The Ultimate Guide to FATCA Form 8938: Filing Requirements

You might face penalties up to $10,000 per year if you don't file your FATCA Form 8938. These penalties could reach $50,000 if you continue to ignore the requirements.

Form 8938 came into existence in 2010 through the Hiring Incentives to Restore Employment (HIRE) Act. U.S. taxpayers must report their specified foreign financial assets above certain limits. Single filers need to report when their foreign assets hit $50,000 at year-end or $75,000 at any point during the tax year. Married couples who file jointly have higher limits - $100,000 at year-end or $150,000 during the tax year.

This blog covers everything about Form 8938 filing requirements. You'll learn about reporting thresholds, specified foreign financial assets, and ways to stay compliant that help you avoid penalties that can get pricey.

What is Form 8938 for NRIs?

Form 8938, "Statement of Specified Foreign Financial Assets," is a vital reporting tool the Internal Revenue Service (IRS) uses. The IRS created this form under the Foreign Account Tax Compliance Act (FATCA) to track U.S. taxpayers' foreign financial interests.

The form requires you to report foreign financial assets like bank accounts, brokerage accounts, financial instruments, and foreign-issued life insurance. It also covers interests in foreign pension plans, deferred compensation arrangements, and foreign estate holdings.

This document is different from other IRS forms because it gives a detailed financial snapshot. The IRS uses Form 8938 to understand international tax compliance effectively. You must submit this form with your annual federal income tax return as a supplemental document.

Form 8938 works separately from the Report of Foreign Bank and Financial Accounts (FBAR). These forms might look similar, but filing one doesn't mean you can skip the other. This dual reporting system will give a full picture of foreign financial interests.

The form has six distinct parts that each serve a specific purpose. Parts I and II deal with financial accounts and other financial assets. Part III shows income from these foreign financial assets. The remaining Parts IV through VI provide more details about foreign accounts and financial instruments.

Who Needs to file Form 8938?

U.S. taxpayers must follow specific filing requirements for Form 8938. You need to file this form if you qualify as a specified individual. The requirement applies to U.S. citizens, resident aliens, and certain nonresident aliens who choose to be treated as resident aliens for tax filing purposes.

Your residency status and foreign financial asset values determine the filing obligation. Single U.S. resident taxpayers must submit Form 8938 if their foreign financial assets exceed $50,000 on the last day of the tax year or $75,000 during the year. Married couples who file jointly have higher thresholds - $100,000 on the last day or $150,000 during the tax year.

Business owners should note that specified domestic entities must also file Form 8938. This applies to closely held domestic corporations and partnerships where passive income makes up at least 50% of total income or passive income-generating assets constitute 50% of all assets. These entities must follow the same threshold as single U.S. residents - $50,000 on the last day or $75,000 during the year.

What Is Reported in Form 8938 for NRIs?

Form 8938 requires you to report specific foreign financial assets that belong to different categories. The form has six parts that help capture everything in foreign financial holdings.

Foreign Financial Accounts that foreign financial institutions manage to keep are the foundations of reporting requirements. These accounts include depository or custodial accounts plus equity or debt interests in foreign financial institutions. Foreign insurance companies must also report cash value life insurance or annuity contracts they handle.

Investment Assets not held in financial accounts make up another significant category. These assets cover more than standard bank accounts:

Foreign corporation stocks and securities
Capital or profits interests in foreign partnerships
Notes, bonds, or other forms of foreign indebtedness
Interest rate swaps, currency swaps, and similar agreements with foreign counterparties

What Is A Specified Foreign Financial Asset

A specified foreign financial asset covers any financial account that a foreign financial institution manages. These assets include stocks issued by non-U.S. persons, interests in foreign entities, and financial instruments with non-U.S. issuers or counterparties.

Foreign financial institutions meet this definition when they accept deposits during regular banking operations. They also qualify if they hold financial assets for others or participate heavily in investing and trading securities. Assets held for active business operations have different reporting rules than those kept for investment purposes.

Step-by-Step Filing Process for FATCA Form 8938

Filing Form 8938 needs a clear plan to report your foreign financial assets accurately. You should check if you need to file by comparing your foreign asset values with the applicable thresholds.

The filing process becomes easier with these four steps:

Assessment Phase
- Check all your foreign financial accounts and assets
- Use US Treasury Department's year-end exchange rates to calculate total values
- Compare your assets with reporting thresholds
Documentation Gathering
- Get statements from foreign financial institutions
- Get details about foreign pensions and insurance policies
- Record the highest values during the tax year
Form Completion
- Complete each section of Form 8938
- List every specified foreign financial asset
- Add account identification details
Submission Process
- Add Form 8938 to your annual tax return
- File by the tax return due date with extensions
- Save copies of all supporting documents

Make sure Form 8938 has all the required information about your foreign financial accounts, investment assets and their income. Remember that Form 8938 works separately from other international forms like FBAR and might need separate filing.

What Are The Threshold Reporting Requirements

Filing thresholds for Form 8938 depend on your residency status and filing category. U.S. residents who are single need to file at the time their foreign assets reach $50,000 on the tax year's last day or $75,000 during the year.

The numbers look different for married couples in the U.S. who file jointly. Their threshold jumps to $100,000 on the tax year's last day or $150,000 during the year. However, married taxpayers with separate returns must follow single filer thresholds - $50,000 and $75,000 respectively.

U.S. taxpayers based overseas get more flexibility with higher thresholds. Single filers outside the U.S. need to report when foreign assets hit $200,000 on the last day or $300,000 during the year. Married couples filing jointly from abroad have thresholds of $400,000 on the last day or $600,000 during the year.

You qualify as living abroad by meeting one of these conditions:

Being a U.S. citizen with bona fide residency in a foreign country throughout the entire tax year
Staying in foreign countries for at least 330 full days during any consecutive 12-month period that ends in the current tax year

Specified domestic entities like closely held corporations and partnerships must report when foreign assets reach $50,000 on the last day or $75,000 during the tax year. These thresholds apply to entities where passive income makes up at least 50% of total income or their assets generate passive income.

Penalties For Failure To Timely and Accurately File of IRS Form 8938

Non-compliance with Form 8938 requirements can lead to heavy financial penalties. It can be $10,000 base penalty for not filing a complete and accurate Form 8938 by the due date.

The penalties get worse if you keep ignoring them. Missing the 90-day deadline after an IRS notice triggers another $10,000 penalty every 30 days of non-filing. These penalties can add up to $50,000.

Couples who file jointly should know their penalty liability stays joint and several. The IRS assumes maximum value for assets when you don't provide enough details about their worth.

Whatever these strict penalties might be, you can get relief through reasonable cause exception. The IRS reviews each case on its own merits and looks at all relevant facts. But potential civil or criminal penalties in foreign jurisdictions don't count as reasonable cause.

You might face criminal penalties if you intentionally don't comply. Under Internal Revenue Code Section 7203, willful failure to file can result in:

Up to one year imprisonment
Individual penalties reaching $25,000

Conclusion

U.S. taxpayers with foreign financial assets need to understand FATCA Form 8938 requirements. Meeting FATCA requirements protects your financial interests while fulfilling U.S. tax obligations. Keep your foreign financial asset records organized and maintain proper documentation throughout the tax year.

Frequently Asked Questions (FAQs): FATCA IRS Form 8938

What are the basic filing requirements for Form 8938?

Form 8938 must be filed by U.S. taxpayers with specified foreign financial assets exceeding certain thresholds. For single U.S. residents, the threshold is $50,000 at year-end or $75,000 at any time during the tax year. Married couples filing jointly have higher thresholds of $100,000 and $150,000 respectively.

How does FATCA impact U.S. taxpayers with foreign assets?

FATCA requires U.S. taxpayers to report specified foreign financial assets to the IRS when they exceed certain thresholds. This includes foreign bank accounts, investments, and other financial assets. The law aims to prevent tax evasion through the use of offshore accounts and investments.

What should I do if I have more than $100,000 in a foreign bank account?

If you're a U.S. resident and have more than $100,000 in a foreign bank account, you'll likely need to file Form 8938. For married couples filing jointly, the threshold is $150,000 at any time during the year. It's important to accurately report these assets to avoid potential penalties.

Is it necessary to file both FBAR and Form 8938?

Yes, in many cases you may need to file both FBAR (Report of Foreign Bank and Financial Accounts) and Form 8938. While there is some overlap, these forms serve different purposes and have distinct filing requirements. It's crucial to understand and comply with both reporting obligations.

What are the penalties for failing to file Form 8938?

Penalties for not filing Form 8938 can be severe. The base penalty is $10,000 for failing to file a complete and accurate form by the due date. Continued non-compliance after receiving an IRS notice can result in additional penalties of $10,000 for each 30-day period, up to a maximum of $50,000. Criminal penalties may also apply in cases of intentional non-compliance.