IRS Form 8938: Who Needs to File It?

Form 8938, officially titled the Statement of Specified Foreign Financial Assets, serves as a critical tool in the IRS's efforts to enforce tax compliance among U.S. taxpayers with foreign financial interests. Let's delve deeper into its requirements, filing criteria, and implications.

What is Form 8938?

Form 8938 mandates the disclosure of specified foreign financial assets held by U.S. taxpayers. Its primary objective is to ensure that income generated from foreign sources is accurately reported on U.S. tax returns, thereby combating tax evasion.

Form 8938 is required for U.S. citizens, resident aliens, and certain non-resident aliens who meet specific thresholds regarding the total value of their specified foreign financial assets. These thresholds vary depending on the taxpayer's filing status and residency status. For instance, individuals living in the United States must file Form 8938 if their foreign financial assets exceed $50,000 at the end of the tax year or $75,000 at any point during the year.

Who Needs to File Form 8938?

U.S. citizens, resident aliens, and certain non-resident aliens fall under the purview of Form 8938 filing requirements, which are crucial for ensuring comprehensive tax compliance regarding foreign financial assets. The obligation to file Form 8938 arises when the aggregate value of specified foreign financial assets exceeds specific thresholds determined by the taxpayer's filing status and residency status. For instance, individuals living in the United States must file if their foreign financial assets surpass $50,000 at the end of the tax year or $75,000 at any point during the year. Similarly, those residing abroad face higher thresholds, such as $200,000 at year-end or $300,000 at any time, reflecting the diverse financial landscapes encountered by U.S. taxpayers globally. These thresholds serve as benchmarks to determine patency and compliance with U.S. tax laws across international borders, the extent of reporting required, ensuring that all income from foreign sources is accurately disclosed to the IRS, thereby maintaining transfers.

Step-by-Step Guide to Completing Form 8938

Here are the instructions to help you accurately complete Form 8938:

Preparation

If you have already reported all your specified foreign financial assets on forms such as Form 3520, 5471, 8621, or 8865, you do not need to include them again on Form 8938. However, you must complete Part IV of Form 8938 to indicate this.

Section 1 - Identifying Information (Lines 1-4): Provide your name(s) and taxpayer identification number (TIN) as it appears on your tax return. Specify whether you are an individual, partnership, corporation, or trust, and include any additional required identifying details.

Section 2 - Summary of Foreign Deposit and Custodial Accounts (Lines 5-9): Summarize information about your foreign deposit and custodial accounts. Include the number of accounts, their total maximum value, and indicate if any accounts were closed during the tax year.

Section 3 - Summary of Other Foreign Assets (Lines 10-12): Provide a summary of other specified foreign financial assets, including the number of assets, their total maximum value, and any acquisitions or disposals of these assets during the tax year.

Section 4 - Summary of Tax Items Attributable to Specified Foreign Financial Assets: Record any tax items such as interest, dividends, royalties, and other income that are attributable to your specified foreign financial assets.

Section 5 - Excepted Specified Foreign Financial Assets: If you have reported specified foreign financial assets on other forms, indicate this here. You do not need to report them again on Form 8938, but you must note this in this section.

Section 6 - Detailed Information for Each Foreign Deposit and Custodial Account (Lines 20-28): Provide detailed information for each foreign deposit and custodial account listed in Part I. This should include the account number, maximum value, and other relevant details.

Section 7 - Detailed Information for Each Other Foreign Asset (Lines 29-36): Provide detailed information for each other specified foreign financial asset listed in Part II. Include a description of the asset, its maximum value, and other pertinent details.

Following these steps will help you accurately report your specified foreign financial assets and ensure compliance with the Internal Revenue Code.

Detailed Reporting Thresholds

These thresholds apply to the total value of all your specified foreign financial assets.

Reporting Requirements on Form 8938

Understanding what needs to be reported on Form 8938 can be complex. Here’s a breakdown of what must and must not be reported on this form:

What Assets Need to be Reported?

Form 8938 requires detailed reporting of a wide array of foreign financial assets, encompassing various categories crucial for comprehensive tax disclosure.

• Foreign Bank Accounts

Foreign bank accounts include standard checking and savings accounts as well as any other financial accounts held with foreign financial institutions. This category ensures that all liquid assets abroad are accounted for, reflecting the entirety of an individual's financial footprint beyond U.S. borders.

• Foreign Securities

Form 8938 necessitates reporting on foreign securities, which encompasses a diverse spectrum of financial instruments issued by foreign entities. This includes stocks, bonds, mutual funds, and any other securities held in foreign markets. By requiring disclosure of these investments, the IRS aims to ensure that income generated from these assets is accurately reported, aligning with U.S. tax obligations regardless of where the investments are held globally.

• Foreign Pension Plans and Trusts

Additionally, the form requires reporting on foreign pension plans and trusts, specifically targeting interests in foreign-issued life insurance policies or annuity contracts with cash value. These assets are critical components of many individuals' long-term financial planning strategies and are thus subject to reporting to maintain transparency and compliance with U.S. tax laws.

FBAR vs. Form 8938: Understanding the Differences

It's essential to distinguish between Form 8938 and the FBAR (Report of Foreign Bank and Financial Accounts). While both require reporting of foreign financial assets, the thresholds and filing requirements differ.

Potential Penalties for Non-Compliance

Failure to file Form 8938 can result in significant penalties imposed by the IRS. Initially, a $10,000 penalty may be assessed for failure to file, with additional penalties accruing for continued non-compliance. It's crucial to file accurately and on time to avoid such penalties and maintain compliance with U.S. tax laws.

Conclusion

Understanding and complying with Form 8938 is essential for U.S. taxpayers with foreign financial interests. By carefully reporting specified foreign financial assets that meet the applicable thresholds, taxpayers can ensure compliance with IRS regulations and avoid potential penalties. If you believe you meet the criteria for filing Form 8938 based on your foreign financial holdings, include it with your annual tax return to fulfill your obligations and stay in good standing with the IRS.