Form 8938

Out of all the different international information return filing requirements, Form 8938 is a relative newcomer to the world of foreign account and asset reporting. The Form 8938 is the Statement of Specified Foreign Financial Assets under 26 U.S.C. 6038D and it is filed each year by U.S. taxpayers worldwide who meet the threshold requirements for having to file. Common examples of having to file Form 8938 include ownership of foreign:

• • • Bank Accounts

    • Securities Accounts

    • Pooled Fund Accounts (Mutual Funds and ETFs)

    • Shares of Stock

    • Pensions

    • Life Insurance

    • Foreign Entity (below Form 5471 thresholds)

There are different threshold requirements for filing Form 8938, depending on whether the Taxpayer is considered a U.S. Resident or a foreign resident — as well as if they are filing married or separate/single. Let’s walk through the basics of filing Form 8938. For taxpayers seeking a shortened summary, we have our ‘5 Facts to Know About Form 8938,’ which was recently updated in 2024, and other articles on specific issues such as Form 8938 threshold filing requirements, Exceptions, and Penalties.

Who Has to File Form 8938?

Form 8938 is required by U.S. taxpayers who have to file a tax return and meet the threshold requirement for reporting foreign accounts and assets. Unlike many of the other international information returns, Form 8938 is only required when a Taxpayer has to file a tax return. Thus, even if a taxpayer meets the threshold for having to file a Form 8938, if they are not required to file a tax return in that year, then they are not required to File Form 8938.

What Does it Mean to Have a Financial Interest?

Unlike the FBAR (in which a Taxpayer must file the form even if they do not have an interest in the foreign accounts), Form 8938 is only required when the Taxpayer has an interest in the foreign account/asset.

As provided by the IRS:

• • • “You have an interest in a specified foreign financial asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the asset are or would be required to be reported, included, or otherwise reflected on your income tax return.

    • You have an interest in a specified foreign financial asset even if no income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the asset are included or reflected on your income tax return for this tax year.”

Taxpayers May Qualify for an Extension to File Form 8938

If a taxpayer files an extension to file their tax return in October instead of April — or October instead of June for taxpayers abroad — then Form 8938 goes on extension as well so that the taxpayer is not required to file a separate extension for Form 8938 as they would have to do for Form 3520 (IRS extension Form 7004).

What is a Form 8938 Specified Foreign Financial Asset?

When it comes to Form 8938, many different types of assets qualify as specified foreign financial assets. As mentioned above, it can include a diverse range of accounts and assets, including bank accounts, securities accounts, shares of stock, and life insurance policies.

As provided by the IRS:

Specified foreign financial assets include the following assets

• • • “Financial accounts maintained by a foreign financial institution.

      • The following foreign financial assets if they are held for investment and not held in an account maintained by a financial institution.

        • Stock or securities issued by someone that is not a U.S. person (including stock or securities issued by a person organized under the laws of a U.S. possession).

        • Any interest in a foreign entity.

        • Any financial instrument or contract that has an issuer or counterparty that is not a U.S. person (including a financial contract issued by, or with a counterparty that is, a person organized under the laws of a U.S. possession). For foreign financial assets excepted from reporting, see Assets Not Required To Be Reported, later.”

Examples of Who Has to File Form 8938

Here are a few examples of when Taxpayers have to file Form 8938:

Bank Accounts Example

David has $300,000 in Foreign Bank Accounts in checking, savings, and current accounts.

Mutual Funds (Form 8621 Cross-Over) Example

Michelle owns several individual mutual funds at different institutions as well as different bank accounts — but she is under the Form 8621 threshold for mutual funds and does not have any excess distributions in the current year.

Stock Certificates Example

Peter owns several different shares of stock for different companies (since they are not in an account, there is no FBAR requirement)

Life Insurance Policy Example

Miranda owns an investment life assurance policy with a surrender value of $600,000.

Foreign Entity Example

Randy owns 6% of a family business. It is not a CFC.

Are both FBAR and Form 8938 Required for the Same Foreign Account/Asset?

Depending on the type of foreign assets that taxpayer has, they may be required to file multiple forms for the same asset. Thus, Taxpayers with certain foreign bank accounts, for example, will have to file both the FBAR and Form 8938 if both thresholds are met. Noting, there are different thresholds to consider.

Form 8938 Threshold Reporting Requirements

The threshold for filing the forms is determined based on:

• • • U.S. Resident vs. Non-Residents status; and

    • Filing Jointly vs. Separate or Unmarried

Joint Income Tax Return (U.S. Residents)

• • • If you are married and you and your spouse file a joint income tax return, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

Unmarried or Separate Tax Return (U.S. Residents)

• • • If you are married and file a separate income tax return from your spouse, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Unmarried or Separate Tax Return (Non-U.S. Residents)

• • • If you are not married, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.

Joint Income Tax Return (Non-U.S. Residents)

• • • If you are married and you and your spouse file a joint income tax return, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.

Exceptions to Having to File Form 8938

Here are some exceptions and strategies to avoid Form 8938:

No Tax Return Required

Unlike the FBAR (aka FinCEN Form 114) and several of the other international reporting forms that are required to be filed even when no actual tax return is necessary, Form 8938 is treated differently. Form 8938 is only required to be filed in any tax year in which the Taxpayers are required to file a tax return. Thus, when a Taxpayer is not required to file a tax return, then they are not required to file a Form 8938.

No Election to Be Treated as US Resident

Some non-resident aliens elect to be treated as a US Person because they want to file Married Filing Jointly with their US person spouse. In order to do so, the Taxpayer makes a formal election to do so. And, while making the election does not require the non-resident to file the FBAR, Form 8938 would still be required. Therefore, if the foreign spouse has the majority, if not all of the foreign assets, it may be better to avoid the election and MFJ status.

Married Filed Separately to Avoid Form 8938

Sometimes, if the tax benefit of filing jointly does not outweigh the invasion of privacy of one spouse who may have significant foreign assets and that spouse also does not have sufficient income to file a tax return independent of their spouse, it may be better for the higher income earner (who presumably has little or no foreign assets) to file Married Filing Separately. This way, the spouse with significant foreign assets and low income can avoid filing (noting, joint assets are split for value purposes in an MFS return but not separate assets).

Per the IRS Form 8938 instructions:

• • • • My spouse and I do not live abroad. We file separate income tax returns and jointly own a specified foreign financial asset valued at $60,000 for the entire year.

      • Neither you nor your spouse has to file Form 8938. You each use one-half of the value of the asset, $30,000, to determine the total value of specified foreign financial assets that you each own. Neither of you satisfies the reporting threshold of more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Failure-To-File Penalty

• • • • If you are required to file Form 8938 but do not file a complete and correct Form 8938 by the due date (including extensions), you may be subject to a penalty of $10,000.

Continuing Failure To File

• • • • If you do not file a correct and complete Form 8938 within 90 days after the IRS mails you a notice of the failure to file, you may be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000.

Married Taxpayers

• • • • Filing a Joint Income Tax Return If you are married and you and your spouse file a joint income tax return, the failure-to-file penalties apply as if you and your spouse were a single person. Your and your spouse’s liability for all penalties is joint and several.

Extended Statute of Limitations for Form 8938

For taxpayers who do not file Form 8938, it is important to note that their tax return may remain open indefinitely. In other words, an otherwise correctly filed tax return will not be considered failed for statute of limitation purposes if a form 8938 was required to be included but was not reported with the tax return.

As provided by the IRS:

• • • Statute of Limitations

      • If you fail to file Form 8938 or fail to report a specified foreign financial asset that you are required to report, the statute of limitations for the tax year may remain open for all or a part of your income tax return until 3 years after the date on which you file Form 8938.

More than $5,000 of Unreported Income Also Extends the Statute

The majority of the time, the Internal Revenue Service has three years to audit or examine a tax return. Sometimes that statute of limitations may be extended to six years and one of the more common situations in recent years is when the taxpayer has more than $5000 of income generated from form 8938 assets that was not reported.

As provided by the IRS:

• • • If you do not include in your gross income an amount relating to one or more specified foreign financial assets, and the amount you omit is more than $5,000, any tax you owe for the tax year can be assessed at any time within 6 years after you filed your return.

Form 8938 Failure to File Penalty

When it comes to failing to file a timely or accurate Form 8938 to report Specified Foreign Financial Assets, one of the key issues to consider is whether or not the IRS will assess penalties against the taxpayer. Form 8938 penalties are typically not as bad and not as regularly issued as they are for other types of violations such as the FBAR or Form 8938. Still, if the IRS wants to, they have the authority to issue substantial civil fines — and even pursue a criminal investigation although the latter is very rare but can happen as was the case in Adrian Baron. Let’s take a brief introductory look and how penalties may be issued in conjunction with Internal Revenue Code section 6038D.

Penalties are Per Form, Not Per Asset

Taxpayers who get penalized for Form 8938 non-compliance should note that it is not based on each account or asset identified in Form 8938, but rather on the non-filing or the late filing of the form itself. Typically, penalties start at $10,000 per year.

Joint and Several Liability

For taxpayers who file joint tax returns, unfortunately, if penalties are assessed for failure to file form 8938, those penalties are assessed against the joint tax return. In other words, even if assets belong to only one person, both parties to the tax return may be penalized.

As provided by the IRS:

• • • “Married Taxpayers Filing a Joint Income Tax Return If you are married and you and your spouse file a joint income tax return, the failure-to-file penalties apply as if you and your spouse were a single person. Your and your spouse’s liability for all penalties is joint and several.”

Additional Information Reporting Forms May Be Necessary

There are many different international information reporting forms that a U.S. taxpayer may have to file each year depending on the specific type of foreign accounts, assets, and investments that they maintain overseas. In addition to Form 8938, some of the more common forms include:

• • • FBAR

    • Form 3520

    • Form 3520-A

    • Form 5471

    • Form 8621

    • Form 8865

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.