Form 8938 Penalties: The Form 8938 penalties can be tough. This IRS Form is used by U.S. taxpayers to report Specified Foreign Financial Assets to the IRS. There are many types of offshore assets that are reportable, such as bank accounts, investment accounts, stocks, life insurance, retirement, and more. The IRS has made foreign accounts and assets compliance a key enforcement priority. The failure to report the assets timely may result in significant offshore fines and penalties. Those penalties can get expensive. The Internal Revenue Service has also developed various FBAR and FATCA Amnesty programs to reduce, avoid and abate these penalties. The programs are collectively referred to as offshore voluntary Disclosure.
Form 8938 Penalties
The Form 8938 Penalties range from a warning letter, all the way up to +$50,000. This does not include other potential penalties, such as FBAR Penalties.
You may be subject to penalties if you fail to timely file a correct Form 8938 or if you have an understatement of tax relating to an undisclosed specified foreign financial asset.
As provided by the IRS:
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. You and your spouse’s liability for all penalties is joint and several.
Presumption of Maximum Value
If the IRS determines that you have an interest in one or more specified foreign financial assets and asks you for information about the value of any asset, but you do not provide enough information for the IRS to determine the value of the asset, you are presumed to own specified foreign financial assets with a value of more than the reporting threshold that applies to you. See Determining the Total Value of Your Specified Foreign Financial Assets, earlier. In such case you are subject to the failure-to-file penalties if you do not file Form 8938.
Reasonable Cause Exception
No penalty will be imposed if you fail to file Form 8938 or to disclose one or more specified foreign financial assets on Form 8938 and the failure is due to reasonable cause and not to willful neglect. You must affirmatively show the facts that support a reasonable cause claim. The determination of whether a failure to disclose a specified foreign financial asset on Form 8938 was due to reasonable cause and not due to willful neglect will be determined on a case-by-case basis, taking into account all pertinent facts and circumstances. Effect of foreign jurisdiction laws. The fact that a foreign jurisdiction would impose a civil or criminal penalty on you if you disclose the required information is not reasonable cause.
If you underpay your tax as a result of a transaction involving an undisclosed specified foreign financial asset, you may have to pay a penalty equal to 40% of that underpayment.
Examples of underpayments due to transactions involving an undisclosed specified foreign financial asset include the following.
– You do not report ownership of shares in a foreign corporation on Form 8938 and you received taxable distributions from the company that you did not report on your income tax return.
– You do not report ownership of shares in a foreign company on Form 8938 and you sold the shares in the company for a gain and did not report the gain on your income tax return.
– You do not report a foreign pension on Form 8938 and you received a taxable distribution from the pension plan that you did not report on your income tax return.
If you underpay your tax due to fraud, you must pay a penalty of 75% of the underpayment due to fraud. Criminal Penalties In addition to the penalties already discussed, if you fail to file Form 8938, fail to report an asset, or have an underpayment of tax, you may be subject to criminal penalties.
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.
Extended Statute of Limitations for Failure to Include Income
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.
For this purpose, specified foreign financial assets include any specified foreign financial assets in which you have an interest without regard to the reporting threshold that applies to you and regardless of any exception from reporting a specified foreign financial asset on Form 8938.
26 U.S. Code § 6501 Limitations on Assessment and Collection
Substantial omission of items
Except as otherwise provided in subsection (c)—
(1) Income taxesIn the case of any tax imposed by subtitle A—
(A) General ruleIf the taxpayer omits from gross income an amount properly includible therein and—
(i) such amount is in excess of 25 percent of the amount of gross income stated in the return, or
(ii) such amount—
(I)is attributable to one or more assets with respect to which information is required to be reported under section 6038D (or would be so required if such section were applied without regard to the dollar threshold specified in subsection (a) thereof and without regard to any exceptions provided pursuant to subsection (h)(1) thereof), and (II)is in excess of $5,000, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time within 6 years after the return was filed.
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