Overview
Have you ever wondered what needs to be declared on a U.S. tax return if you own foreign assets? Depending on the type of foreign asset, you may be required to file a Foreign Bank and Financial Accounts Report (for more on that, refer to the article: Reporting My Foreign Bank and Financial Accounts) or even Form 8938.
Beginning in 2011, the Hiring Incentives to Restore Employment (HIRE) Act added Internal Revenue Code (“IRC”) § 6038D requiring any individual holding an interest in a specified foreign financial asset to attach Form 8938 to their personal income tax return.
According to IRS Publication 519, individuals may have to file Form 8938 to report specific foreign financial assets if the individual is:
A U.S. citizen;
A resident alien of the United States for any part of the tax year;
A resident alien of the United States who elects to be treated as a resident of a foreign country under the provisions of a United States tax treaty;
A nonresident alien who makes an election to be treated as a resident for purposes of filing a joint income tax return; or
A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico.
Under IRC § 6038D, “specified foreign financial assets” include:
Any financial account maintained by a foreign financial institution;
Any of the following assets which are not held in an account maintained by a financial institution –
o Any stock or security issued by a person other than a United States person;
o Any financial instrument or contract held for investment that has an issuer or counterparty which is other than a United States person; and
o Any interest in a foreign entity.
Taxpayers must file Form 8938 if the total value of the specified foreign financial assets exceeds the reporting threshold. Depending on the taxpayer’s filing status, the reporting threshold will differ. See the charts below for reporting thresholds as of the IRS’s 2019 instructions.
| Filing Status | Reporting Threshold |
|---|---|
| Unmarried | Taxpayer must file Form 8938 if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. |
| Married filing jointly | Taxpayers must file Form 8938 if the total value of specified foreign financial assets exceeds $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. |
| Married filing separate | Taxpayer must file Form 8938 if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. |
| Filing Status | Reporting Threshold |
|---|---|
| Unmarried | Taxpayer must file Form 8938 if the total value of your specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year. |
| Married filing jointly | Taxpayers must file Form 8938 if the total value of specified foreign financial assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year. |
| Married filing separate | Taxpayer must file Form 8938 if the total value of your specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year. |
Reporting Maximum Value
According to the Form 8938 instructions, taxpayers must report the maximum value during the tax year of specified foreign financial assets reported on Form 8938. Additionally, if the asset is denominated in a foreign currency, the maximum value of the asset must be determined in U.S. dollars by first determining the value of the asset in the foreign currency, then converting to U.S. dollars. To determine the currency exchange rate, the exchange rate on the last day of the tax year must be used. The exchange rate on the last day of the tax year is to be used even if the specified foreign financial asset was sold or otherwise disposed of before the last day of the tax year.
In the case of foreign deposit or custodial accounts, the following must be reported:
Account type;
Account number;
Account opening and closing dates; and
Name and address of the financial institution in which the account is maintained.
With respect to stock or interest in a foreign entity, the following must be reported:
A description of the stock or interest in the entity;
Entity identifying number;
Stock or interest acquisition and disposition dates;
Type of foreign entity; and
Name and address of the foreign entity.
Regarding all other specified foreign financial assets, the following must be reported:
A description of the asset;
Any asset identification number; and
Names and addresses of all issuers and counterparties with respect to the asset.
Penalties
Failure-to-Disclose Penalty
Under IRC § 6038D(d), if a taxpayer fails to furnish the information required on Form 8938 by the due date (typically April 15th following the tax year or October 15th with a valid extension), the taxpayer shall be subject to a penalty of $10,000. Additionally, if the failure continues for more than 90 days after the IRS mails a Failure to Disclose notice, the taxpayer shall be subject to an additional $10,000 penalty for each 30-day period (or fraction thereof) thereafter. However, the maximum continuous Failure to Disclose penalty is $50,000 per tax year in which the taxpayer fails to comply with IRC § 6038D.
Under IRC § 6038D(g), no penalty shall be imposed if the taxpayer’s failure to file Form 8938 or failure to disclose specified foreign financial asset(s) is due to reasonable cause and not willful neglect. The determination of whether a failure to file or disclose a specified foreign financial asset on Form 8938 was due to reasonable cause will be determined on a case-by-case basis, taking into account all the facts and circumstances.
Accuracy-Related Penalty
In the event that a taxpayer underpays the tax as a result of a transaction involving an undisclosed specified foreign financial asset, the taxpayer may be subject to a penalty of 40% of the underpayment. Likewise, if the underpayment is due to fraud, the taxpayer shall be subject to a penalty of 75% of the underpayment.
Criminal Penalties
Taxpayers may be subject to criminal penalties for failing to file Form 8938, failing to report a specified foreign financial asset, or for an underpayment of tax as a result.
Statute of Limitations
If a taxpayer fails to file Form 8938 or fails to report a specified foreign financial asset that they were required to report, the statute of limitations for the tax year may remain open until the Form 8938 is filed. Once the Form 8938 is filed, the general statute of limitations on assessment of taxes on a tax returns applies. See IRC § 6501(a).
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