In an increasingly globalized world, many U.S. taxpayers maintain financial interests in foreign countries. Whether it’s a foreign bank account, investment portfolio, or ownership in a foreign entity, the Internal Revenue Service (IRS) requires that these assets be disclosed to ensure full tax compliance. One key reporting requirement for such assets is Form 8938, also known as the Statement of Specified Foreign Financial Assets, mandated under the Foreign Account Tax Compliance Act (FATCA). This detailed guide explores everything you need to know about Form 8938 — including who must file, what qualifies as a foreign financial asset, filing thresholds, penalties for noncompliance, and how it differs from FBAR.
What is Form 8938?
Form 8938 is an IRS tax form used by certain U.S. taxpayers to report specified foreign financial assets. It was introduced under FATCA, a law enacted in 2010 to combat offshore tax evasion. The form is filed annually with your federal income tax return and requires detailed disclosure of foreign financial assets when the total value exceeds specific thresholds.
Form 8938 is part of the IRS’s broader initiative to ensure taxpayers disclose foreign income and holdings. The information reported helps the IRS identify tax evasion and enforce compliance with U.S. tax laws on global income.
Who Must File Form 8938?
The filing requirement applies to specified individuals, including:
- U.S. citizens
- Resident aliens
- Non-resident aliens who elect to be treated as resident aliens for tax purposes
- Certain domestic entities (such as corporations, partnerships, and trusts)
You must file Form 8938 if the total value of your specified foreign financial assets exceeds the applicable threshold based on your filing status and residency:
| Filing Status | Living in the U.S. | Living Abroad |
|---|---|---|
| Single or Married Filing Separately | > $50,000 (end of year) or > $75,000 (any time during year) | > $200,000 (end of year) or > $300,000 (any time during year) |
| Married Filing Jointly | > $100,000 (end of year) or > $150,000 (any time during year) | > $400,000 (end of year) or > $600,000 (any time during year) |
What Are Specified Foreign Financial Assets?
The term “specified foreign financial assets” is broad and includes:
- Foreign bank and brokerage accounts
- Foreign mutual funds
- Foreign-issued stocks and securities held outside of U.S. accounts
- Foreign pension and retirement accounts
- Interests in foreign partnerships, trusts, or estates
- Foreign life insurance with cash value
- Any financial instrument or contract issued by a non-U.S. person
Assets that are held in a U.S. financial institution are generally not reportable on Form 8938, even if they relate to a foreign entity.
How to Complete Form 8938
Form 8938 has several parts that require detailed reporting of your foreign financial holdings. Here’s a breakdown:
Part I: Foreign Deposit and Custodial Accounts
Include details of any bank accounts or brokerage accounts held outside the U.S., including:
- Name and address of financial institution
- Account number
- Maximum value during the year
- Whether the asset generated income
Part II: Other Foreign Assets
Report other specified assets such as ownership in a foreign entity or foreign investment accounts not held through a bank. Information includes:
- Description of the asset
- Identifying details (name, address, etc.)
- Fair market value
- Income type and amount (if any)
Part III: Summary and Totals
Summarize the total number of assets reported and the combined value. This part also includes yes/no questions on foreign trusts and gifts.
Part IV–VI: Additional Disclosures
These parts are used if you are filing an amended return, making adjustments, or if your spouse is also reporting assets under a joint return.
Form 8938 vs. FBAR (FinCEN Form 114)
Form 8938 is often confused with FBAR (Foreign Bank Account Report), but they serve different purposes:
| Feature | Form 8938 | FBAR (FinCEN Form 114) |
|---|---|---|
| Governing Body | IRS | FinCEN (Financial Crimes Enforcement Network) |
| Filing Threshold | $50,000 or higher (based on filing status) | $10,000 aggregate across all accounts |
| Where to File | With your federal income tax return | Electronically via BSA E-Filing System |
| Types of Assets | Broader (includes foreign entities, contracts, pensions) | Only bank and financial accounts |
| Penalties | Up to $10,000 for failure to file; additional $50,000 for continued noncompliance | Up to $10,000 for non-willful; over $100,000 or 50% of balance for willful violations |
Penalties for Noncompliance
The IRS imposes strict penalties for failing to file Form 8938:
- Failure to File Penalty: $10,000 per year per form.
- Continued Non-Filing: Additional $10,000 per 30-day period (up to $50,000).
- Accuracy-Related Penalty: 40% of any underpayment of tax related to undisclosed foreign assets.
- Criminal Penalties: In cases of willful concealment or fraud, criminal charges may apply.
Given the high stakes, it is essential to comply with all reporting obligations under FATCA.
Common Mistakes to Avoid
- Failing to recognize that non-interest-bearing accounts may still need reporting
- Assuming FATCA thresholds are the same as FBAR
- Not reporting assets held in joint or nominee names
- Omitting pension funds or retirement accounts held overseas
- Failing to report income from foreign assets even if tax treaty benefits apply
How to Determine Asset Value
You must determine the maximum fair market value of each asset during the tax year, typically using the end-of-year balance or the highest balance. Use reasonable estimates based on exchange rates provided by the IRS, banks, or financial institutions. Values must be reported in U.S. dollars.
When and Where to File
Form 8938 must be filed with your annual tax return (Form 1040). It cannot be submitted separately. The deadline is typically April 15, with an automatic extension to October 15 if you file Form 4868.
Foreign Tax Credit and FATCA Reporting
Even though you report your foreign financial assets on Form 8938, you may also be eligible to claim a Foreign Tax Credit (Form 1116) to offset taxes paid to a foreign government. FATCA reporting does not affect your eligibility for this credit but enhances transparency of your global financial dealings.
Form 8938 for Dual Citizens and Expats
U.S. citizens living abroad are still required to file Form 8938 if they meet the reporting threshold. The IRS does not exempt dual citizens or expatriates from FATCA obligations. It is crucial for Americans abroad to review both FATCA and FBAR requirements each year to ensure full compliance.
Professional Help and Resources
Given the complexity of international tax compliance, it is advisable to consult a tax professional with experience in FATCA reporting if you hold foreign assets. Mistakes can be costly and trigger audits or penalties. You can also refer to the IRS instructions for Form 8938 and Publication 519 for guidance.
Conclusion
Form 8938 is a critical part of your tax compliance responsibilities if you have specified foreign financial assets. With strict penalties for noncompliance and broad definitions of foreign assets, it is vital to understand whether you are required to file this form and how to do so accurately. FATCA is here to stay, and the global exchange of financial information is growing. Stay informed, stay compliant, and seek professional help if you have any doubts regarding your foreign asset reporting requirements.
