You might have already heard about the FinCEN Form 114, also known as FBAR. It is where you report certain foreign financial accounts to the Department of the Treasury. Filing an FBAR is not the only requirement you might have, though. If you have an interest in certain foreign financial assets, you may also have to file FATCA Form 8938 – Statement of Specified Foreign Financial Assets.
Form 8938 is more comprehensive than the FBAR and comes with its own set of rules. It is important that you understand them in order to remain compliant and avoid fines.
The Foreign Account Tax Compliance Act – FATCA
To help to reduce the unemployment in the country caused by the financial crisis of 2008, the government enacted, in 2010, the Hiring Incentives to Restore Employment (HIRE) Act. This act provided a series of incentives, including tax credits and payroll tax breaks, for businesses to hire unemployed workers. These incentives, though, came at a huge cost to the government in the form of lost tax revenue.
To offset this cost, the Foreign Account Tax Compliance Act (FATCA) was created as part of the HIRE Act. The FATCA requires all U.S. taxpayers to report, yearly, any foreign financial assets they have an interest in, via Form 8938. This form is filed as part of your federal income tax return and is due at the same time.
FATCA also requires foreign financial institutions (FFI) and non-financial foreign entities (NFFE) to disclose information about all their U.S. taxpayer customers. The required information includes name, address, tax ID, account number, account balance, and list of deposits and withdraws. FFIs and NFFEs that do not consent to, or comply with, FATCA are subject to a 30% withholding tax, applied to certain U.S. sourced payments made to them.
While FATCA itself does not impose any taxes on the assets held outside of the country, requiring taxpayers to disclose their foreign financial assets makes it harder for them to evade U.S. taxes, thus, increasing tax revenue. Penalties applied to non-compliant taxpayers and foreign institutions also generate extra revenue for the government.
Who Must File FATCA Form 8938?
You must file Form 8938 if you are a specified person, as defined by the IRS, and you have an interest in foreign financial assets whose aggregate market value is greater than the reporting threshold. An exception to this rule is if you don’t have to file an income tax return for the tax year. In this case, you also don’t have to file Form 8938, even if you meet all the criteria.
You are a specified person if you are:
- A U.S. citizen; or
- A resident alien for any part of the tax year; or
- A nonresident alien who made an election to be treated as a resident alien; or
- A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico.
In short, if you are a U.S. person and the combined value of your foreign assets exceeds the reporting threshold, you must file Form 8938. This also applies to certain entities, such as corporations, but this article focus only on individuals. For more information about entities, please consult the instructions for Form 8938.
What Are the Reporting Thresholds?
The reporting threshold varies depending on what type of taxpayer you are. You must file Form 8938 if the aggregate market value of all foreign financial assets you have an interest in is:
- Unmarried living in the United States: more than $50,000 on the last day of the tax year or more than $75,000 at any time during the year.
- Married filing jointly and living in the United States: more than $100,000 on the last day of the tax year or more than $150,000 at any time during the year.
- Married filing separately and living in the United States: more than $50,000 on the last day of the tax year or more than $75,000 at any time during the year.
- Unmarried living outside the United States: more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year.
- Married filing jointly and living outside the United States: more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
- Married filing separately and living outside the United States: more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year.
Note that you are considered as living outside of the United States, according to the IRS, if you are:
- A bona fide resident of a foreign country for an uninterrupted period that includes the entire year; or
- Are present in a foreign country for at least 330 full days during any period of 12 consecutive months that ends in the tax year being reported.
What Foreign Financial Assets Must Be Reported?
You must report all specified foreign financial assets, as defined by the IRS, that you have an interest in. It is important to note that Form 8938 specifies interest rather than ownership or signature authority. That means you don’t have to report accounts you have signature authority over as long as you don’t have any financial interest in them. For example, officers in a foreign corporation might have signature authority over bank accounts, but no financial interest. Therefore, they don’t have to report these accounts.
Examples of specified foreign financial assets include:
- Checking and savings account;
- Brokerage account;
- Certificate of Deposit;
- Retirement account;
- Stocks, Bonds, Notes or other securities issued by a non-U.S. person and not held in a financial account;
- Certain foreign financial instruments;
- Interest in a foreign corporation, partnership, estate, or trust;
- Insurance policy with cash value, such as whole life insurance policy;
- Annuity policy with cash value;
- Shares in a mutual fund or similar pooled fund.
The list above is by no means complete and other types of assets might be reportable. Remember to always consult with a tax professional to determine what foreign assets you must report.
What Information Must Be Reported?
The following information must be disclosed on Part V for each specified foreign financial account reported on Form 8938:
- Type of account;
- Account number;
- Whether the account was opened or closed during the tax year being reported;
- If the account is jointly owned with a spouse;
- If you had taxable income attributable to the specified account;
- The maximum value of the account;
- The currency exchange rate used, and source, if applicable;
- Name and address of the financial institution.
For other specified foreign financial assets, such as interest in a corporation, partnership, estate, or trust, the following information must be disclosed on Part VI:
- Description of the asset;
- Identification number;
- Whether the asset was acquired or disposed of during the tax year being reported;
- If the asset is jointly owned with a spouse;
- If you had taxable income attributable to the specified asset;
- The maximum value of the asset during the tax year being reported;
- The currency exchange rate used, and source, if applicable;
- If the asset being reported is an entity: the name, type, and address of the entity;
- If the asset being reported is not an entity: the name, type, and address of the issuer or counterparty.
How to Calculate the Assets Value?
Before determining if you are required to file Form 8938, you will have to calculate the maximum value of each of your foreign financial assets during the calendar year, as well as the value on the last day of the year. For accounts held with a financial institution, such as bank accounts, use the following steps:
- Determine the maximum value of the account and the value on the last day of the calendar year, in the currency of the account. You can rely on periodic statements for this purpose;
- Convert the values to U.S. dollars using the exchange rate of the last day of the calendar year;
For assets that are not financial accounts, you may use only the fair market value of the asset as of the last day of the tax year, unless you have a reason to believe that this value does not reflect the maximum value of the asset during the tax year. Once the value is determined, you convert to U.S. dollars using the exchange rate of the last day of the calendar year.
You must use the Treasury Reporting Rates of Exchange to determine the exchange rate of the last day of the calendar year. If no official rate is available, you may use any public foreign currency exchange rate as long as you disclose the source on your Form 8938.
What About Real Estate?
Foreign real estate is not considered a specified foreign financial asset and, therefore, must not be reported on Form 8938. It gets tricky, though, if the real estate is held by a foreign entity, such as a foreign corporation, partnership, estate, or trust. In this case, the market value of the real estate has to be taken into account when calculating the value of the entity.
What Are The Penalties For Not Filing?
If you fail to timely file Form 8938, you are subject to a $10,000 fine. Also, if you receive a notice of failure to file from the IRS and don’t file a complete Form 8938 within 90 days of the notice, you are subject to an extra $10,000 fine for each 30-day period in which you continue to fail to file, up to a total of $50,000. That is a potential $60,000 fine per year.
And there’s more. If you underpay your taxes due to not reporting income related to a foreign account that should’ve been disclosed on Form 8938, but wasn’t, you will have to pay a penalty of 40% of the underpayment. That is, of course, on top of the back taxes.
And finally, as is the case with most things IRS-related, you could face criminal charges on top of all the penalties. If you think you are required to file Form 8938, please consult with a licensed tax professional before trying to handle this on your own.
What are the Differences Between FATCA Form 8938 and FBAR?
It might seem like Form 8938 and FBAR are pretty much the same but they have many differences. Starting with the fact that Form 8938 is filed with the IRS while the FBAR is filed with the FinCEN. Also, keep in mind that one form does not replace the other. You might be required to file either Form 8938, FBAR, or both.
The IRS provides a complete comparison table of the differences between the two forms but here are some of the most obvious ones:
- Form 8938 reporting threshold can be as high as $600,000 in some cases while the threshold for the FBAR is $10,000;
- The accounts that must be reported on Form 8938 is based on interest, while it is based on ownership or signature authority on the FBAR;
- You must report any interest in a foreign entity on Form 8938. You don’t need to report it on the FBAR;
- While the penalties for failing to file Form 8938 are pretty steep, the penalties on the FBAR can sometimes be a lot worse;
While FATCA might not impact most immigrants due to its high reporting thresholds, it is nevertheless important to be aware of it and its rules to make sure you don’t get in trouble with the IRS.
Owning foreign financial assets is not illegal in any way but it can make your tax return very complicated. If you are in this situation, please consult with a tax professional to ensure you are filing all required forms.