Foreign Financial Assets Reporting: A Complete Guide to IRS Form 8938

Are you a U.S. taxpayer with foreign financial assets?

If so, you might need to file IRS Form 8938 to report those assets.

Form 8938 is mandatory for U.S. taxpayers who need to file a tax return and surpass certain thresholds for reporting foreign accounts and assets. The IRS requires this under the Foreign Account Tax Compliance Act (FATCA), and failing to comply can lead to severe penalties. In this guide, we’ll walk you through the process of preparing Form 8938, breaking down the IRS’s complex instructions into clear, actionable steps.

This guide will save you time and help ensure that your foreign financial asset reporting is accurate and complete.

CONTENT ON THIS BLOG:

1. What is a Foreign Financial Asset?
2. Differences Between Form 8938 and FBAR/FinCEN 114
3. Compliance Tips and Common Pitfalls to Avoid
4. Additional Reporting Requirements
5. 10 Tax Tips for Filing IRS Form 8938 and Reporting Foreign Financial Assets
6. Frequently Asked Questions

The Importance of IRS Form 8938

IRS Form 8938 is used to report specified foreign financial assets. This form is part of the U.S. government’s effort to prevent tax evasion through foreign investments. While similar to FBAR (FinCEN Form 114), Form 8938 has different thresholds, and failing to file this form can lead to significant penalties.

The form is required by the Foreign Account Tax Compliance Act (FATCA), and it ensures that U.S. taxpayers declare their foreign financial interests to the IRS. This guide will help you understand how to prepare and file Form 8938 accurately. It is crucial to follow the form 8938 instructions to ensure accurate reporting.

Who Needs to File Form 8938?

You must file Form 8938 if you are a specified individual or specified domestic entity with financial accounts maintained at foreign financial institutions that exceed the IRS reporting thresholds. These accounts are significant for individuals and entities due to the implications of the Foreign Account Tax Compliance Act (FATCA), which mandates reporting obligations and compliance requirements to prevent tax evasion involving foreign assets.

• Specified individuals include U.S. citizens, resident aliens, and non-resident aliens who choose to be treated as resident aliens.

• Specified domestic entities include certain domestic corporations, partnerships, and trusts formed primarily to hold foreign financial assets.

Reporting Thresholds

The reporting thresholds depend on your filing status and whether you live in the U.S. or abroad:

• Single or married filing separately, living in the U.S.:

  • More than $50,000 on the last day of the year, or

  • More than $75,000 at any point during the year.

• Married filing jointly, living in the U.S.:

  • More than $100,000 on the last day of the year, or

  • More than $150,000 at any point during the year.

• Taxpayers living abroad (single or married filing separately):

  • More than $200,000 on the last day of the year, or

  • More than $300,000 at any point during the year.

• Married filing jointly, living abroad:

  • More than $400,000 on the last day of the year, or

  • More than $600,000 at any point during the year.

What is a Foreign Financial Asset?

A foreign financial asset is any financial asset held or maintained outside of the United States. A foreign financial asset includes financial accounts maintained at foreign financial institutions, which are crucial for accurate reporting. These assets can take various forms, including but not limited to:

• Foreign bank accounts: Savings, checking, or other types of accounts held in foreign banks.

• Foreign securities: Stocks, bonds, or other securities issued by foreign entities.

• Interests in foreign entities: Ownership stakes in foreign corporations, partnerships, or trusts.

• Foreign mutual funds: Investment funds that pool money from multiple investors to purchase foreign securities.

• Foreign real estate: Property located outside the United States, if held through a foreign entity.

• Foreign partnership interests: Ownership interests in foreign partnerships.

• Foreign financial instruments: Contracts or instruments issued by foreign persons.

The IRS mandates that U.S. taxpayers report certain foreign financial assets on Form 8938, Statement of Specified Foreign Financial Assets. This form is crucial for identifying and tracking U.S. taxpayers’ foreign financial assets. If the total value of your foreign financial assets exceeds the reporting threshold, you must include Form 8938 with your annual tax return.

Exceptions to Filing Form 8938

While many U.S. taxpayers with foreign financial assets must file Form 8938, there are notable exceptions:

• Exempt Foreign Financial Assets: Certain foreign financial assets are exempt from reporting. For instance, U.S. citizens living abroad who meet specific requirements may not need to report some assets.

• Below Reporting Threshold: If the total value of your foreign financial assets is below the reporting threshold, you are not required to file Form 8938. The threshold varies based on your filing status and whether you reside in the U.S. or abroad.

• No Tax Return Requirement: Taxpayers not required to file a tax return are also exempt from filing Form 8938.

• Certain Domestic Entities: Some domestic entities, such as partnerships and corporations, are not required to file Form 8938.

It’s important to remember that even if you are exempt from filing Form 8938, you may still need to file other forms, such as the FBAR (FinCEN Form 114), to report your foreign financial assets.

Differences Between Form 8938 and FBAR/FinCEN 114

Form 8938 and FBAR/FinCEN 114 are both used to report foreign financial assets, but they serve different purposes and have distinct requirements:

• Form 8938: This form is filed with your annual tax return and is used to report specified foreign financial assets if their total value exceeds the specified thresholds. It requires detailed information about each asset, including the type, value, and the name and address of the foreign financial institution.

• FBAR/FinCEN 114: This form is filed separately from your tax return and specifically reports foreign bank and financial accounts if their total value exceeds $10,000 at any point during the year. It requires less detailed information compared to Form 8938 but must be filed by April 15th each year.

Taxpayers who meet the reporting criteria for both forms must ensure they report the same accounts on both Form 8938 and FBAR/FinCEN 114. Understanding the differences and requirements of each form is crucial to staying compliant with IRS regulations.

Step-by-Step Guide to Preparing Form 8938

Step 1: Gather Your Financial Documents

Before you start, you’ll need records of your foreign bank accounts, foreign investments, and any other specified financial assets. You should also have information on the maximum value of each asset during the year.

• Bank account statements.

• Investment account records.

• Ownership documents for foreign corporations or trusts.

Step 2: Complete the Form

Part I: Foreign Deposit and Custodial Accounts Summary

In this section, you report any foreign deposit or custodial accounts. This could include foreign savings accounts, checking accounts, or investment accounts held in foreign financial institutions.

• Enter the number of accounts.

• Report the maximum value of these accounts during the year.

• Indicate whether any accounts were opened or closed during the tax year.

These financial accounts maintained at foreign financial institutions must be accurately reported to comply with IRS requirements.

Additionally, having financial accounts in a foreign branch of a US bank has specific implications. While such accounts may not be deemed ‘foreign’ for certain tax forms like Form 8938, they are considered ‘foreign’ for FBAR reporting purposes.

Part II: Other Foreign Assets Summary

Here, you’ll report foreign financial assets not held in a financial account, such as:

• Foreign stocks or securities.

• Interest in a foreign entity.

• Any financial instrument or contract issued by a foreign person.

Like Part I, you will need to report the total number and maximum value of these assets during the year.

Part III: Tax Items Attributable to Specified Foreign Financial Assets

This section requires you to list any income (interest, dividends, capital gains) you earned from your foreign assets. Make sure you’ve already reported this income on your tax return.

Part IV: Excepted Specified Foreign Financial Assets

If you’ve already reported certain foreign assets on other forms (like Form 3520 or 5471), you won’t need to duplicate the information on Form 8938. Simply indicate on Form 8938 that these assets have been reported elsewhere.

Step 3: Valuing Your Foreign Financial Assets

To determine whether you meet the reporting threshold, you need to know the fair market value of each asset.

• For financial accounts, you can use periodic account statements to report the highest value.

• For other assets like foreign stocks or securities, you should use the fair market value as of the last day of the tax year.

• If your assets are in foreign currency, convert their value to U.S. dollars using the exchange rate on the last day of the tax year.

Compliance Tips and Common Pitfalls to Avoid

1. Double-check Your Reporting Thresholds: Make sure you know the correct thresholds for your filing status. Don’t assume the same thresholds apply to everyone.

2. Understand Joint Ownership: If you own foreign financial assets jointly, the rules vary depending on whether the joint owner is your spouse or someone else. Make sure to apply the correct rules when valuing and reporting joint assets.

3. Don’t Confuse Form 8938 with FBAR: Both forms report foreign financial assets, but they are filed separately and have different requirements. Failing to file either form can result in penalties. It is crucial to follow the form 8938 instructions to avoid common pitfalls.

4. Avoid Underestimating the Value of Your Assets: If you don’t know the fair market value of an asset, make a reasonable estimate based on readily available information. Failing to provide enough information could lead to penalties.

5. File Even If You Don’t Owe Taxes: You must file Form 8938 even if you don’t owe any U.S. taxes. The IRS requires the form to track foreign financial assets, regardless of their impact on your tax liability.

Penalties for Failing to File Form 8938

The IRS imposes strict penalties for failure to file Form 8938, especially for those with foreign financial accounts. Reporting these accounts is crucial to avoid severe penalties:

• Failure-to-file penalty: Starts at $10,000, with additional penalties up to $50,000 for continued failure.

• Understatement penalties: If you underreport your tax due to unreported foreign assets, you could face a penalty of up to 40% of the underpayment.

• Criminal penalties: In cases of willful neglect, fraud, or evasion, you may face criminal charges.

How to Avoid Penalties with Reasonable Cause

If you fail to file Form 8938, you may avoid penalties by showing reasonable cause. For example, if you didn’t know about an asset and had no reason to know, you can explain your situation to the IRS. Keep records of your efforts to comply, such as contacting foreign financial institutions for information.

Extended Statute of Limitations

The extended statute of limitations for Form 8938 is a critical aspect of the form’s requirements. The IRS has the authority to extend the statute of limitations for assessing tax related to a specified foreign financial asset if the taxpayer fails to comply with the reporting requirements. This means that the IRS can assess tax, penalties, and interest on unreported foreign financial assets for an extended period, typically up to six years from the date the taxpayer files Form 8938.

It is essential to note that the extended statute of limitations applies to all tax years in which the taxpayer failed to report the specified foreign financial assets. This can result in significant tax liabilities, penalties, and interest for taxpayers who have not complied with the reporting requirements.

Taxpayers who are concerned about the extended statute of limitations should consult with a qualified tax professional to ensure they comply with the reporting requirements. By filing Form 8938 accurately and on time, taxpayers can avoid the extended statute of limitations and minimize their tax liabilities.

Additional Reporting Requirements

In addition to Form 8938, taxpayers with foreign financial assets may be required to file other forms and reports with the IRS. These additional reporting requirements can include:

• Form 1040: Taxpayers with foreign financial assets must report their worldwide income on Form 1040, including income from foreign sources.

• Form 2555: Taxpayers who qualify for the Foreign Earned Income Exclusion must file Form 2555 to claim the exclusion.

• Form 1116: Taxpayers who claim a foreign tax credit must file Form 1116 to report the credit.

• Form 8621: Taxpayers with Passive Foreign Investment Company (PFIC) investments must file Form 8621 to report the income and gains from these investments.

• Form 5471: Taxpayers with foreign partnership interests must file Form 5471 to report the income and gains from these interests.

Taxpayers with foreign financial assets should consult with a qualified tax professional to ensure they are meeting all the additional reporting requirements. Failure to comply with these requirements can result in significant tax liabilities, penalties, and interest.

It is also important to note that the IRS has implemented various programs and initiatives to improve compliance with foreign financial asset reporting requirements. These programs include the Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Filing Compliance Procedures. Taxpayers who are concerned about their compliance with foreign financial asset reporting requirements should consult with a qualified tax professional to determine the best course of action.

Additional Resources for Navigating Form 8938

The IRS offers several resources to help you navigate Form 8938:

• IRS Comparison of Form 8938 and FBAR:

• Currency Conversion Rates: You can find up-to-date foreign exchange rates on the U.S. Treasury website.

• Professional Help: If your foreign assets are complex, consult a tax professional specializing in international tax to ensure full compliance.

10 Tax Tips for Filing IRS Form 8938 and Reporting Foreign Financial Assets

Navigating the complexities of IRS Form 8938 can be overwhelming, especially when dealing with foreign financial assets. Here are 10 valuable tax tips to help you stay compliant, avoid penalties, and make the process smoother:

1. Know Your Reporting Thresholds

The reporting thresholds for foreign financial assets vary based on your filing status and residency:

• Single filers living in the U.S.: Report if assets exceed $50,000 at year-end or $75,000 during the year.

• Married filing jointly, living in the U.S.: Report if assets exceed $100,000 at year-end or $150,000 during the year.

• Higher thresholds apply to taxpayers living abroad.

Tip: Carefully check which threshold applies to your situation to avoid unnecessary filing or missing a reporting requirement.

2. Don’t Forget About Joint Accounts

If you own foreign assets jointly with a spouse or another person, be mindful of how you report them:

• For spouses filing jointly, report the full value of the asset once.

• For spouses filing separately, each spouse reports half the value of jointly owned assets.

• For other joint owners, report the full value of the asset.

3. Include All Types of Foreign Financial Assets

Form 8938 covers more than just foreign bank accounts. You need to report:

• Foreign stocks, bonds, and securities.

• Interests in foreign entities, such as partnerships or trusts.

• Financial instruments or contracts with foreign persons.

Tip: Review all of your foreign investments to ensure nothing is left out.

4. Keep Track of the Maximum Value of Your Assets

You’re required to report the maximum value of your foreign assets during the tax year, not just their value at year-end. Be sure to:

• Gather account statements.

• Use the highest value shown during the year.

5. Convert Foreign Currency Correctly

When reporting foreign assets, convert the value to U.S. dollars using the exchange rate on the last day of the tax year. If you closed or sold the asset before year-end, still use the rate on December 31st.

Tip: Use the U.S. Treasury exchange rate or another reliable source, and document your conversion method.

6. Don’t Mix Up FBAR and Form 8938

FBAR (FinCEN Form 114) and Form 8938 both require foreign asset reporting but have different filing requirements:

• FBAR is filed with FinCEN and applies if your foreign accounts exceed $10,000 at any point during the year.

• Form 8938 is filed with your tax return and has higher thresholds.

Tip: You may need to file both, so understand which assets go on each form.

7. Use Reasonable Estimates if Necessary

If you don’t know the exact value of a foreign asset, it’s acceptable to use a reasonable estimate based on available information. For example, you can use financial statements or publicly available market data to estimate values.

Tip: Be sure to document how you arrived at your estimate in case the IRS asks for clarification.

8. Don’t Ignore Specified Domestic Entities

If you own a closely held domestic corporation, partnership, or trust, these entities might be considered “specified domestic entities” under the IRS rules. They must also file Form 8938 if they hold foreign financial assets exceeding $50,000 at year-end or $75,000 during the year.

9. Report Foreign Income on Your Tax Return

Any income from foreign financial assets—such as interest, dividends, or capital gains—must be reported on your U.S. tax return, even if you also report it on Form 8938.

Tip: Failing to report foreign income earned on foreign financial assets can lead to significant penalties, so double-check that all income is accounted for.

10. Seek Professional Help if Needed

Tip: If you’re unsure about any part of the filing process, it’s worth the investment to consult a CPA or tax advisor specializing in international taxation. A tax professional with expertise in international tax law can help ensure you’re compliant and avoid costly mistakes.

By following these tips, you can make the process of filing Form 8938 simpler, avoid penalties, and stay compliant with the IRS’s reporting requirements for foreign financial assets.

Conclusion

Filing IRS Form 8938 can feel daunting, but with the right information and preparation, you can avoid penalties and stay compliant. This guide is designed to simplify the IRS instructions, helping you understand your reporting requirements and how to accurately prepare and submit the form.

Don’t wait until the deadline—gather your documents now, follow the steps in this guide, and file on time to stay on the right side of the law!

How We Can Help with IRS Form 8938 Compliance and Foreign Financial Asset Reporting

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With offices across the U.S. in Miami, Coral Gables, Aventura, Fort Lauderdale, Orlando, Melbourne, Tampa, and in over 29 countries worldwide, our team of CPAs and International Tax Advisors are readily available to assist you with tax planning, tax preparation, and IRS representation. Learn more about how our services can help with your individual and business tax needs, international tax services, expatriate tax services, SAP Business One solution, entity management, human capital, and audit and assurance services.

Our services include:

• IRS Form 8938 Preparation and Compliance: We offer full-service assistance to ensure accurate reporting of your foreign financial assets and compliance with IRS regulations.

• Foreign Income Tax Planning: We help clients optimize their foreign financial portfolios while staying in compliance with U.S. tax laws, reducing potential tax liability.

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• s in a way that optimizes your tax position and ensures you meet all reporting requirements under FATCA.

Contact H&CO today to discuss how we can assist you with all aspects of Form 8938 reporting and other international tax compliance matters.

Frequently Asked Questions

What is the IRS reporting threshold for foreign assets?

The reporting threshold for foreign assets depends on your filing status and residency. For U.S. taxpayers living in the U.S., the threshold is $50,000 on the last day of the year or $75,000 at any time during the year for single filers. For married couples filing jointly, it's $100,000 at year-end or $150,000 at any time. Higher thresholds apply if you live abroad.

How do I report foreign financial assets?

To report foreign financial assets, U.S. taxpayers must complete and submit Form 8938 as part of their annual tax return if their assets exceed the IRS thresholds. This includes detailing foreign bank accounts, investments, and other financial holdings on the form.

Who is required to file FBAR?

U.S. taxpayers with foreign financial accounts that, in aggregate, exceed $10,000 at any time during the year must file FBAR (FinCEN Form 114). This applies to U.S. citizens, resident aliens, and certain non-resident aliens with foreign financial interests.

What foreign assets should be reported?

Foreign assets that should be reported on Form 8938 include foreign bank accounts, stocks, securities, foreign partnership interests, financial instruments issued by foreign persons, and interests in foreign trusts or estates. It’s important to report these if they exceed the IRS thresholds.

Who is required to file Form 8938?

U.S. citizens, resident aliens, and certain non-resident aliens who hold specified foreign financial assets that exceed the IRS reporting thresholds are required to file Form 8938. Specified domestic entities that hold foreign assets may also need to file.

What is the difference between Form 8938 and FBAR?

The key difference between Form 8938 and FBAR is that Form 8938 is filed with your annual tax return and has higher reporting thresholds, whereas FBAR is filed separately with FinCEN and applies to foreign financial accounts totaling over $10,000. Form 8938 also includes a wider range of reportable assets.

What is the maximum account value for Form 8938?

When reporting on Form 8938, you must provide the maximum value of your foreign financial assets during the tax year. This refers to the highest value the asset reached, not just its value at the end of the year.