FORM 8938 - FATCA
Beginning with tax years starting after March 18, 2010, United States taxpayers are required to report to the IRS about financial assets held outside the United States. This reporting requirement is part of the Foreign Account Tax Compliance Act (FATCA).
FATCA consists of two parts: a new withholding regime designed for offshore financial institutions to submit reports to the IRS regarding the international finances of U.S. citizens, and a reporting mechanism by which U.S. taxpayers self-report to the IRS financial assets held outside tcvhe United States (FBAR & Form 8938).
Who Is Required To File Form 8938?
All U.S. taxpayers who are impacted by FATCA. The following "specified individuals" may be required to file Form 8938: U.S. citizens, resident aliens, non-resident aliens who elect to be treated as if they were resident aliens, and non-resident aliens who reside in American Samoa or Puerto Rico.
When to File Form 8938?
Form 8938 is filed with the Form 1040 tax return. Filing an extension also extends the time to file Form 8938. Any changes to a previously filed 8938 must be made with an amended 1040 return (1040X).
What Counts as a Foreign Financial Asset?
Foreign financial assets or "specified foreign financial assets" as the IRS calls them, consist of: Financial accounts maintained at financial institutions outside the United States, such as bank accounts, investment accounts and mutual funds. Stocks, bonds, or other securities issued by a non-U.S. person and not held through an investment account. Any interest in a foreign entity, such as a foreign corporation, foreign partnership, or foreign trust. Any financial instrument or contract that has an issuer or counterparty that is not a U.S. person. Foreign investments held through U.S.-based investment accounts are not reported on Form 8938.
Reporting Thresholds for FATCA Form 8938?
Taxpayers will need to track two measures of the market value of all their foreign financial assets: the maximum value of the asset at any time during the year and the value of the asset at the end of the tax year.
Taxpayers will then take the sum of all the maximum values and the sum of all the year-end values. These totals are then used to determine if the value of the assets exceed the reporting thresholds. If so, taxpayers will need to report all their foreign financial assets to the IRS. The IRS has set forth different thresholds for different types of taxpayers, as follows:
Residing in the USA:
Unmarried individual residing in the United States are required to file Form 8938 if the market value of their foreign financial assets is greater than $50,000 on last day of year or greater than $75,000 at any time during the year.
Married individuals filing jointly and residing in the United States are required to file Form 8938 if the market value of their foreign financial assets is greater than $100,000 on last day of year or greater than $150,000 at any time during the year.
Married individuals filing separately and residing in the United States are required to file Form 8938 if the market value of their foreign financial assets is greater than $50,000 on last day of the year or greater than $75,000 at any time during the year.
Residing Outside the USA:
Unmarried individual residing outside the United States and satisfying either the bona fide resident or physical presence tests are required to file Form 8938 if the market value of their foreign financial assets is greater than $200,000 on last day of year or greater than $300,000 at any time during the year.
Married individuals filing jointly residing outside the United States and satisfying either the bona fide resident or physical presence tests are required to file Form 8938 if the market value of their foreign financial assets is greater than $400,000 on last day of year or greater than $600,000 at any time during the year.
Married individuals filing separately and residing outside the United States and satisfying either the bona fide resident or physical presence tests are required to file Form 8938 if the market value of their foreign financial assets is greater than $200,000 on last day of year or greater than $300,000 at any time during the year.
How Form 8938 Relates to the Foreign Bank Account Report?
Form 8938 closely resembles older versions of the Foreign Bank Account Report (FBAR). But Form 8938 requests greater detail and serves a different purpose than the FBAR. The purpose of Form 8938 is to facilitate compliance with an internal revenue law (FATCA) and is part of the tax return, and is considered confidential tax return information. The purpose of the FBAR is compliance with the Bank Secrecy Act, is not part of the tax return, and is not considered confidential tax return information. FBARs can be and are shared among governmental agencies and are used primarily by the Treasury Department's Financial Crimes Enforcement Network to track and combat international money laundering. Form 8938 is designed to be used by the Internal Revenue Service for combating international tax evasion. Also, Form 8938 requests information about foreign assets, which includes foreign accounts that hold assets, while the FBAR requests information only about foreign accounts.
Taxpayers who have a requirement to file Form 8938 probably also have an obligation to report substantially the same information on the FBAR, which is filed separately with the Treasury Department. An FBAR is required if any United States person (including corporations and other entities) have at least $10,000 held in foreign accounts at any time during the year. However, the types of financial accounts reported on the FBAR differ slightly from the types of accounts reported on the Form 8938.
Penalties Relating to Form 8938
The IRS can impose a $10,000 penalty for failing to file Form 8938 by the due date of the tax return (including extensions), or for filing an incomplete or inaccurate Form 8938. If the Form 8938 has not been filed within 90 days of a formal notice by the IRS, then the IRS can assess additional penalties of $10,000 for each 30-day period (or part of a 30-day period) that the Form 8938 continues to be not-filed, up to a maximum penalty of $50,000.
If no Form 8938 is filed and the IRS determines that a taxpayer owns one or more foreign financial assets required to be reported, the IRS is allowed to presume that the foreign financial asset has sufficient value to meet the reporting thresholds. Penalties can be waived if the taxpayer can show reasonable cause for not reporting an asset on Form 8938.
FORM 5471
If you own more than 10% of the shares of a foreign corporation, you are required to file form 5471 each year with your income tax return. That includes any foreign corporation that operates your business or owns real property. And if the tax law states that failure to file that form, automatically subjects you to a penalty of $10,000, you are in serious trouble. It is form 5471.
If U.S. citizens own over 50% of a foreign corporation and you are at least a 10% shareholder there is a good chance you should include your pro-rata share of the foreign corporation's income in your U.S. tax return.
The form requires that you supply the IRS with the corporation's income statement, balance sheet, and data on its loans, operations, and other shareholders. It also requires information on dividends and managerial payments made to shareholders, officers, and directors. The financial information must be presented using U.S. accounting principles which differ from those used to produce foreign financial statements. If you have failed to file the Form, you can avoid the penalty by showing your failure to file was due to "reasonable cause." We prepare the Reasonable Cause Letter for you.
If you own part or all of a foreign corporation, and have not filed form 5471, you should start filing it immediately to avoid the $10,000 penalty. The IRS is actively involved in securing more information of U.S. citizens’ finances overseas and will only increase its efforts in the future. And, of course, there are many US-Foreign Country tax treaties which do provide for complete cooperation between the two nations with respect to the exchange of tax information on citizens domiciled in each.