Form 8938

What Is Form 8938?

Form 8938, officially known as the "Statement of Specified Foreign Financial Assets," is an Internal Revenue Service (IRS) form that certain U.S. taxpayers must file to report their interests in specified foreign financial assets if the aggregate value of those assets exceeds certain reporting thresholds⁴⁹. This form is a key component of the Foreign Account Tax Compliance Act (FATCA), a U.S. federal law enacted to combat offshore tax evasion within the broader category of International Tax Compliance. The purpose of Form 8938 is to enhance transparency regarding U.S. persons' financial holdings outside the United States.

History and Origin

Form 8938 emerged from the enactment of the Foreign Account Tax Compliance Act (FATCA) in 2010. FATCA was passed as part of the Hiring Incentives to Restore Employment (HIRE) Act, with the primary goal of deterring U.S. persons from using offshore accounts and assets to evade U.S. taxes⁴⁸. Before FATCA, the U.S. government had limited visibility into the foreign financial holdings of its citizens and residents. FATCA aimed to address this by requiring both certain U.S. taxpayers and foreign financial institutions (FFIs) to report information about specified foreign financial assets to the IRS⁴⁶, ⁴⁷. This legislative change introduced significant new reporting obligations, including the requirement to file Form 8938 for individuals meeting the specified asset thresholds, and Form 8966 for foreign financial institutions⁴⁵.

Key Takeaways

• Form 8938 requires certain U.S. taxpayers to disclose their interests in specified foreign financial assets.
• The obligation to file Form 8938 is part of the Foreign Account Tax Compliance Act (FATCA), enacted to combat offshore tax evasion.
• Reporting thresholds for Form 8938 vary based on the taxpayer's filing status and whether they reside in the U.S. or abroad.
• This form must be attached to the taxpayer's annual income tax return.
• Failure to file Form 8938 when required can result in significant penalties.

Interpreting Form 8938

Interpreting Form 8938 primarily involves understanding whether a U.S. person meets the criteria for filing and accurately reporting their financial assets held abroad. The form requires taxpayers to list details such as the type of asset, the name and address of the financial institution or issuer, and the maximum value of the asset during the tax year⁴⁴. It is not merely a quantitative disclosure; it provides the IRS with a comprehensive overview of a taxpayer's foreign financial landscape. For instance, if an individual holds diverse foreign investments, Form 8938 helps the IRS track potential income generated from those investments, ensuring proper compliance with U.S. tax laws.

Hypothetical Example

Consider Jane, a U.S. citizen living in the United States, who maintains a foreign bank account and owns shares in a foreign corporation. On December 31st, her foreign bank account has a balance of $35,000, and her foreign corporate stock is valued at $20,000. Throughout the year, the maximum balance in her foreign bank account reached $45,000, and her foreign stock peaked at $25,000.

For a single filer living in the U.S., the reporting threshold for Form 8938 is $50,000 on the last day of the tax year or $75,000 at any time during the year⁴³. Jane's combined foreign financial assets total $55,000 ($35,000 + $20,000) on December 31st, exceeding the $50,000 year-end threshold. Therefore, Jane would be required to file Form 8938 with her annual income tax return, reporting both the foreign bank account and the foreign corporate stock, along with their maximum values during the year.

Practical Applications

Form 8938 is a critical tool in the IRS's efforts to ensure U.S. Citizens and Resident Aliens living both domestically and abroad fulfill their global tax obligations. It applies to a broad range of specified foreign financial assets, including foreign bank accounts, foreign stocks, interests in foreign partnerships, foreign bonds, foreign mutual funds, and foreign pension plans⁴¹, ⁴². Taxpayers with significant overseas financial activity must ensure accurate and timely filing of Form 8938. This includes those who might own shares in a foreign corporation or have beneficial interests in a foreign trust. The form helps the IRS cross-reference information received from foreign financial institutions under FATCA intergovernmental agreements, facilitating the detection of unreported income or assets⁴⁰.

Limitations and Criticisms

While Form 8938 is designed to increase tax compliance, its implementation under FATCA has faced criticisms and demonstrated limitations. One key concern highlighted by the Treasury Inspector General for Tax Administration (TIGTA) is that the costs of FATCA implementation have significantly outweighed the revenue generated from related assessments. As of April 2022, the cost of FATCA implementation between 2010 and 2020 was $574 million, while assessments from compliance activities amounted to only $14 million³⁷, ³⁸, ³⁹. TIGTA reports have also pointed to issues with the accuracy and completeness of data received from foreign financial institutions, with a significant percentage of records missing or containing invalid taxpayer identification numbers³⁵, ³⁶. This data quality issue can hinder the IRS's ability to effectively match FFI reports with individual taxpayer filings, impacting the overall compliance effectiveness of Form 8938³³, ³⁴.

Form 8938 vs. FinCEN Form 114 (FBAR)

Form 8938 and FinCEN Form 114, also known as the Report of Foreign Bank and Financial Accounts (FBAR), are both mandatory disclosures for U.S. persons with foreign financial interests, but they serve different purposes and have distinct requirements.

Taxpayers may be required to file both forms, as the requirements are separate and distinct¹³, ¹⁴, ¹⁵. It is crucial for individuals with foreign financial holdings to understand the specific criteria for each to ensure full compliance.

FAQs

Who needs to file Form 8938?

Generally, U.S. citizens, resident aliens, and certain nonresident aliens who have an interest in specified foreign financial assets and whose total value of those assets exceeds specific reporting thresholds must file Form 8938¹¹, ¹². Thresholds vary based on factors like filing status (e.g., single, married filing jointly) and whether the individual resides in the U.S. or a foreign country⁹, ¹⁰.

What types of assets are reported on Form 8938?

Form 8938 covers a broad range of specified foreign financial assets, including foreign bank accounts, foreign stocks, foreign bonds, interests in foreign partnerships, foreign mutual funds, foreign pension plans, and certain financial instruments or contracts with foreign counterparties⁶, ⁷, ⁸.

What are the penalties for not filing Form 8938?

Failure to file a correct and timely Form 8938 when required can lead to significant penalties. These can include civil penalties, which can be substantial, and in some cases, criminal penalties. There might also be an understatement of tax related to undisclosed foreign financial assets⁴, ⁵.

Is Form 8938 the same as FBAR?

No, Form 8938 and the FBAR (FinCEN Form 114) are distinct reporting requirements. Form 8938 is filed with the IRS as part of your income tax return and covers a broader range of financial assets, while the FBAR is filed electronically with FinCEN and focuses specifically on foreign financial accounts², ³. It is possible to be required to file both forms¹.