 18th, 2010. Form 8938 is used to report foreign financial assets.
Threshold requirements for Form 8938
Thresholds for filing of Form 8938 is a bit different from that of the FBAR and they also vary depending on whether or not you are married, filing joint or single, or married filing single; or if you are a US resident or a foreign resident.
In case, you are a US resident, single or married but filing separate returns, you will be required to file form 8938 if your foreign financial assets are $50,000 at year-end or $75,000 or more at any time during that fiscal year.
These thresholds increase for those persons that are married and filing jointly, in this case, the threshold is $100,000 a year-end and $150,0000 or more at any time during the year.
If you are a foreign resident, the thresholds are even higher because the IRS figured out that if you are a foreign resident, you are more likely to have foreign financial assets. Thus, if you are foreign resident, single or married filing separately, you would be required to file if at year-end your foreign financial assets are at $200,0000 or more or if they were $300,000 or more at any time during the year.
Alternatively, if you are one of those taxpayers that are married and filing jointly then those thresholds increase to $400,000 at year-end or $600,000 or more at any time during the year.
What are Foreign financial assets?
Foreign financial assets include foreign financial accounts, so the form 8938 encompasses the same things as the FBAR being those foreign financial accounts but in addition, it also includes foreign stock or securities, ownership in any form/type of foreign entity, a financial instrument or contract with a foreign issuer counterpart (like a foreign annuity or insurance policy).
What are foreign financial accounts?
There is a very common misconception that a foreign financial account is simply a bank account or a brokerage account. Bank accounts or brokerage accounts are definitely foreign financial accounts but the term is very broad and encompasses a lot of different types of accounts, for example, foreign mutual funds, security deposits on rented real estate, foreign annuities, life insurance policies with a cash value etc.
Difference between FBAR and form 8938
On the surface, FBAR and form 8938 look the same because both of them report almost similar information, however, there are few marked differences between the two.
Specified persons for FBAR reporting are those that earn more than $10,000 per annum, while in case of form 8938, the specified persons are:
any unmarried individual holding foreign assets worth more than $50,000 at the end of the fiscal year or had ownership of foreign assets worth $75,000 or more, throughout the fiscal year.
Any married persons that had $150,000 worth of foreign assets in a fiscal year or that still hold foreign assets worth $100,000 at the end of the fiscal year.
The second difference between FBAR and form 8938 is the reporting requirements. In FBAR, specified persons are required to declare only foreign financial accounts while in form 8938, they are required to file foreign financial assets.
FBAR is filed separately from the individual tax return and form 8938 is filed along with annual tax return.
Penalties for non-compliance
The penalty of non-filing of form 8938 is $10,000 which can go up to $50,000 if the failure continues after receiving formal notification from the IRS. However, one of the scariest penalties is the unlimited statute of limitations. Basically what this means is, traditionally the IRS has always had three years to audit a tax return so if you made it past three years (even if you made a mistake) the IRS could not go back and audit it, unless there were some very exceptional circumstances. Now that has been changed. If you didn’t file any of these foreign information returns, the IRS can essentially go back and audit the entire tax return whenever they want. So, if you have failed to file form 8938 in 2011. even though that’s more than three years old, the IRS could still go back to audit the entire tax return simply because you failed to file one of these informational forms.
Another monetary component to this penalty is the application of 40% surcharge based on the underpayment of taxes to unreported foreign financial assets and of course criminal charges. If you intentionally did not file form 8938, or you’ve been filing it incorrectly, the IRS can prosecute you against criminal offense.
We shall conclude it with our disclaimer that this blog post is for informational or educational purposes only. It is neither a legal or tax advice nor is it to be construed as such. Each individual circumstance is different, you should seek legal and/or tax advice to address any specific questions you may have.
Have a question? Contact Olivier Wagner.