Tax Law Center Blog

By Parag P. Patel, Esq. | Updated April 7, 2012

In recent years, the IRS and US Treasury have stepped up their efforts toward tracking down delinquent tax payers and enforcing payment of overdue taxes. One of these initiatives has been labeled the “Foreign Account Tax Compliance Act”. FATCA is part of the Hiring Incentives to Restore Employment (HIRE) Act, which was designed to enforce higher tax compliance among U.S. taxpayers with foreign accounts and assets. FATCA created Form 8938, an additional foreign account reporting requirement over and above the Report of Foreign Bank and Financial Accounts (FBAR) or Form TD F 90-22.1 that needs to be filed with the U.S. Treasury every year. If a taxpayer has more than a certain amount of foreign assets, Form 8938 is included as part of their annual 1040 filing and requires reporting an expanded list of foreign assets not covered by FBAR.

Every US taxpayer should be made aware of FATCA and how it may affect their investments and taxes.

Who Must File Form 8938

U.S. Citizens Living Abroad: For U.S. citizens who are considered by the IRS to be foreign residents for the entire tax year or who meet the physical presence test for living in a foreign county, the new limits are:

      Single: Aggregate foreign assets of USD 200,000 on the last day of the year or USD 300,000 at any time during the year.

      Married Filing Jointly: Aggregate foreign assets of USD 400,000 on the last day of the year or USD 600,000 at any time during the year.

For more details on who needs to file, what constitutes foreign assets, and other details, check out the IRS article, “Do I need to file Form 8938, ‘Statement of Specified Foreign Financial Assets?'”

Some Other Considerations:

      Form 8938 is due at the time of your normal tax filing including extensions.

      Filing Form 8938 does not exempt you from the requirement to file Form TD 90-22.1, the Report of Foreign Bank and Financial Accounts (FBAR).

      If you are not required to file a tax return, you do not need to file Form 8938.

      If you are required to file a Form 8938 and you have a specified foreign financial asset reported on Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, or Form 8891, you do not need to report the asset on Form 8938. On the Form 8938, however, you do have to identify which and how many of each of these forms you file.

      Even if a foreign financial asset is reported on one of the forms listed above, it still must be included it in your calculation of specified foreign financial assets.

      The penalty for failing to file Form 8938 is USD 10,000, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed and special statute of limitation rules apply.

Form 8938 is separate from the FBAR form and its requirements. The FBAR (90-22.1) is filed with the US treasury while Form 8938 is filed with the IRS. However, if you are required to file Form 8938, your assets will most likely fall under the FBAR filing requirements (f the majority of your assets are financial) accounts.

Penalties

Ignorance is not bliss when it comes to taxes, and there are penalties for failing to file the appropriate forms by the appropriate date. Each penalty is levied on a case by case basis, however, and those who are unintentional and ignorant are usually not penalized as harshly as those who have intended to (or appear to have intended to) defraud the government. The penalty that may be incurred for failing to file Form 8938 is a severe $10,000 with an additional $50,000 for those who ignore the IRS’ initial warning. Additionally, the IRS may apply a 40% penalty on the taxes from non-disclosed assets. Unlike many US taxpayer tax matters, the filing requirements leave little guess work. Everything is clearly detailed in the section “Form 8938 instructions” on the IRS website. These details include relevant dates, asset types, account types and thresholds. Failing to comply or fully understand the 8938 requirements is a costly mistake, both in time and money. The IRS continues to roll out new ways to identify Americans holding financial and investment accounts abroad. These disclosure reporting requirements all come loaded with the highest IRS penalties, starting at $10,000 per non-filing or incorrect filing incident.

Some Frequently Asked Questions About FATCA

What’s a specified foreign financial asset? For this definition we can go straight to the source – the IRS text:

1. Any financial account maintained by a foreign financial institution.
2. Other foreign financial assets, which include any of the following assets that are held for investment and not held in an account maintained by a financial institution.

• Stock or securities issued by someone other than a U.S. person,
• Any interest in a foreign entity, and
• Any financial instrument or contract that has an issuer or counterparty that is other than a U.S. person.

What are the value thresholds? The aggregate value thresholds of specified foreign financial accounts vary depending on how you file your tax return.

Filing Status: Unmarried/Single

Aggregate Value at Year End: $50,000

Highest Aggregate Value at Any Time During the Year: $100,000

Filing Status: Married Filing Joint

Aggregate Value at Year End: $100,000

Highest Aggregate Value at Any Time During the Year: $200,000

Filing Status: Married Filing Separate

Aggregate Value at Year End: $50,000

Highest Aggregate Value at Any Time During the Year: $100,000

Filing Status: Taxpayer Living Abroad (Non-Joint)

Aggregate Value at Year End: $200,000

Highest Aggregate Value at Any Time During the Year: $400,000

Filing Status: Taxpayer Living Abroad (Joint)

Aggregate Value at Year End: $400,000

Highest Aggregate Value at Any Time During the Year: $600,000

If I’m currently filing the FBAR (TD F90-22.1) does Form 8938 replace it?

No. Both forms are required to be filed. The FBAR will still be filed directly with the US Treasury Department. Form 8938 will be attached to your U.S. tax return and filed with the IRS.

What happens if the IRS finds out I didn’t file or if I under-reported my foreign interest, dividends, capital gains, and business earnings?

If you do not file a complete and correct Form 8938, it is an automatic $10,000 penalty that can grow to a $50,000 penalty if not dealt with immediately. You will be required to pay the regular tax that would have been due on these assets plus interest and incur an additional penalty of 40% of the tax due. There may be criminal penalties for non-compliance.

Our law firm expects unabated aggressive enforcement of the US tax laws, including increased criminal prosecutions and civil audit examinations. We have been advising our clients to expect the unexpected (and the worst) in their tax treatment and disclosure of offshore assets.

Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.

About the Author

Parag P. Patel, Esq. brings over three decades of experience to individuals and businesses facing complex tax problems. Holding advanced degrees from Georgetown University Law Center (J.D.) and New York University School of Law (LL.M. in Tax Law), the nation’s top tax programs, Mr. Patel delivers sophisticated and creative strategies in complicated federal and state audits, penalty abatements, and foreign asset/income reporting. His practice emphasizes international tax matters, specifically foreign financial account reporting (FBAR), voluntary disclosures, and penalty defense.

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