Tax Law Center Blog

As anticipated, IRS Form 8938 Statement of Foreign Financial Assets is causing significant confusion among taxpayers attempting to complete these Forms for filing.

Form 8938, Statement of Specified Foreign Financial Assets, is a new reporting form, which will be used to report certain foreign financial assets as required as part of the Hiring Incentives to Restore Employment Act (HIRE Act). Form 8938 is effective for 2011 and future tax years. The form will typically be attached to the federal income tax return if you have a filing requirement. Form 8938 is a separate and distinct reporting form from Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly referred to as the FBAR. Individuals may be required to file both reports, depending on the specific facts of a particular year.

Form 8938- Statement Of Foreign Financial Assets

The confusion with correctly completing Form 8938 results from the vagueness of the instructions as well as the lack of direction as to what needs to be reported. The instructions state that income producing foreign assets must be disclosed but the Treasury has stated that foreign rental properties do not need to be disclosed. A single person living abroad must file Form 8938 if foreign assets exceed $200,000 at year end or $300,000 at any time during the year. To accomplish this you must convert local currency to US dollars. Common sense would dictate using the exchange rate in effect as of the day your foreign assets were at their highest during 2011. But the instructions state that the exchange rate as of December 31, 2011 must be used which will likely give you a different answer.

The filing of Form 8938 with the 2011 tax return does not relieve the individual of having to separately file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts with the U.S. Department of Treasury on or before June 30, 2012. Adding to the confusion is that there are assets that must be reported on Form 8938 that are not required to be reported on Form 90-22.1.

Form 8938 May Force Taxpayers to Enter the Offshore Voluntary Disclosure Program (OVDP)

This ability by the IRS to discern whether the areas of actual or potential non-compliance in current as well as prior years puts previously non-compliant taxpayers in a very uncomfortable position.  A previously non-compliant taxpayer who failed to reporting foreign bank accounts will have great difficulty with Form 8938. Since Form 8938 required to be annually filed together with the tax return, the failure to file (or being untruthful) Form 8938 at this point is likely to turn previous non-willful non-compliance into a willful one.

For example, Question 3a of Form 8938 indirectly asks a problematic question: the date of the account opening (the question specifically asks whether the account was opened in the tax year). For older accounts, this is a dangerous question. Answering that the account was not opened in the tax year, implicitly (and affirmatively by omission) states that account was opened in a prior year. As a result, prior years FBARs should have been filed. The answer to question 3a could provide incriminating evidence to the IRS.

Question 3a (similar to Question 7a of Form 1040 Schedule B) also does something far worse: it requires a response from the taxpayer. Answering (or not answering) the question could demonstrate “willfullness” in failing to file FBARs. The IRS has previously used taxpayers’ answer (or non-answer) of Question 7a of Form 1040 Schedule B to successfully demonstrate “willfullness” and “intent” in criminal prosecutions. A person who willfully fails to report an FBAR may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. Willful violations would also be subject to criminal penalties.

Foreign Asset Reporting

It is going to get harder to keep the IRS from learning about your foreign bank or brokerage account. Current law phases in reporting by foreign banks of US owned accounts. In 2014 and 2015, banks need only to disclose the owner’s identifying information, account number and balance. In 2016, income earned on accounts must be reported. And starting in 2017, gross proceeds of securities sold in foreign brokerage accounts must be reported.

The US is setting up a special disclosure pact with France, Germany, Italy, Spain and the United Kingdom that will accelerate and expand the above timetable.

Foreign Asset Reporting and Form 8938 is likely to have a major impact on the number and depth of voluntary disclosures as taxpayers are forced to re-evaluate their tax compliance strategies.  The impact of Form 8938 on your particular situation should be analyzed by a competent tax attorney.

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.